Overview: Beach Energy Group (“Beach Energy”, “the Company”), is an Australian oil and gas company focused on the Cooper/Eromanga basin. During FY16 Beach Energy produced 9.7M barrels of oil equivalent, with 53% being oil and 47% gas and gas liquids. The Company recently completed the merger with Drillsearch Energy Limited, which is now operating as a fully owned subsidiary of Beach Energy, and divested assets in Egypt and Queensland.
Catalysts: Beach Energy is highly leveraged to any recovery in the oil price generating an additional $50m NPAT if oil prices increase by US$10 per barrel. The Company successfully identified operational cost savings, reducing the cash flow break-even point to $26 per barrel. Beach has a strong balance sheet with 243 million in cash and undrawn debt facilities of $350m. The merger with Drillsearch may result in further synergies and could be a value driver.
Hurdles: Global benchmark oil prices have significantly declined since 2014 and there is no guarantee that prices won’t fall further. Beach Energy posted a statutory loss during FY16, which may affect the company’s ability to pay dividends in the future. There are integration risks associated with the Drillsearch merger.
Investment View: Beach Energy offers transitional exposure to the domestic oil and gas market. The Company has a strong balance sheet with surplus cash and access to additional capital. Generating free cash flow at the lower end of the commodity cycle, Beach Energy is well-positioned to benefit from any cyclical recovery in the oil and gas market which may allow for higher dividend distributions. However, commodity price volatility, lumpy earnings, and integration risks are primary hurdles. Beach Energy is sensitive to price movements but we believe the valuation is compelling and the risk to reward ratio favourable. We initiate coverage with a ‘buy’ recommendation.