Beach Energy: Not over-promising with the updated base case

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
29 September 2021, 8:00 AM
Sectors Covered:
Industrials, New Energy

  • Beach Energy (ASX:BPT) has set a modest benchmark for FY24 production that excludes exploration success and growth programs that aren’t already committed to.
  • We think it should readily exceed that forecast, and given our expectations for a strong domestic gas market, we expect the company to target further growth.
  • We maintain our ADD rating and our target price (login to view).

Updated production forecasts and balance sheet looking solid 

BPT is targeting 28MMboe of production from committed growth projects by FY24. This excludes any exploration upside or production increases from projects like Trefoil that are still subject to a final investment decision.

The company is expecting accelerated depreciation tax credits of between $200m - $300m to lower cash tax payments between FY22 – FY24.

The balance sheet remains solid with the company in a $50m net cash position at the end of August. The existing debt facilities have been refinanced and extended by $150m. The new loans mature in FY25 and FY27, relieving any pressure in the medium term on the balance sheet.

Analysis

Our FY24 production forecast exceeds BPT’s base case (+18%). We are factoring in increases in Bass gas production that are not currently committed in BPT’s base case.

This explains 5% of the variance but even with significant decline in Western Flank production we think the base case target will be exceeded if the Waitsia expansion is delivered on time and the Otway plant reaches a utilisation of 88%.

BPT does not have the depth of 2C resource that larger peers have (e.g. STO, WPL) however it has a portfolio of high margin projects. Analysis by EV / resource metrics is therefore difficult for BPT and instead we look to the strong free cash flow yields of 16% that we expect in FY24 coming from its expected growth.

Forecast and valuation update

We have reduced our forecast gas production in the Western Flank to allow for faster decline given the company’s modest FY24 base case production forecast.

Our expected ramp up of the Waitsia expansion has been pushed back to 1H24. Additionally, we’ve also reduced our spot LNG price expectations to allow for potentially higher shipping costs to affect FOB pricing.

We have factored in cash tax reductions across FY22 – 24 with a total expected impact of $252m. Our valuation and target price increases slightly to (login to view).

Investment view

We maintain our ADD rating given the upside to our valuation even after today’s 11% rally in the share price.

BPT lost the market’s confidence after it wrote down a significant amount of its reserves however if it can show its ability to deliver on its growth program in the Otway in the next six months we expect the gap to our valuation to shrink.

Price Catalysts

Exploration is continuing in the Western Flank and we think there is the potential for further upside with modest oil discoveries.

BPT has also highlighted the significant exploration potential in the Perth basin. While this is not likely to be significantly progressed by the company in the next 12 months, any discoveries by other participants in the basin may have positive implications for BPT.

Execution of a binding LNG offtake agreement based on the current Heads Of Agreement with BP.

Risks

Oil and gas production, development, construction, exploration and appraisal.

Commodity price movements (oil, gas, LNG, carbon).

Energy market regulation.

Interest rates and tax regimes.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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