Citi Not Sold On Beach Shale

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This story features BEACH ENERGY LIMITED, and other companies.
For more info SHARE ANALYSIS: BPT
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

The FNArena database shows Beach Petroleum ((BPT)) has been relatively well regarded in the market given the stock was rated as Buy three times, Hold once and Sell once prior to Citi initiating coverage on the stock today.

This hasn't totally changed as Citi has initiated with a Hold rating, but the broker takes a somewhat less optimistic view of Beach given some issues with the options taken in trying to grow the business for the future.

Citi's quick summary of Beach is that management has sold assets well, the most obvious being the Tipton West and BMG stakes it held at one time. But the money received from these sales has been spent poorly according to the broker.

As an example Citi points out Beach spent around $70 million buying oil hedges at the peak of the oil market, while the $160 million spent on developing North Shadwan that came via a $191 million capital raising has also not panned out as reserves were subsequently downgraded by around 60%.

For Citi this suggests capital stewardship is an issue for Beach, and as a result an issue for investors in the stock.

Looking at Beach's assets now, Citi's estimate of discounted cash flow valuation stands at $0.77. This includes the company's base business, a 50% risk weighting to the development of a 600PJ conventional gas operation in the Cooper Basin and a 25% risk weighting to Basker Manta Gummy (BMG) gas.

The valuation also includes a 10% risk weighting for undeveloped gas resources at Burnside and Pandora, as well as a 5% risk weighting to a 50 million barrel oil discovery in Tanzania. Citi ascribes no value to Beach's Cooper shale gas assets as it doesn't see these as being economic at prices of around $5 per gigajoule, given an expectation of high costs at the project.

Citi does acknowledge the Cooper shale assets could be a company maker if Beach's ability to produce from the assets, or gas prices, exceed its expectations. Further exploration of this asset is set to commence this month.

Beach does have some other growth options, Citi noting there remains potential for the company to sell gas to Santos ((STO)) for that company's LNG project at Gladstone in Queensland. On Citi's numbers this could add up to 9c per share to Beach's valuation.

With respect to earnings, Citi is actually a little above consensus in both FY11 and FY12 with its forecasts. This reflects lower depreciation and amortisation assumptions, as the broker's operational earnings (EBITDA) are around 8% below consensus in both years given forecasts of higher production costs.

Citi is forecasting earnings per share (EPS) for Beach of 4c in FY11 and 5.7c in FY12, which compares to consensus estimates according to the FNArena database of minus 7.9c in FY11 and 6.3c in FY12.

Among others in the database to cover Beach, UBS remains positive given the potential for the drilling program running through FY11 to bring enough success to spark some interest in the stock. Macquarie also has a Buy rating, noting the company has to date been successful in its push to lift its traditional gas reserves in the Cooper Basin.

BA Merrill Lynch continues to have reservations about Beach's operations and strategy however, enough to rate the stock as Underperform. The broker has a price target on the stock of $0.65, which compares to an average price target according to the database of $0.87.

Shares in Beach today are slightly higher and as at 11.15am the stock was up 1c at $0.70. This compares to a range over the past year of $0.595 to $1.04 and implies upside of around 24% to the average price target in the FNArena database.
 

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