Beach Energy: For True Believers Only?

This story features BEACH ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: BPT

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.

Split Views

Earlier this month, ahead of Beach Energy’s quarterly update, Morgan Stanley downgraded the stock to Underweight from Equal-weight due to development challenges and ongoing reserve headwinds. This broker was worried by potential for further downgrades after a further -5% of total reserve downgrade following management’s June 18 strategic review, which also downgraded reserves.

Management stated growth options won’t be prioritised until delivery of the Otway and Waitsia developments, and delivery of production cost targets.

Following the quarterly update, Morgan Stanley has retained its Underweight rating.

At the same time, Goldman Sachs reassessed its energy sector recommendations ahead of the round of first quarter reports. Escalating tensions in the Middle East have driven significant oil price volatility, this broker notes, as the market considers the risk of disruptions to supply out of the region. Amid the uncertainty Goldman remained selective, noting Santos ((STO)) and Karoon Energy ((KAR)) trading at steep -14/18% discounts to the broker’s net asset valuation, while Beach Energy was trading at 1x net asset valuation, as Citi highlighted above.

Goldman thus has Buy ratings on Santos and Karoon and a Sell on Beach Energy.

Ord Minnett (Buy) nevertheless views Beach as undervalued, especially considering its strong (and getting stronger) cash flow prospects. The broker forecasts a free cash flow yield of more than 25% over the FY26-30 horizon, which should spur greater shareholder returns. Much of Beach’s project execution risk, Waitsia delays notwithstanding, appears to have been overcome, suggests Ord Minnett, and this, along with potential cost savings, adds to the investment attraction.

Over FY25, Waitsia Stage 2 will ramp-up and new Otway wells are expected to offset Western Flank decline, notes Bell Potter (Buy). Capex is now trending lower and production growth will see free cash flow lift from FY26.

Beach’s near-term production growth is a key differentiator in this broker’s view when compared with domestic peers. A positive view on Australian east coast gas and LNG markets, and a strong production and earnings growth outlook, underscore Bell Potter’s Buy recommendation.

UBS has Beach Energy trading at the lowest implied oil price across its sector coverage US$52/bbl compared to Santos at US$59/bbl and Woodside Energy ((WDS)) at US$62/bbl. UBS thus retains Buy.

Jarden maintains its US$80/bbl near-term Brent oil price forecast despite material upside and downside risks from rising tensions in the Middle East. Upside should a supply disruption occur and downside if no disruption eventuates. This broker noted, earlier this month, rising market concerns about the global economic growth outlook (particularly the impact of China) and media reports noting Saudi Arabia’s threat to increase output weakening sentiment.

That said, Jarden retains an Overweight rating on Beach Energy.

Morgans (Add) has not updated since Beach Energy’s FY24 earnings result in August.

As it stands, there are four Buy or equivalent ratings on Beach Energy among brokers monitored daily by FNArena, one Hold and two Sell. Not surprisingly, broker target prices cover a wide range dependent on positive or negative views.

Citi (Sell) has the lowest among them at $1.10, Macquarie (Neutral) is in the middle with $1.35 and Ord Minnet (Buy) has $1.65. (Morgans has $1.75 but as noted has not recently updated). The consensus target is $1.45.

Goldman Sachs (Sell) has a target of $1.26 and Jarden (Overweight) has $1.34. At the time of writing, Beach Energy is trading at $1.28.

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