Australia | Oct 22 2024
Beach Energy posted strong first quarter numbers and is headed to a production and cash flow inflection in FY26. But broker recommendations are polarised.
-Beach Energy's quarterly results ahead of consensus
-Improved Otway production key
-Delays at Waitsia disappoint
-Analyst views are split down the middle
By Greg Peel
Beach Energy ((BPT)) shares initially shot up 4% on the release of its first quarter FY25 update. Production, sales and revenues were all ahead of consensus forecasts. The better-than-expected revenue number was driven by a 16% quarter-on-quarter increase in production, which, in turn, was driven by very strong gas output from the Otway Basin operations offshore South Australia and Victoria.
The company's mature (and declining) assets Western Flank (Cooper Basin, on shore Queensland) and BassGas (Bass Basin, offshore Victoria) also provided a boost following successful well intervention works, while Beach secured additional swap cargoes for its Waitsia project (onshore Western Australia).
On the other hand, the key disappointment consisted of more delays at the Waitsia project. Waitsia's schedule and budget were nevertheless reiterated, despite poor productivity delaying first gas into the plant. Fifteen Beach staff are being seconded into the Waitsia joint venture with Mitsui, despite Mitsui being the operator, to control aspects of the commissioning phase.
One Waitsia development was drilled successfully in the quarter, bringing the number to twelve, with two more development wells and one appraisal well planned for FY25, and three more development wells on the horizon.
Wait and See
With fuel gas still yet to be introduced into the Waitsia Gas Plant, UBS (Buy) now anticipates first gas is achieved in March and recognises the key outstanding risk remains commissioning the compressor trains. If further productivity issues arise at Waitsia, it could see the contingency in the timeline to hit nameplate in the March quarter FY25 begin to thin.
That said, UBS is encouraged by Beach's ability to insert key people with commissioning expertise into supervisory roles for the remainder of the commissioning process.
Group FY25 production guidance is unchanged, on a wide production range. This wide production range allows for Waitsia Stage 2 ramp-up variability, notes Bell Potter (Buy), with first gas targeted for early 2025 preceding a three to four month ramp-up.
Production in the Otways will also rebase higher following Thylacine West well connection with first gas expected end of October 2024. This growth will offset a relatively stable Cooper Basin outlook and ongoing decline at the Western Flank oil assets.
It was a solid quarterly update in Macquarie's (Neutral) view, featuring "sensible" LNG swaps and progress on new Otway wells. The Waitsia start-up in the March quarter is seen as the primary catalyst. The Mitsui/Beach Energy JV could buy Mineral Resources' ((MIN)) Perth basin assets to reinforce its Waitsia position, Macquarie suggests, although this would likely be a negative catalyst for Beach's share price.
Citi (Sell) points to operating cash flow in the quarter being more than 10% higher than forecast following Beach securing additional swap cargoes for Waitsia. However, the broker warns, an unwind on this sees earnings and operating cash flow fall commensurately in 2026, with only a modest net present value benefit.
The stock trades around a 1x price/net asset value ratio using a consensus oil curve forecast, Citi notes, despite Waitsia and transformation execution risks remaining elevated. If the oil price falls in 2025 in the way Citi expects, then Beach, which is unhedged, will have a smaller balance sheet to transact on acquisitions.
Citi thinks the size of an acquisition will be large in the sense that management will presumably want to dilute away the low quality nature of some assets that have high sustaining capex and/or short reserves life.
Investors can therefore wait for execution first, Citi suggests, while getting a free look on the commodity price.
Citi is simply not a fan, stating "Beach Energy currently remains too difficult for us". The stock's inclusion in an equity portfolio is too hard to justify for now, the broker believes.
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