Is Beach Energy Ltd a buy at this share price?

Beach Energy Ltd (ASX: BPT) has seen its share price rise more than 33% since the start of this year, mostly as a result of the rising oil price, but are currently down around 2.7% today at 65.7 cents.

Beach says it is Australia’s largest onshore oil producer, with 9.2 million barrels of oil equivalent (MMoe) produced in the 2015 financial year (FY15).

Most of Beach’s major assets are located in the Cooper/Eromanga Basins in Australia, but the group also has operations in Egypt, Tanzania and New Zealand.

Earlier this year, Beach merged its operations with Drillsearch Energy Ltd (ASX: DLS) which should see the group comfortably exceed last year’s production. In the first half of FY16, Beach produced 4.8 MMboe, down 5% over the previous year, but that doesn’t include any of Drillsearch’s operations. That saw sales revenues of $272 million, but an underlying net profit of just $9 million – down 88% from the previous year.

But despite the merger, Beach said in February it expected to produce between 8 and 8.6 MMboe. That has since been upgraded to between 9.5 and 9.8 MMboe two weeks ago, along with savings of around $40 million thanks to the closure of Drillsearch’s Sydney office and reduced employee and contractor expenses.

Beach also proposes to cut its combined headcount further from 301 at the end of June 2015 to 213.

However, Beach itself appears to be a takeover target from billionaire Kerry Stokes’ Seven Group Holdings Ltd (ASX: SVW). The group now holds 22.89% of Beach Energy and has been diversifying into the oil and gas sector ever since former Woodside Petroleum Limited (ASX: WPL) CEO Don Voelte was appointed as CEO in 2013. Mr Voelte resigned from the group last year as CEO and director.

Foolish takeaway

Despite the potential, Beach Energy is one for the oil & gas faithful. The company suspended its dividend to preserve capital in February – as its exploration program currently consumes hundreds of millions of dollars each year – despite partnerships with a number of oil and gas majors including Santos Ltd (ASX: STO) and Origin Energy Limited (ASX: ORG).

High all-in sustaining costs also mean Beach has a lot of work to do to grow its profits, and on underlying net profit the share price is expensive. But on the up side, the oil and gas producer could also be a takeover target from Seven.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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