Portfolio Update – Purchase of Beach Energy (BPT:ASX)

By March 27, 2020Portfolio

Across investor portfolios, we have bought Beach Energy (ASX: BPT), an oil and natural gas exploration and production company with interests in five producing basins across Australia and New Zealand. Via its interest in the Western Flank of the Cooper Basin, it is Australia’s largest onshore oil producer and supplies approximately 15% of Australian east coast domestic natural gas demand.

We are positive on the medium-term outlook for Beach for the following reasons:

· Firstly it has a strong balance sheet (net cash position), combined with growing operating cash flows, allows for self-funding of the significant investment in organic production growth at very high rates of return.

· High certainty of revenues and cash flow – Beach has limited exposure to lower domestic spot gas prices with almost all volumes contracted and by 2022, more than 70% of east coast sales are expected to be via higher-priced market offers versus current.

· Beach Energy is a well-managed low-cost producer with a diversified portfolio of quality assets and;

· Management continues to guide the market towards substantial production upside over the next 5 years and has demonstrated significant exploration and development success in allocating capital in the past.

Furthermore, at Elston Asset Management (EAM), we are focused on both value and growth when selecting businesses for investment. We believe Beach Energy meets both of these criteria with the material production and free cash flow growth over our 3 – 5-year investment horizon whilst trading at approximately 5 times this year’s EBIT we believe the business is inexpensive. In the short term, the coronavirus outbreak has clouded the outlook for global energy demand and production; this has provided a long-term opportunity to invest at a significant discount to our intrinsic value giving investors a margin for safety given obvious short-term uncertainties. EAM focus only on the top 100 companies enabling us to act decisively when market dislocation occurs, these dislocations present opportunities to invest in businesses that we understand well.

We have funded the purchase of Beach Energy from the sale of Tabcorp which we believe may take longer to turn around it’s waging business than initially anticipated.


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Prepared by:
EP Financial Services Pty Ltd
ABN 52 130 772 495 AFSL 325 252 (“ELSTON”)
GPO Box 2220
Brisbane Q 4001