Beach Petroleum (BPT) Market overlooking strong earnings from diversified production Buy for diversified oil and gas growth 1.130
Event Large mid-sized oil and gas producer, Beach Petroleum (BPT) continues to develop its operations on a number of fronts but has so far failed to gain any market recognition for its efforts. The company has been through a rapid growth phase, building on its growing cash flow from oil and gas production in its Cooper/Eromanga Basin areas that has allowed it to fund the purchase of significant stakes in the Basker-Manta-Gummy (BMG) project in the offshore Gippsland Basin in Victoria(50%), the Tipton West coal seam gas (csg) project in the Surat Basin in Queensland (40%) and a very significant increase in oil and gas reserves and production in the Cooper/Eromanga Basins with the purchase of the Delhi Petroleum assets.
The acquisition of the Delhi interest on 5/9/06, but with effect from 1/7/06, represents a major step up for the company as it lifted BPT’s share of proved and probable reserves from about 63M barrels of oil equivalent (boe) to about 101Mboe, with a change in mix from 90% gas/gas liquids and 10% oil to 70% gas/gas liquids and 30% oil with the Delhi interest. BPT is confident of the reserves in the Delhi permits can be substantially lifted, especially for oil, which is expected to come from the significantly boosted exploration program now under way.
BPT raised about $461M during 1H07 from the exercise of listed options at $1.00 and a placement, rights issue and conversion of FIELDS (the funding instruments related to the Delhi acquisition) at $1.39 per BPT share. After acquiring all the Delhi assets for about $590 (which included about $45M in cash in the Delhi Group structure), BPT disclosed recently that at December 2006 it had net debt of about $200M comprising total debt of about $240M and cash reserves of about $40M. At the end of 1H07, therefore, we estimate BPT’s gearing (net debt to equity) would have been about 26%. Recently BPT announced it had hedged a significant amount (4.8 million barrels) of future oil sales at a minimum of $US60 per barrel over the next three years, underpinning strong returns from its rising oil production in the event that the current softness in the global oil price continues.
Impact BPT currently has a market capitalisation of just over $1.0 billion and is now the fifth largest oil and gas company listed on the ASX, ranking just behind Australian Worldwide Exploration (AWE) in terms of market capitalisation. Despite its significant size and status as an established and growing oil and gas producer, the share price has been languishing for some time for what we believe are a combination of reasons unrelated to the underlying fundamentals of the company. These reasons include the massive expansion of the share capital from options exercise and to fund the Delhi acquisition; concerns that BPT paid too much for the Delhi interest given that it overbid co-venturer, Santos (STO); the weaker world oil price, which we see as a relatively short-run phenomenon; poor understanding of the company flowing from it having previously been a serial underperformer and not having a well developed investor relations message or presence amongst analysts; and from paying only a modest level of dividends despite strongly rising profitability.
We believe the share market will begin to re-rate BPT as it sees tangible evidence of strong operating and financial performance, likely over the course of FY07. As a result of some production decline in the Cooper Basin in 2Q07 and commencement of oil production from the BMG project in the Gippsland Basin at the end of 2Q07, it is likely that the 1H07 profit result for BPT will be slightly less than in the previous corresponding period (pcp) of 1H06 at just under $30M, but we see a much stronger 2H07 result from a full period of BMG and the start of the Tipton West csg sales taking the FY07 result to a forecast NPAT of around $120M or just over 16 cents per share. With a full year of BMG and Tipton West along with expected higher Cooper Basin output in FY08, we see earnings rising strongly to a forecast level of around $185M or just under 21 cents per share. We expect dividends, likely to be largely unfranked to rise in both FY07 and FY08 based on modest payout ratios of only about 19% as the company continues to direct its strong cash flow into its expanded exploration efforts on a number of fronts. We believe the attractive prospective fundamentals for BPT of price/earnings ratios of under seven times will be a catalyst for a re-rating.
BPT is in a strong financial position after acquiring the Delhi interests and funding its strong exploration effort that will see it participate in about 100 exploration and appraisal wells in FY07. We estimate BPT will lower its gearing (net debt to equity) from around 26% currently and at the end of FY07 to about 20% by the end of FY08 despite continued heavy exploration and development expenditure. We also believe the market does not fully appreciate the diversification of BPT’s operations, with highly profitable conventional oil and gas supplemented by growing natural gas from its Tipton West csg interests and an important and growing presence in the renewable energy sector, such as its involvement with Petratherm (PTR).
We believe the sharemarket is overlooking the investment merits of BPT, leading to share price weakness. We interpret some of the current BPT share price weakness could also be related to market caution about the forthcoming 1H07 result, which we anticipate may be slightly below the pcp before a very strong 2H07 performance boosts the FY07 result ahead of an even stronger FY08 result. Accordingly, we recommend investors with the appropriate risk profile seeking growing and diversified oil and gas exposure take positions in BPT for strongly growing returns.
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