EUR 850.00 For Business Accounts Only

Morningstar | Strong 4Q Free Cash Flows Set No-Moat Beach Up for Delivery on Production Expansion.

We make no change to our AUD 2.25 per share fair value estimate for no-moat Beach Energy. Fourth-quarter fiscal 2019 production marginally exceeded expectations, down just 4% to 7.0 million barrels of oil equivalent, or mmboe. Decline was expected given the sale of 40% of Otway, but Western Flank output ballooned 32% after successful expansion of liquids handling infrastructure. The application of horizontal drilling further boosted Western Flank oil output. Group fourth-quarter sales revenue increased by a better than expected 7% to AUD 501 million reflecting strong production, oil inventory drawdown and marginally higher average pricing overall.

Our fiscal 2019 EPS forecast is little changed at AUD 0.22. Beach maintains underlying EBITDA guidance at the upper end of AUD 1.25-1.35 billion. We remain at the upper end, particularly given full-year production of 29.4mmboe marginally exceeded the top end of most recent 28-29mmboe guidance. At AUD 2.04, Beach shares are somewhat undervalued. Demonstrable progress on production growth targets is likely to narrow the value gap.

Our fair value equates to a fiscal 2023 EV/EBITDA exit of 4.5, assuming 9.5% five-year EBITDA CAGR to AUD 1.2 billion by fiscal 2023. In addition to an unchanged USD 60 Brent crude price forecast in 2022 dollars, we still assume a 60% increase in group production to 30.6mmboe, by fiscal 2023. This is toward the lower end of Beach’s five-year production target range of 30-36mmboe and a better result could bring upside to our fair value estimate. However, given associated expansionary capital expenditure required and limited field lives based on the company’s current reserve/resource position, we determine even more material value add could come through reserve additions to extend the production and cash flow tail. At June 2018, group proven and probable reserves stood at 313mmboe, equivalent to just over 10 years life at prevailing 29.5mmboe annualised production rates.

Our model credits somewhat more, an average 15 years life, anticipating exploration success and conversion of resources to producible reserves. But increasing life by a further five years would increase our fair value estimate by around 20% to AUD 2.75. This is naturally a focus for Beach and the company targets a greater than 100% reserves replacement rate for the five years to fiscal 2023. Success with that goal would extend life by at least five years. In fiscal 2019, Beach participated in 134 wells with a creditable success rate of 84% overall. The drilling rate was 40% ahead of fiscal 2018 and heightened activity is expected to continue.

Strong fourth-quarter free cash flow of AUD 130 million combined with AUD 262 million Otway sale proceeds leaves Beach with a commendable AUD 172 million net cash position. This is two years earlier than was anticipated immediately post the AUD 1.6 billion Lattice Energy acquisition. The strong balance sheet leaves Beach in an excellent position to deliver on growth promises. One of these is expansion of gas production from the Waitsia field in the Perth Basin, already fully factored into our numbers. Beach in joint venture with Mitsui has just signed a 20TJ/day contract with Alinta Energy to run for 4.5 years from mid-2020. This stamps a doubling in capacity of the associated Xyris gas processing facility to 20TJ/day, known as Waitsia Stage 1 expansion. Stage 1 expansion includes a large diameter pipeline to the Dampier to Bunbury Natural Gas Pipeline, though capacity for even further expanded Waitsia Stage 2 capacity volumes will be built-in. Front end engineering and design for Waitsia Stage 2, including construction of new 100-250TJ/day processing capacity is complete. We assume 200TJ/day, and value Beach’s 50% share at around AUD 0.11 per share or 5% of group total. Stage 2 gas volumes will comprise around 10% of expanded group total volumes but upfront capital expenditure crimps the fair value impact.