What: Energy producer Beach Energy Ltd (ASX: BPT) has had a rollercoaster ride in its share price recently.
So What: Beach Energy and other oil and gas companies have been sold off because of falling world oil prices. Benchmark WTI crude and Brent crude were trading at US$75.77 and US$79.61 respectively, near multi-year lows. Since early September, Beach Energy is down about 37%.
If the recent oil price drop is only short term, then this may be a chance to pick up a strong oil and gas producer at low prices. Just as iron ore has sold off in the past year, investors may be reacting to the sudden oil price decline by selling like a herd into weakness.
Here's why Beach Energy could be a very attractive buy:
1) Beach is still producing and discovering new gas
As the largest onshore oil and gas producer, it achieved revenue of over $1 billion for the first time in FY 2014. Underlying net profit was up considerably. This was mostly due to increased production from recent discoveries. During the first quarter of FY 2015, the company reported a 3% increase in quarterly oil production and announced three new oil discoveries.
Its Western Flank area in the Cooper Basin region has been the source of a lot of new oil. Soon it will be turning to explore its Eastern Flank, where it could find new oil fairways.
2) Strong cash position and well-funded capex
Beach Energy is in a joint venture with international oil giant Chevron Corporation (NYSE: CVX), which has agreed to help fund further exploration in the Cooper Basin. Still, the company has around $343 million in cash and with good, solid cash flows, it expects it will be able to fund its FY 2015 capex in full.
3) Wide profit margins
Even with lower oil prices, the company's total operating costs including transport and royalties are around US$25 – $30 a barrel, so that still leaves a wide earnings margin with prices around US$75 – $80 a barrel. If this recent world price slump is just a temporary situation and prices head back up, Beach Energy will be even better off.
We can't say if oil prices will weaken more or soon rebound, but with the amount of discoveries Beach Energy is making combined with lower production costs, it could be generating good earnings for years to come. If the market gets scared off, then it's time for Foolish investors to move in and seek out value.
