Beach Energy (ASX: BPT) drops 13% on weak outlook

Mr. Market was not happy with the annual results of oil and gas producer Beach Energy. The overall results were good – revenues grew 13%, EBITDA was up 17% and NPAT jumped 39%. However, to some observers the FY23 outlook did not look promising.

 

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Beach Energy set for a transition and we thought it was well positioned

Beach Energy owns oil and gas infrastructure assets as well as offshore and onshore development projects. We have backed Beach, making it a Concierge Stock back in May 2022, on the basis that it was set to benefit from the gas shortage on the East Coast in the longer term.

In addition to positive market fundamentals, the company was setting itself up well for the future, anticipating a 2024 start-up of Stage 2 production at Waitsia, one of the largest gas fields ever discovered onshore in Australia and will deliver 250TJ per day over 15-year life cycle. Just last week, Beach signed an offtake agreement for Waitsia with BP. Remember, this deal would formally christen it as an LNG exporter.

And in the short term, it was benefiting from higher gas prices due to Russian gas being cut off from the global economy as the world retaliates to its invasion of Ukraine. Not to mention, it was (and still is) trading at a reasonable valuation of around 3x EV/EBITDA and around 6x P/E for FY23.

 

Internal issues drag Beach down

However, things weren’t all smooth sailing. Beach Energy lagged for several months after the Corona Crash as energy prices hit rock bottom and stagnated. And even as energy prices recovered, it spooked the market several times with multiple production downgrades (leading to a legal action against the company) and the unexplained exit of its CEO.

Today’s results were arguably not too bad. After all, it grew its revenue and profit despite lower production thanks to increased pricing. But we think investors were spooked by the short-term outlook, which at first glance appears a step backwards.

 

FY23 set to be a year of transition

The company said FY23 would be a year that would set it up for the longer term – FY24 and beyond. It has a number of initiatives to grow its production set to begin from mid-CY23 with work on those initiatives set to continue until then. These include bringing the Otway Gas Plant back to full capacity and tying in the Thylacine 1-4 wells.

These are set to have an impact on Beach’s books. Capex is set to be $800m-$1bn, compared with $872m in FY22, and unit field operating costs will be $12-$13 per boe compared with $11.74 in FY22. The latter numbers had people worried because it looked like Beach’s costs in the current financial year could end up being 10% higher than in FY22. The company hasn’t guided on revenue and this is where the upside in FY23 could come from. It’s also important to remember that Beach Energy still has some uncontracted East Coast gas capacity for FY23 and that allows it to take advantage of higher wholesale prices. And Beach itself noted that the company provides investors with ‘unhedged exposure to Brent and liquids pricing’.

 

The big bump in production should come in FY24

Beach’s production is set to takeoff in FY24 with the company forecasting up to 28MMboe. But in FY23, it expects production to be 20m – 22.5m barrels of oil equivalent (MMboe), which compared to FY22 would be 3% growth at best and an 8% reduction at worst.

Bear in mind, this assumes all other assets perform to forecast and everything runs on time. Some critics would argue that this assumption is arguably optimistic given its past record of production downgrades and the unforeseen issues that have impacted the industry during the pandemic. One analyst in the Q&A session of the results briefing on Monday morning asked management if the company’s production assumptions were conservative or not, observing that if it downgraded production this would be the fourth instance in as many years. CEO Morne Engelbrecht replied that these were targets the company was setting for itself.

 

We still like Beach Energy’s prospects

Where do we stand on Beach Energy after these results? We remain optimistic on this story given high ongoing demand for gas both domestically and internationally, the favourable pricing environment generally and the potential for exploration success in FY23, particularly in the Perth Basin. We think $1.60 may turn out to be a great entry point for people who missed the initial ride to $1.85. Our stop loss is $1.53.

 

 

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