Life’s A Beach Under New CEO

This story features BEACH ENERGY LIMITED. For more info SHARE ANALYSIS: BPT

Beach Energy’s result was not great, but largely irrelevant. Brokers are gushing over the company’s future under its new CEO.

-Beach Energy posts weak result
-Past irrelevant, future looks bright
-Brokers have significant faith in new CEO
-Strategic review underway

By Greg Peel

Beach Energy ((BPT)) this week posted what looked at face value to be a weak first half result. But while the headline result looked poor, once stripping out the accounting related to North West Shelf LNG and condensate cargoes, the result may not have been as large a miss at the operating level, Citi suggests.

Higher capex did see free cash flow significantly miss consensus. Citi suggested on Monday the share price will initially react poorly to the result. But the share price rose 3.3% on Monday and another 6.7% on Tuesday.

Because for brokers, the actual result matters little.

The appointment of a new CEO always leads to analyst assessment of the experience, track record and reputation of the new guy and what he/she may be able to bring to the table that the predecessor couldn’t. But the response to the appointment of Brett Woods as the new CEO of Beach Energy has been met with rare excitement within the analyst community.

“There’s a new Beach in town,” declared Morgan Stanley.

Brett Woods is set to implement a major bottom-up strategic review of the company’s operations – not unusual for a new CEO – but Macquarie suggests Woods’ review will be “substantive,” given his background and highly relevant experience previously at Santos.

Beach has been a low-performing organisation in recent years, Macquarie notes, suffering, the broker suspects, from the lack of consistent leadership, sub-optimal decision-making and poor fiscal discipline, and there is clearly “low-hanging fruit” with regard strategic potential.

In recent years the company has mis-stepped on execution, UBS suggests, and while the broker expects it will take some time for investors to build confidence in a complete turnaround in execution capability, the new CEO’s commitment to a strategy review focusing on cost and capital discipline is “a step in the right direction”.

Macquarie has upgraded to Outperform from Neutral, and the core driver of the upgrade is after reflecting some review outcomes in estimates over time, such as lower sustaining capital expenditure and lower unit operating expenditure mainly on Beach-operated assets where management can implement changes soonest.

How to Proceed?

There are four focus areas Woods can assess from a strategic perspective looking forward, Citi suggests: 1) cost out and operations efficiencies; 2) margin expansion; 3) disciplined capital allocation; and 4) leveraging a unique position. The company’s focus on Waitsia until now, the broker argues, has not allowed full consideration to be given to how the business should be run once production growth and high cash flows are delivered.

Management expects to complete the strategic review and present an update around the company’s full year results in August, considering opportunities for organic exploration growth, potential acquisitions, and cost reduction, which, Goldman Sachs suggests, could present a significant milestone for the company.

Woods' priority is "discipline", Morgan Stanley notes, drawing on his experience at Santos to increase margins from firstly driving costs down, predominantly in offshore assets, and reducing sustaining capex, including Cooper Basin exploration drilling, and secondly higher spot exposure through increased contract flexibility.

Management sees upcoming tightness in all markets it operates in, and targets further spot exposure over time. The company has around a 12% share of the East Coast gas market.

Beach Energy has a strong, fully funded production growth outlook, Bell Potter notes, diversified across five energy basins and across four separate gas markets, including LNG. The company is rolling off peak capex into a step-change in production and free cash flow in FY25-26, and has a strong balance sheet.

Responses

Citi joins Macquarie in upgrading its rating for Beach Energy, to Buy from Neutral.

With a positive view on Australian east coast gas and LNG markets, and a strong earnings growth outlook, Bell Potter maintains a Buy recommendation.

Ord Minnett expects efficiencies and cost-outs under the new CEO will lead to a margin recovery, and retains an Accumulate rating.

Posting a better cost performance, particularly in the Cooper Basin, delivering Waitsia Stage 1, and pursuing new growth in the Otway and elsewhere, are all key future drivers, Morgans suggests. But with the share price trading close to the broker’s fair value estimation, Hold retained.

Morgan Stanley similarly sticks with Equal-weight, while UBS sticks with Buy.

That leaves four Buy or equivalent and two Hold ratings among brokers monitored daily by FNArena. The consensus target price has risen to $1.91 from $1.81.

Not quite feeling the love is Goldman Sachs (not monitored daily).

“We are Sell rated on BPT based on relative valuation,” says Goldman. “Trading at around a 1x NAV [net asset value] we see more attractive valuation discounts across our upstream coverage with an average of around 0.9x”.

Life’s a Beach.

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