Company Overview: Beach Energy Limited (ASX: BPT) is an oil and gas exploration and production company with ownership interests in strategic oil and gas infrastructure, such as the Moomba processing facility, Otway Gas Plant and BassGas. The company was founded in 1961 and is currently headquartered in Adelaide, South Australia. BPT has established a world-class operated oil business on the Western Flank of the Cooper Basin and has a suite of exploration permits across the onshore Cooper and Perth basins, onshore and offshore Otway Basin and offshore Bonaparte and Carnarvon basins in Australia.

BPT Details

Long-term Growth Supported by the Development of Key Gas Growth Projects: Beach Energy Limited (ASX: BPT) is an oil and gas exploration and production company and a key supplier of gas into the Australian east coast gas market. The company’s strategy is focused on pursuing growth opportunities within Australia and nearby jurisdictions while maintaining a focus on creating value for shareholders. In March 2021, BPT completed the acquisition of Senex Energy’s Cooper Basin portfolio, making it the 100% operator of Senex’s Western Flank assets. BPT’s stable earnings base supported by fixed-price gas business has allowed the company to earn decent revenues. For Q3FY21, BPT reported 14% QoQ growth in sales revenue to $393 million.

Revenue Trend (Source: Company Reports)

Looking ahead, the company is focused on re-investing cash flow into long-life growth projects, increasing earnings of BPT’s stable gas business. Notably, BPT’s production growth is expected from FY23 with Waitsia LNG and offshore Otway developments. With stable earnings base, and robust balance sheet, the company is well placed to support its capital intensive FY22 and FY23 program and delivery of its key gas growth projects.

H1FY21 Results Highlights: For H1FY21, the company reported production of 13.0 MMboe, in line with H1FY20. Notably, the oil production from Western Flank was 8% higher than pcp. For the period, the company reported EBITDA of $407 million, which was impacted by a $39 million exploration expense, primarily relating to Ironbark, Wherry and Bonaparte assets. NPAT for H1FY21 stood at $128.7 million. During the period, the company announced two opportunistic bolt-on acquisitions, including Senex Energy’s Cooper Basin portfolio and Mitsui’s Bass Basin assets, which provide a platform for further synergies and growth.

Top 10 Shareholders: The top 10 shareholders together form around 39.44% of the total shareholding, while the top four constitutes the maximum holding. Seven Group Holdings Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 30.02% and 1.86%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)                                             

Key Metrics: For H1FY21, the company reported gross margin of 31.4%, down from 42% in H1FY20. EBITDA margin for H1FY21 stood at 56.3%, down from 65.5% in H1FY20. Current ratio for H1FY21 stood at 1.66x, up from 1.06x in H1FY20.

Liquidity Profile (Source: Analysis from Kalkine Group)

Decent Revenue Growth in Q3FY21: For Q3FY21, the company reported production of 5.9 MMboe, down by 5% on the previous quarter. Over the quarter, the sales revenue increased 14% to $393 million, despite the challenges across Western Flank oil and gas assets as a result of the unique nature of these fields. During the quarter, the company executed an agreement for Beach to undertake FEED activities for the Moomba CCS project in the Cooper Basin. As at 31 March 2021, the company had cash reserves of $190 million and drawn debt of $210 million.

Change in Director’s Interest: Recently, one of the company’s Directors, Joycelyn Cheryl Morton, acquired 24,000 shares of the company at a price of $1.29 per share via an on-market trade.

Key Risks: The company is exposed to the risks related to the fluctuations in the prices of oil and gas. A sustained period of low or declining crude oil prices can impact BPT’s operations, financial position and ability to finance the developments. As BPT also operates in those jurisdictions where the Australian dollar is not an accepted currency, fluctuations in the foreign currency exchange rates may impact the company’s financial results. Further, the company is also exposed to the risks related to the ongoing COVID-19 pandemic.

Outlook: Due to reduced reservoir performance and natural field declines within Western Flank oil fields, and lower customer nominations for the Victorian Otway, the company has recently reduced its FY21 guidance. It now expects its production to be in the range of 25.2 – 25.7 MMboe, down from guidance of 26.5 – 27.5 MMboe. Underlying EBITDA in FY21 is expected to be in the range of $850-$900 million.

The company’s robust balance sheet and stable gas revenue base underpins its growth capital programs in FY22 and FY23. BPT is continuing the development drilling in the offshore Otway, with first gas from Geographe wells expected to commence in FY22, providing an uplift to Victorian Otway production. BPT is also on track to enter FEED activities for the potential Trefoil development in Q4FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 20.17% and is trading below the average 52-weeks’ price level band of $1.150-$2.035, offering a decent opportunity for accumulation. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We have taken a slight discount to its peer average EV/Sales (NTM trading multiple), considering the reduced reservoir performance, natural field declines, reduced guidance, and also taking into account that the company has been trading at a discount in the past 3-years over its peer average. Considering the decent performance in Q3FY21, reduced net debt, rise in current ratio, modest long-term outlook, expected benefits from the recent acquisition of Senex Energy’s Cooper Basin portfolio, current trading level, and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.365, down by 1.087% as on 9 June 2021.

BPT Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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