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Morningstar | Beach Targets Production Growth to 40 mmboe by Fiscal 2023. FVE Increased to AUD 1.80. See Updated Analyst Note from 02 Oct 2018

We increase our fair value by 13% to AUD 1.80 after Beach outlined plans to increase production by 80-100% to 34-40 million barrels of oil equivalent, or mmboe, by fiscal 2023, or by 20%-55% from forecast fiscal 2019 production of 26-28 mmboe, which includes a full year’s contribution from the AUD 1.6 billion Lattice Energy acquisition. Our midcycle fiscal 2023 production forecast had been for 30 mmboe, with Beach’s plans representing a 13%-33% increase on our prior target. However, we only increase our midcycle production target by 17% to a guidance low-end 35 mmboe, preferring to greater clarity on contributing projects before crediting Beach’s full 40  mmboe.

Despite growth plans, Beach targets a near-zero net debt position by fiscal 2020 due to strong free cash flows, expected to total AUD 2.3 billion for the five years to fiscal 2023. This includes a potential strategic 30%-40% sell-down of the company’s 100% Otway Basin gas stake that in addition to delivering sale proceeds, would also reduce Beach’s fiscal 2020-2023 capital expenditure requirement by up to AUD 450 million. It will, however, reduce production by 2.5-3.0 mmboe. Cash flow projections are underpinned by strong long-term gas contracts and repricing. Our forecasts credit slightly higher five-year total free cash flow of AUD 2.4 billion, but we are assuming less growth capital on lower production, though we don’t yet include any Otway sell-down.

Beach’s growth trajectory is reminiscent of that for Santos, each company recently making transformative acquisitions, for Beach Lattice, and for Santos Quadrant. Both have timed these acquisitions well, with strengthening energy prices making short work of acquisition-related debt. But the comparison runs deeper still, with growth plans for each resting meaningfully on improving Cooper Basin performance where they are joint venture partners. Beach has a 33.4% Moomba gas hub stake in which Santos is operator.

Strong collaboration is a component of efficiencies currently being delivered, in the context of best practice and technology. Implicit in Beach’s production growth target is improvement in facility reliability from 94.3% in fiscal 2018 to 98% by fiscal 2021, we estimate accounting for 0.5 mmboe of the annual production increment. Further, Cooper Basin cost reduction and high East Coast gas prices facilitate renewed growth efforts to drive steadily increasing output over the next decade. But most importantly, Otway gas plant production is now forecast to increase by around 35% to around 57PJ by fiscal 2023 from around 42PJ in fiscal 2019, for an around 2.5 mmboe growth increment before any part equity sell-down. This represents nearly half the production increase we’ve credited with nine drilling opportunities planned in the next four years to drive higher output.

Our fair value equates to a marginally higher 2023 EV/EBITDA exit of 4.7 versus 4.5 prior, still suitably lower than larger peer Santos’ 6.9 for example, in keeping with Beach’s lesser field life. Beach had approximately 10 years proven and probable, or 2P, reserve life based on our prior midcycle 30 mmboe production target. At 35 mmboe life is shorter still, and considerable work will be required to convert more resource to reserve. This is part of the grand strategy, with Beach admitting a considerable part of its production stretch target is dependent upon drilling outcomes. It points to multiple avenues to replace or grow proven and probable reserves, including in the Cooper, Otway, Perth, and frontier Carnarvon, Bonaparte, and Canterbury basins. Exploration spend of around 80 million per year is targeted for the next five years.

Beach has also now provided fiscal 2019 EBITDA guidance of AUD 1.1-1.2 billion, added to unchanged production guidance of 26-28 mmboe. Our forecast was already for AUD 1.05 billion in fiscal 2019 EBITDA and this and all our other fiscal 2019 forecasts stand. So too Beach’s fiscal 2021 production target of 30 mmboe stands which ours mirrors.