Beach Energy: Valuation upside looking more attractive
About the author:
- Author name:
- By Max Vickerson
- Job title:
- Date posted:
- 19 February 2020, 11:00 AM
- Sectors Covered:
- Industrials, New Energy
- The ongoing impact from the coronavirus has given the market a buying opportunity for BPT.
- We had previously factored in lower oil prices in the short to medium term in addition to some conservatism on the prospects for the Waitsia expansion.
- The current upside to our valuation (+8%) and the small dividend (1% yield) lifts potential 12-m TSR to 9%.
- We upgrade our recommendation to ADD and retain our target price (login to view).
The start of a buying opportunity
After the release of BPT’s first half result we suggested waiting for better buying opportunities. We had held the view, since initiating coverage in November last year, that the market was pricing in value that the company has not yet delivered in its proposed growth program.
The market had a cool reception to Beach’s result from lower forecast production and higher capex as well as the shock to oil demand and price from the coronavirus.
We have made allowances for production and oil prices in our forecast already and the share price is now at a point where we see value despite the uncertainty.
Oil drop may have further to run but it won’t last forever
It seems too early to declare the impact of the virus over and there could be further downside shocks to oil demand and price in the short term. Over half of BPT’s revenues come from oil so this will have a significant impact on near term earnings.
In our most recent note we’d lowered our forecast for FY20 and FY21 EPS by 8% and 3% respectively as a result of lower oil prices. There could be further downside shocks as the true extent of the impact to demand becomes clearer with time however we expect prices to gradually recover in FY21 and head towards our long term USD70/bbl forecast.
Positive catalyst potential at the full year result
BPT has highlighted the successful appraisal work in the Western Flank, particularly its Bauer field. The Western Flank currently holds 18% of BPT’s 2P reserves. We also note the exploration successes in the Dombey field in the SA Otway which haven’t yet been recognised as reserves. We expect that BPT will issue upgraded reserves numbers with the full year result in August. We can’t quantify how much Beach’s reserves might increase by however we estimate that an increase of 1MMboe of 2P oil reserves would increase our valuation by ~1cps.
We upgrade our recommendation to ADD on the upside potential to our valuation.
We have used conservative assumptions in our valuation for capex costs for the offshore Otway development and we’re not assuming that the Waitsia expansion will receive more than current domestic prices in WA.
Despite our caution in valuation we still see value at the current price. We estimate potential 12-m TSR of 9% but we note the ongoing uncertainty in how the coronavirus will impact oil demand.
Recent share price movements have been highly correlated with movements in Brent oil contract prices which investors could take advantage of for increased upside potential if there is further downward movements in oil prices.
Morgans clients can login to view our detailed report and share price target for Beach Energy (BPT). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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