Beach Energy is rewarding shareholders as it waits for major projects to boost production
The energy group isn’t giving medium term guidance due to uncertainty over project timing, but has fired up its dividend payouts ahead of an expected production jump.
Beach Energy has doubled its interim dividend payout and will institute a new, more generous payout policy, but is not giving production guidance past the end of the financial year due to uncertainty around the timing of the delivery of major projects.
The oil and gas company, which reported a 10 per cent fall in underlying first half net profit to $191.2m on Monday, also revised its full year production guidance down from 20-22.5 million barrels of oil equivalent (mmboe) to 19-20.5mmboe.
First half production was 10mmboe down from 11mmboe in the same period the previous year.
The company will pay a fully-franked dividend of 2c, up from 1c for previous periods, and will be targeting a payout ratio of 40-50 per cent of “pre-growth” free cash flow “enabling the distribution of our substantial franking credit balance’’.
Beach chief executive Morne Engelbrecht said the company was anticipating a “step change” in production and free cash flow from FY24, but said it would not be providing guidance for that financial year until the release of its full year results in August.
The company is expecting a boost from the Waitsia Stage 2 gas project in the Perth Basin and the offshore Otway Thylacine project, however the failure of contractor Clough has pushed back production from Waitsia while contributing to a cost blowout.
Beach now estimates its share of capex at Waitsia at between $400 million and $450 million, up from an original forecast of $350 million-$400 million.
Across the entire business, the expected capital expenditure was now $900m-$1bn for the full year, tightening from $800m-$1bn, while field operating costs increased from $12-$13 per barrel of oil equivalent to $13.75-$14.75.
Mr Engelbrecht declined to tell an analyst call on Monday how far exactly the Waitsia project was progressed, saying Italian firm Webuild, which had taken over from Clough to deliver the project, would soon provide an update and it would be “prudent” to wait until that had happened.
Mr Engelbrecht said the company’s major projects would provide a boost to production next year.
“Our agreement with Webuild to complete the Waitsia Stage 2 project and the environmental plan approval for installation of the offshore Otway Thylacine wells are big steps forward for Beach in 2023,’’ Mr Engelbrecht said.
“These two projects will trigger a step-change in production and free cash flow generation from FY24.
“Our agreement with Webuild to complete the Waitsia Stage 2 project is particularly welcome news. Webuild and the Waitsia joint venture are now planning for first gas from the Waitsia gas plant by the end of 2023.
“We also completed our development drilling campaign at Waitsia during the half and we have since had success from the Perth Basin exploration campaign, which soon turns to the Beach-operated phase commencing in early Q4 FY23 with the spudding of Trigg 1.
“In the Otway Basin, the Thylacine well connections will add up to 100 terajoules a day through the Otway Gas Plant.’’
Mr Engelbrecht said the business would not be materially affected by the Federal Government’s current $12 gas price cap given its gas was largely contracted. The company was paid an average $8.42 per gigajoule in the first half, up 12 per cent over the previous corresponding period.
Beach’s sales revenue was up 3 per cent to $813m for the half, while it had $609m in cash and liquidity at the end of December.
UBS analysts said the market was broadly expecting the production fall, and investor focus would be on the new capital management policy, which would unlock the company’s $500m in franking credits.
“Despite a soft update to guidance reflecting lower production and higher costs expected for FY23, this was largely expected and already reflected in the price,’’ the broker said in a note to clients.
“Investor focus will be the new distribution policy announced providing a clear path to a step change in fully-franked distributions and how the board will balance growth versus shareholder returns going forward.’’
RBC Capital Markets said the result came in slightly under consensus estimates with pre-tax earnings 4 per cent below its forecast.
RBC has a $2 price target on Beach while UBS has a $1.90 target. Beach stock was steady at $1.51 early on Monday.
Also on Monday, fellow gas producer Senex Energy said it had lodged a submission with the federal government regarding its domestic gas market consultation, saying the intervention as it stands will drive away investment in new gas supplies and risk electricity shortages.
Senex managing director Ian Davies said rather than ensuring there was critical supply for the domestic market at reasonable prices, it instead risked “irreparably eroding investment confidence’’.
Mr Davies said there was the risk that further tampering with the market could lead to the breaking of LNG export contracts to divert supplies to domestic users.
“The result will mean investors like Senex’s majority shareholder POSCO International, a subsidiary of POSCO Group and one of Australia’s largest natural resource customers, will see the country as a much riskier proposition,’’ Mr Davies said.
Senex said it had already put $1bn worth of new investment on hold, and the government’s intervention had derailed an expression of interest process for the sale of an extra 229 petajoules of gas into the domestic market from late 2024.
“Senex and its shareholders stand ready to invest billions of dollars in new energy supply for Australia, and have the balance sheet strength, capability and capacity to do so,’’ Mr Davies said.
“But for this to happen Senex must be confident that the necessary regulatory settings are stable and sufficiently balanced to incentivise the necessary risk-taking of material investment in new gas supply.’’