Beach Turns Away From Shale

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

-Production declines
-Needs new conventional
-Capex to fall markedly
 

By Eva Brocklehurst

Beach Energy ((BPT)) will scale back international activity and may even investigate infrastructure asset monetisation or value accretive transactions as its strategic review is progressed.

March quarter production was weaker than many brokers expected, because of natural declines across the Cooper Basin acreage, longer-than-planned downtime at the Moomba facility and weather-related delays to commissioning of the Bauer upgrade. Sales revenue was down 33% on the prior quarter because of lower oil prices and volume.

Brokers await more detail on the capital expenditure plans for FY16, given the company is engaged in an internal review. Production should trend towards the top of narrowed FY15 guidance of 8.9-9.2mmboe in Macquarie's estimation, following completion of the Bauer facility upgrade and with less downtime at Moomba. The broker now forecasts a FY16 capex program of $220m, representing a 50% decline from the lower end of the FY15 guidance range.

Canaccord Genuity remains cautious about the growth outlook. Of most concern is the production declines across the Australian assets and limited visibility on the options to offset future declines. The broker expects the review to focus on the medium-term direction and also delineate corporate cost reductions. The broker estimates Beach Energy will sustain declining production of around 4.0% over the next five years in its base business, despite allowing for a meaningful level of new production from exploration success. Therefore, Beach is expected to look at acquisitions to enable growth.

Bauer production is to be maintained at current levels for the rest of 2015, as additional wells come on line, but UBS does not consider this will be enough to replace oil reserves this year. Morgan Stanley concurs, noting that Western Flank oil production falls away quickly so a steady stream of new wells is required as an offset and success in exploration continues only at modest rates. The broker expects cash flow metrics to improve as capex falls markedly in FY16 and the company should be well positioned to capitalise on its renewed focus on Australia, given balance sheet strength, scale of production and ownership of infrastructure.

Minimal spending on unconventional exploration is expected post the exit of Chevron from Beach Energy's Cooper Basin project. Partner and SACB joint venture operator, Santos ((STO)), has signalled a decline in forecasts for gross Cooper raw gas processing over 2015/16, reducing operated rigs to three from seven in recent months. JP Morgan estimates that all partners in the SACB JV will need to draw on stored gas to supplement the flat to declining Cooper production over the next couple of years. The broker still expects Beach can satisfy its Origin Energy ((ORG)) contract and its share of the SACB contract with AGL Energy ((AGL)) with the help of stored gas but there appears to be little upside available to contract to other parties.

The SACB JV has moved its 30% growth target to 15%, and removed a cornerstone growth project, in Canaccord Genuity's view. The JV has a peak contractual requirement in 2016 and this leaves little head room for lower well capacity. Consequently, the broker also expects the JV will store production in the June quarter to enable inventory to be drawn down to meet 2016 obligations.

Morgans takes the opportunity to update forecasts ahead of the strategic review and downgrades to Hold from Add. The broker expects a greater focus on conventional exploration going forward and agrees that spending is likely to be limited following the withdrawal of Chevron from the Cooper. Instead, the broker expects Beach to focus on near-term production opportunities, particularly in oil.

The start of a divestment process for the Egyptian assets suggests to Morgans that the company will position itself as an Australian east coast energy company, which makes sense given its large and diverse asset base. The new managing director has signalled a willingness to explore divestment opportunities for infrastructure assets, either separately or in step with the SACB JV. JP Morgan suggests the Moomba to Port Bonython liquids pipeline may be a consideration in this regard as it is less complex than other parts of the Cooper Basin infrastructure.

The stock continues to trade at a premium to its valuation on the hope of corporate activity, which UBS ascribes to Seven Group ((SVW)) entering the share register. The broker still considers it more the case that Beach will acquire assets rather than be acquired. Macquarie also considers it difficult to form a positive investment case until a firm strategy is outlined, particularly as the stock appears fully valued.

Beach Energy has three Hold ratings and three Sell on FNArena's database. The consensus target is 99c, suggesting 14.6% downside to the last share price. Targets range from 75c to $1.14.

See also, Beach Energy Mulls Life Without Chevron on March 31 2015.
 

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