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Beach Energy Ltd (ASX:BPT) shares slammed on asset sale and guidance downgrade

One of the worst performers on the market on Friday has been the Beach Energy Ltd (ASX: BPT) share price.

At the time of writing the energy producer’s shares are down 7% to $7.04.

Why have Beach Energy’s shares been crushed today?

As well as coming under pressure from declines in oil prices overnight after Saudi Arabia pledged to increase its production and U.S. crude inventories rose, Beach Energy has made a couple of market sensitive announcements this morning.

The first announcement was that it has agreed to sell 40% of its Victorian Otway interests to Eyal Ofer’s O.G. Energy for $344 million.

According to the release, Beach and O.G. Energy have signed a sale and purchase agreement under which the latter will acquire a 40% interest in a parcel of Beach’s nearshore and offshore Victorian Otway Basin interests. Beach will remain operator of the assets.

The Otway parcel includes the Otway Gas Plant, existing gas fields Geographe, Thylacine, Halladale, Speculant, and Black Watch, as well as exploration prospects Enterprise and Artisan.

Beach CEO Matt Kay believes the transaction aligns perfectly with the company’s ambitions.

He has stated: “We are delighted to have O.G. Energy join us in our Victorian Otway assets. This transaction introduces a fully-aligned partner to support the rapid exploration and development of our offshore Victorian acreage. Securing an excellent development partner for the Otway gas fields is a pivotal step towards creating new supply to Australia’s East Coast gas market.”

Because of this sale the company has released a second announcement with revisions to its guidance.

In FY 2019 production guidance has been reduced to between 25 and 27 MMboe from between 26 and 28 MMboe. EBITDA guidance has also been downgraded by $50 million to between $1,050 million and $1,150 million.

While this isn’t too drastic, it is worth noting that it does have a greater impact on its long-term guidance. The market was especially excited in recent days over the company’s plan to grow its production up to 40 MMboe by FY 2023.

However, the impact of this sale means that its new target for FY 2023 tops out at 36 MMboe. Importantly, its cumulative free cash flow guidance remains the same at $2.3 billion.

Should you buy the dip?

Considering the cash flow targets have remained the same, I feel like this selloff is a bit of an overreaction.

However, I wouldn’t necessarily be in a rush to buy its shares just yet. I still feel they are a touch overvalued and reliant on oil prices remaining at these lofty levels for the long term, which is not guaranteed.

Because of this, I still see more value in the shares of resources sector peers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

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Motley Fool contributor James Mickleboro 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 Scott Phillips.

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