21 November 2019
Within the Australian equity component of investor accounts, we have bought Beach Energy (ASX: BPT), an oil and natural gas exploration and production company with operated and non-operated interests in five producing basins across Australia and New Zealand following the acquisition of Lattice Energy in 2018. Via its interest in the Western Flank of the Cooper Basin it is Australia’s largest onshore oil producer and supplies approximately 15% of Australian east coast domestic natural gas demand.
We are positive on the medium-term outlook for Beach for the following reasons:
- The company provides exposure to a diversified suite of assets and is led by an experienced management team doing an impressive job operationally and in terms of capital allocation decisions which improves confidence in their ability to identify, invest in and execute on value accretive opportunities.
- A strong balance sheet (net cash position), combined with growing operating cash flows allows for self-funding of the significant capex investment in organic production growth projects with high rates of return.
- In addition to high-returning internal growth opportunities, the company has the financial flexibility to pursue additional growth via M&A.
- It offers leverage to domestic gas prices as lower-priced legacy contracts roll-off or come up to be re-priced, as well as the potential to bring undeveloped reserves into the market at higher prices.
As with all equity investment, the purchase is not without risk. Prime amongst these would be a failure of the extensive drilling program to prove the resources critical not only to underpinning the strong 5 year production volume growth outlook, but also to increase the reserve life which is relatively low versus peers (especially on a 2P + 2C basis), and weighing on the valuation the market is prepared to subscribe to the company.
The purchase was funded from the sale of Oil Search (OSH.ASX), a quality business with significant undeveloped PNG gas resources and longer-dated production growth from expansion beyond the initial two trains at the PNG LNG project and development of the Papua LNG project. From a risk management perspective, we view it as prudent to not increase the aggregate commodity exposure across portfolios further given the softer global economic growth outlook and inherent volatility in short-term commodity prices.
For more information refer to the Beach Energy Snapshot.