Adelaide-based Beach Energy Ltd (ASX: BPT) is an established player in the energy sector. It has almost 60 years' worth of experience in oil and gas exploration, and over that time has grown into Australia's largest onshore oil producer.
The company's share price has skyrocketed about 140% since July 2017 on the back of positive financial performance, a key strategic acquisition, and favourable movements in commodities markets. Let's look at each of these factors in turn and see what they might mean for Beach Energy in the future.
- Financials
After three years of flat sales volumes, declining revenues and plummeting NPAT, FY17 was a banner year for Beach Energy. Sales volumes reached record highs, up 9% to 11.8 million barrels of oil equivalent (MMboe). Combined with a 3% decrease in cost of sales and favourable movements in the oil price (we'll get to that), this drove a revenue increase of 16% and caused underlying NPAT to jump a staggering 353% to $162 million.
So has the party continued into 1Q18? My answer: sort of.
Total sales volumes of 2.88 MMboe for 1Q18 are up 2% on the prior quarter's 2.84 MMboe, but they are well down on 1Q17 volumes of 3.29 MMboe. Sales revenue for the period ending September 2017 was $178 million, up 17% on the prior quarter, and $9 million higher than 1Q17.
So the key driver for revenues – and the reason why I'm a little apprehensive about joining the Beach party – is the oil price (but again, we'll get to that). According to Beach's quarterly announcement, the average price it could fetch for a barrel of its oil was $62.6 in 1Q17, but this had jumped up to $77.6 a barrel by 1Q18.
- Acquisition of Lattice Energy
Here's what does make me more bullish about Beach Energy.
It's big play last year was the purchase of conventional oil and gas business Lattice Energy, a subsidiary of Origin Energy Ltd (ASX: ORG), for $1.6 billion. This was partly funded by a $301 million entitlement offer to existing shareholders (completed in October 2017), with the remaining financing coming from cash reserves and new senior debt.
The acquisition means that Beach can add oil and gas fields in WA, New Zealand and the eastern Australian states to its existing Cooper Basin asset in SA.
The acquisition is forecast to increase FY18 production guidance by 150% and triple Beach's provable and probable oil reserves to around 232 MMboe. Plus, it is expected provide $20 million worth of overhead and corporate savings through readily identifiable synergies.
The deal also comes with inbuilt long-term contracts to continue to deliver gas to Origin as well as AGL Energy Ltd (ASX: AGL), which means more stable cash flows.
- Commodities Markets
As evidenced in its quarterly results, the biggest driver of Beach's performance has been the price of oil and gas. The price of West Texas Crude was booming in 2014, consistently hovering around US$80-$90 a barrel. However, within the space of about 18 months, prices fell dramatically to hit multi-year lows of under US$40 a barrel in 2016. Since then, the price has recovered slightly and has headed back up towards US$70 a barrel.
Considering it is Australia's largest onshore oil producer, an investment in Beach Energy is akin to a pure play on oil. And its financial results have largely moved in lockstep with the oil price. Its best year out of the last 5 in terms of revenues and NPAT was FY14, an its worst was FY16, when oil prices crashed.
The outlook for 2018 is mixed. CNBC recently reported that analysts at both Morgan Stanley and Goldman Sachs had upgraded their 2018 oil price forecasts in December, whereas a senior analyst at Commerzbank expected a 15% pullback over the next few months.
Foolish takeaway
The key message that comes out of Beach's financial results is how much of its success or failure is determined by the price of oil. However, I think the increased scale and synergies that come from the Lattice acquisition will shield Beach from some of that risk.
To reduce the revenue volatility that is brought about by changes in the price of oil and gas, Beach needs to either find ways to produce more at a lower cost, or lock in long term contracts and sure up its profit guidance.
Its acquisition of Lattice shows it is willing to do both those things – so I can see it having another strong year in 2018. I wouldn't put all my money in it, but it could still add value to a diversified portfolio.
