Australia | Aug 13 2007
By Chris Shaw
As the latest machinations in global credit markets make raising funds more expensive Beach Petroleum (BPT) has adopted an alternative approach, selling a 10% stake in the Basker-Manta-Gummy project to Itochu for $123 million.
According to Merrill Lynch the sale is a positive as it both allows the company to generate a profit on its stake while also confirming the value of the project as a whole. On its numbers the company should make a profit on the sale of around $70m, while retaining a 40% interest.
Anzon Australia (AZA) also holds 40% of the project and Itochu now has a 20% stake after also buying 10% from Anzon.
The lower stake means Beach Petroleum’s share of production will be around 4% lower, so the broker has adjusted its earnings estimates accordingly. This means its estimates in FY08 have been cut by 15% and in FY09 by 10%, resulting in earnings per share estimates of 9.9c next year and 8.9c in FY09 after an expected 8.6c this year.
Macquarie has made similar adjustments with only the magnitude differing slightly, its forecasts for the next two years being cut by 7.8% and 9.9% respectively. It also points out performance in terms of production for the company has of late been impacted by some one-off factors so is not an entirely accurate portrayal of the outlook for the company.
Apart from the earnings impact Merrills points out the deal provides Beach with additional proceeds with which to advance future development plans, while at the same time reducing its share of the required capex at the Basker-Manta-Gummy project. This is estimated at a gross cost of $200-$300m for the Phase 2 oil development, so the company’s reduced requirements are significant.
At the same time it leaves the company with a large enough stake in the project to benefit from any future upside, which Citi notes is possible if exploration planned for 2008 is successful in increasing oil reserves substantially.
Both Macquarie and Merrill Lynch have retained their Buy ratings on the stock as a result of the deal, with almost identical target prices of $1.60 and $1.62. The FNArena database shows ABN Amro also rates the stock as a Buy with a $1.55 price target but the last update on record from the broker dates back to February.
According to Thomson One Analytics the median price target for Beach is $1.78, indicative of the upside potential from exploration success Citi alluded to in its update.
Shares in Beach this morning are slightly weaker despite a stronger overall market and as at 11.20am were down 2c at $1.21. Over the past 12 months the stock has ranged between $1.04 and $1.68.
Partner Anzon is only covered by Citi (out of the ten experts we monitor daily) and the announced deal has led to Citi analysts pushing up their price target by 20c to $1.30. Their recommendation for the stock remains Hold, High Risk.