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Is the market missing Beach Energy’s potential?

Investors still trying to track down companies trading at bargain prices may have overlooked the potential of Beach Energy (ASX: BPT) as a long-term winner. Over the last 12 months the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has climbed 21%, however shares in the Cooper Basin oil and gas producer are up exactly 0%.

It’s a curious result for a company that has seen 10% annual production growth since 2011 and is forecasting between 10% to 16% growth for the financial year 2014. This will be an increase in production from 8 million barrels of oil equivalent (mmobe) in 2013 to between 8.7 and 9.3 million at around a 50/50 mix of oil and gas.

So far Beach Energy has been making strong efforts to achieve its forecasts. In the first quarter of FY14 Beach had an 80% drilling success rate from the 27 wells it drilled as part of an aggressive programme aiming to increase production and identify additional pockets of reserves.

But despite this, the company trades at a price to earnings ratio of just 11 – a ratio much more likely to fit a fully mature company with limited growth potential or perhaps a debt-laden start-up. Beach Energy fits neither of these profiles.

The company holds $402 million in cash, which makes up 23% of its $1.7 billion market capitalisation and which will be the means to fund its growth. Although the nature of oil and gas exploration is traditionally high risk, investing in an oil company with no debt significantly lowers the risk of the company being seized by creditors and going belly-up if something goes wrong.

Beach Energy also has partnership deals with some of the country’s biggest major energy operators, including Santos (ASX: STO) and Origin Energy (ASX: ORG). The company expects to capitalise on the rising demand for natural gas from Australia’s east coast and signed a deal to sell $1.5 billion of natural gas to Origin in April this year with this in mind.

Foolish takeaway

Major analysts including Credit Suisse, Citigroup and Bank of America rate Beach Energy as ‘neutral’ according to the Analyst Rating Network, but given its prospects and conservative price they, too, may be over looking Beach’s potential.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned. 

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