Beach Energy has warned its Perth Basin project will cost more than expected

Beach Energy has underdelivered on exploration hopes and costs are set to increase for its WA project, while industry jitters remain over government intervention.

Billions of dollars worth of its potential developments in the East Coast gas market face an uncertain future while the rules of engagement with the Federal Government remain up in the air, Beach Energy chief executive Morne Engelbrecht says.

Mr Engelbrecht said on Tuesday the company is forging ahead with its Waitsia Stage-2 and offshore Otway developments, the latter of which will bring another 100 terajoules of gas into the East Coast market when it comes online later this year, however developing financial models for new projects beyond the end of 2023 is problematic.

Comet Ridge also weighed into the debate over intervention in the gas sector on Tuesday, telling the ASX in its quarterly report that it expected the gas market supply crunch to worsen “particularly from winter 2024 - due to delays and cancellations of investment in new supply by the industry’’.

“Comet Ridge is prioritising available cash on the development of already proven gas reserves over further appraisal spending whilst market uncertainty prevails,’’ the company said.

Comet Ridge cited Senex Energy’s decision to halt any new contracts related to the $1bn Atlas expansion project in Queensland and Cooper Energy’s decision to put the phase three development of its Otway project offshore Victoria under review as examples of the investment freeze hitting the sector.

The sentiment put forth by both companies was backed up by Allan Gray Australia analyst Dr Suhas Nayak, who said on Tuesday that companies such as Santos and Woodside Energy which had the potential to develop major projects offshore could find that more attractive than investing in Australia.

The government’s current emergency $12 per gigajoule gas price cap will remain in place until December this year, while final submissions on the structure of new legislation to govern the operation of the East Coast gas market are due next week.

Consultation on the price cap element of the government’s proposals closed in mid-December.

Mr Engelbrecht said Beach had decisions to make at some point about how to progress new major developments such as further investment in its BassGas assets and more drilling in the Otway, but it needed some certainty around pricing and what sort of interventions the government will institute over the longer term before it could go ahead with confidence.

“What that might look like, and therefore what economic returns can be assumed, and therefore how we look at the returns on the potentially billions of dollars of investment,’’ Mr Engelbrecht said.

“We just need some clarity on how that will actually work going forward.’’

Dr Nayak said the government’s interventions would likely have only a small impact on listed company earnings in the short term, but over a longer time frame might disincentivise investment in Australia.

“I think for large companies like Woodside and Santos that have operations outside of Australia, it really does bring into question whether it’s worth making significant new commitments into this market,’’ he said.

“I’m sure that’s something that they’ll work through as some of these provisions become clearer. But I think it does change the pay-off profile for them, making investments into Australia versus elsewhere.’’

A lack of domestic investment could also flow through to large energy users, Dr Nayak said, “because that may mean there isn’t enough gas in the domestic market ...and that’s a problem for all of us’’.

Announcing Beach’s quarterly production results on Tuesday, Mr Engelbrecht said the execution of agreements with a new contractor to take over construction of the $770m Waitsia Stage-2 project were “imminent”, following the collapse of the previous contractor Clough in December last year.

He foreshadowed an increase in the project’s cost due to “inefficiencies” stemming from dealing with a company under administration, and said a new cost estimate would be released along with the identity of the new contractor.

“Unfortunately, we’re not able to announce that deal today. I would have liked to have done that, but we do believe we can make an announcement soon,’’ he said.

Mr Engelbrecht acknowledged that there was strong competition for staff in what remains a tight labour market in Western Australia, but said “we don’t see that that is going to be a major issue for us going forward’’.

Citi analysts estimate a capex overrun of $250m for Waitsia, with Beach as a 50 per cent owner being liable for half of this.

The broker also warned there were risks to the project missing its production start date.

“With the project losing contractors, we don’t feel the company can provide any certainty on schedule in the near term, given a tight WA labour market; this is the bigger risk than capex in our view,’’ Citi said.

Citi said the Waitsia drilling results announced on Tuesday were “disappointing’’ and spoke to the complexity of the gas field.

Beach downgraded its 2P reserves for the Perth Basin by 11 per cent following the appraisal of results from the Waitsia Stage-2 drilling program, but the company said its “ability to supply 3.75Mt of LNG volumes and meet domestic gas commitment remains unchanged’’.

Mr Engelbrecht said the results also had not impacted the company’s expectations for the third stage of the drilling campaign which will focus on areas with less structural complexity.

Beach’s major growth projects - Waitsia and the offshore Otway project - “continue to progress well and we remain on track for a step change in production and free cash flow in FY24’’ Mr Engelbrecht said.

Beach’s sales revenue for the quarter was up 1 per cent to $408m from the previous quarter however production fell 8 per cent to 4.8 million barrels of oil equivalent (mmboe) and sales volumes were 3 per cent lower at 5.2mmboe.

The realised oil price was 10 per cent lower at $141.10 per barrel while the realised gas price was 1 per cent down at $8.40 per gigajoule.

Citi said the production figure fell short of the consensus estimate of 5.1mmboe due to lower gas nominations and revenue fell $31m short of consensus.

RBC Capital Markets said the Perth Basin exploration program had got off to a “poor start’’ but on the upside said the company had “a relatively strong balance sheet that provides flexibility to pursue M&A or increased returns to shareholders’’.

Mr Engelbrecht told an analyst call on Tuesday that production guidance would be updated when the company releases its half year results in February.

Beach shares were 4.2 per cent higher at $1.56.