Australia | Dec 06 2012
– Beach should easily meet conventional production targets
– Excitement is building with regard to unconventional reserves
– Risks build along with excitement
– Analysts yet to be totally convinced
By Greg Peel
It was only a few months ago that a red-faced BHP Billiton ((BHP)) was forced to admit it had paid a bit too much for some of its recently acquired US shale oil assets and hence had been forced to write down their value. In the meantime, however, the buzz on Wall Street is of the possibility shale oil will elevate America to energy self-sufficiency in under a decade. Only a year ago such a forecast would have been met with amusement.
The shale oil revolution seems to have crept up suddenly on the world while others are still trying to get their heads around, and justify their investments in, coal seam gas. Shale oil saw a brief time in the spotlight during the 70s-80s when OPEC sanctions sent the crude oil price skyrocketing. Once the price again retreated, expensive shale oil was thrown on the backburner. Only in recent times of sustained high oil prices, coupled with a horizontal drilling technology breakthrough, has shale oil resurfaced. And resurfaced in spectacular fashion.
Yet even US analysts have had to be convinced. About the time scepticism was rising, comparative oil “junior” Beach Energy ((BPT)) was announcing, with great excitement, prospective shale oil reserves in the Cooper Basin. Forget it, said local analysts at first blush. Too expensive, too risky, too novel, too far away from any required infrastructure, and way too long a lead-time. Even long term Cooper resident Santos ((STO)) seemed disinterested. But with the US shale story quickly gaining traction, analysts took another look at little old Beach.
And now they're impressed. They're not selling the farm, but interest is building. Yesterday Beach Energy held an investor briefing which was a largely a technical deposition on the company's shale/tight oil and gas progress and plans. Investors were on the edge of their seats.
Before Beach started talking shale it was producing conventional gas in the Cooper, and the good news here is that the company is on target to easily reach its 8.5-9.0 million barrels of oil equivalent (mmboe) production forecast, delivering a likely $800m in operating cashflow for FY13-14 – a figure in excess of analyst predictions. This is handy given Beach will need plenty of funds to realise its shale ambitions which at this stage do not involve farming out equity in the assets. Beach retains both a standalone interest as well as a feed-in joint venture with neighbour Santos.
At this stage, notes BA-Merrill Lynch, Beach is looking at a $950m two-year capex program but this will rise to $1050m if Cooper rejuvenation and expansion is sanctioned. In going it alone the company will take a risk given the capex figure represents a substantial draw down on cash and credit facilities and management is banking on an oil equivalent selling price of A$110/bbl. Brent, which is as good a benchmark as any for Australian crude, is currently trading under that level at spot.
Rather than farm out the unconventional assets, Beach believes it will achieve greater value through de-risking them, which amounts to spending $120-150m in FY13 on further exploration and appraisal. The sceptics have had a go at Beach, using big boy Santos' Moomba-191 well as the benchmark. Your flow rates are inferior, they said. Your carbon dioxide content will be higher, they suggest. You are behind Santos in terms of your fracking know-how, they smirked. Wrong, wrong and wrong, declared a defiant Beach management. The jury's still out, but the Merrills analysts will be watching testing progress closely. In the meantime the analysts have ticked up their target price for BPT to $1.47 from $1.41 and maintained a Neutral rating.
We won't have to wait too long for some indication, as activity is set to accelerate over the next six months, as Macquarie notes. New discoveries seem to have added a “new dimension” to the Western Flank prospects, Macquarie suggests, while the next stage of the unconventional program is underway and the crude oil pipeline infrastructure is expected to be completed by early next year. One must remember that if you went looking for the place on the Australian mainland that was about as far away as possible from everywhere, you might well stumble into the Cooper Basin.
Macquarie retains a Buy (Outperform) rating and has lifted its BPT target to $1.70 from $1.60.
Goldman Sachs feels Beach's de-risking of the shale program has been encouraging to date but would still like to see better flow rates. There should be strong reserve additions triggered in FY13 in the Western Flank and in participation with Santos, but management's aggressive strategy has increased risk. In coming quarters we'll have a better idea of well economics, Goldman suggests.
Goldman retains Buy with a $1.75 target, up 6%.
Noting Beach's forecast of a material increase in Cooper oil production over the next six months, UBS is sticking with Buy but is happy with its $1.55 target.
JP Morgan began as one of the greater sceptics once Beach announced its shale aspirations but as of yesterday the analysts admit Beach has firmly established itself as a frontrunner in appraising the “vast” potential of shale/tight gas in Australia, with both current test wells deemed “important”. However the scepticism lingers with the analysts deciding the market has become over-excited about something unconventional, untested and unproven. As is JPM policy, the analysts rate BPT as a Sell (Underweight) within the energy sector (as opposed to the market in general) on a valuation basis.
JP Morgan has also dropped its target to $1.32 from $1.34.
Citi concurs, maintaining a Sell rating with a target lowered to $1.22 from $1.23, despite upgrading forecasts for Beach production outlook. It should be an “exciting” six months for unconventional reserve appraisal, the Citi analysts suggest, but the economics of the venture will take a lot longer to assess. For now, the market is over-pricing, they feel.
Which is interesting given for a long time now the market has tended to be a lot less effusive about that other, arguably unconventional energy source – coal seam gas – than analysts. The score is pretty much in the market's favour to date given fear of frightfully expensive LNG conversion has kept investors at bay on the CSG front, ignoring analyst declarations of untold riches to be had and watching cost estimates rise almost by the hour. The ramp-up progress is biblical in its time frame, and while one day LNG success will likely bring a step-jump in LNG producer share prices, the long wait simply means high risk and other potential investment opportunities missed.
Shale is nevertheless the “it” word of the 2010s, and while Cooper shale oil/gas will likely stay onshore (rather than be converted to LNG) the lead-in timing is no less onerous. Beach is offering the potential for a short-term “good news” run (or not) but things will probably settle back again after any re-rating. So the potential is there, for the patient, and not so risk-averse.
The five brokers in the FNArena database who cover Beach are split down the middle, offering two Buys, one Hold and two Sells. A $1.45 consensus target price is right where the stock is trading, and targets range from $1.22 to $1.70.
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