Why I'd buy Beach Energy Ltd at this share price

The Beach Energy Ltd (ASX:BPT) share price ended last week on a high, up almost 7% in Friday trading to close just under $1.40. But it's really been on a tear for the last 6 months, more than doubling in value since July 2017. What's driving these rapid gains in the company's share price, and will they continue into 2018? 

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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. 

Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »