Last month Beach Energy Ltd (ASX: BPT) completed the acquisition of Drillseach Energy, locking in Beach as the country's largest on-shore oil producer.
It was a well-timed acquisition near the bottom of the current oil price slump, so do the additional benefits from the acquisition make Beach Energy worth buying?
What the deal will do for Beach Energy
Importantly the deal will strengthen Beach Energy's reserves of 2P (proved and probable) oil and gas without the need for costly exploration.
The company's reserves had been declining since mid-2012, and although Beach has significant contingent energy resources, the reduction of capital expenditure in response to falling oil prices meant the company needed a quick way to add 2P reserves. The Drillsearch acquisition adds 25.7 million barrels of oil equivalent (mmboe) to Beach's portfolio, a jump of 35%, and also contributes a growing production profile.
Efficiency
Beach and Drillsearch already had a joint-interest in several big permits around the Cooper Basin, so bringing these interests together should simplify planning processes and streamline production.
In addition, cost reductions from reduced finance costs and the lower combined staff head count are expected to achieve annual cost savings of $28 million (pre‐tax) by FY17. For context, the savings would represent around 3% of the combined company's FY15 revenue.
Product mix
A key focus for Beach is the domestic east coast gas market where demand is expected to strengthen as natural gas gets diverted to the major export projects.
Drillsearch's reserves are about 63% weighted towards wet gas and production is expected to ramp up from the second half of the 2016 financial year which times well with the growing demand profile for domestic gas.
Market position
Commodity producers have little or no pricing power over customers who can easily switch suppliers. However there are few onshore gas producers with the scale that Beach now commands which may strengthen its position for long-term domestic supply contracts.
Should you buy?
The new Beach Energy sells for an Enterprise value (EV) to 2P reserve ratio (EV/2P ratio) of around 10 which looks like reasonable value compared to Santos Ltd (ASX: STO) on 14.
The acquisition was certainly smart from Beach, creating efficiency and solving key problems at the opportune moment. However in my view the benefits achieved by the new, bigger Beach Energy aren't remarkable enough to make the company a more attractive 'buy' than before.
