Investors in Beach Energy can look forward to a likely upgrade of its earnings outlook by early next month, after the group yesterday finalised a multimillion-dollar reduction of its Cooper Basin royalty payments to ExxonMobil.
The real question, though, is whether the burying of the hatchet between Beach and Exxon is the start of something bigger - say a partnership on the Adelaide-based group's estimated 60 trillion cubic feet of shale gas in the Cooper Basin?
Beach has been paying millions under a confidential royalty agreement to Exxon's local offshoot, Esso Australia Resources, since it acquired control of Delhi Petroleum and its interests in the Cooper and Eromanga basins in 2006.
The Delhi assets form the crux of Beach's worth.
Even when Beach acquired the assets, Exxon was already making a claim on Delhi that it had been miscalculating the royalties due, and underpaying the US group.
Beach's royalty payment disclosures in its annual accounts in 2007, the first year with Delhi on the balance sheet, showed a jump in outlays from $7.7 million to $70.8 million.
Of course, not all of that goes to Exxon, because state governments and others take their tithes.
In last year's annual report, Beach showed that it was still paying $65.8 million in the 2011 financial year, up from $54.2 million in 2010.
If even half of that money was the cash going to Exxon, then it appears Beach has conserved somewhere north of $20 million a year, based on yesterday's statement that said Beach was paying perhaps as little as $8 million a year for the next five years.
So why would Exxon give up that money? Theoretically, the US group has elected to take a short-term haircut for a larger reward in the long term. Beach appears to have successfully argued to Exxon that it could continue to receive a large slice of royalties from assets that must eventually dwindle in output - meaning that eventually Exxon would be receiving nothing - or forgo some income now to give Beach the cash to invest in further development.
Its arrangements in the Cooper with its partner Santos allow ''sole risk'' developments, as was done on the Western Flank region.
This yielded the tastefully named Growler and Snatcher fields. Exxon has been guaranteed a minimum payment of $40 million over the first five years, and Beach has already paid $8 million in good faith.
The complaint about the under-calculation of royalties has also been settled.
The money saved will clearly flow through to Beach's bottom line.
That, along with better prices being achieved for output, will form the foundation of the managing director, Reg Nelson, and his team recalculating earnings when December quarter production figures are finalised over the next week or so.
Conspiracy theorists might also want to consider that ExxonMobil, like most energy producers around the globe at the moment, is keen on shale gas - the controversial gas source that uses fracture stimulation, or fracking, to recover deposits.
Beach's PEL 218 in South Australia is estimated to have as much as 60 trillion cubic feet of gas, although a lot more work is required. It now owns 100 per cent of the area, after taking out minority partner Adelaide Energy, which owned 10 per cent, with a $94 million takeover.
Recent reports were that Beach has been running a data room for potential global partners in the shale gas deposit.
Maybe Exxon worked out on which side its bread might be buttered with the potential of much greater returns for longer than the Delhi royalty.
ICN Price at posting:
18.5¢ Sentiment: None Disclosure: Held
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