Sandstone Insights: Beach Energy set for major shake-up at strategy day

ASX code: BPT

Suggestion: Sell

Need to know

• Strategy Day on 18 June is likely to reset everything from production profile to cost management
• There is downside risk in the share price as the market does not yet incorporate the likely measures
• Once absorbed, there may be a re-entry opportunity at a better price, in our view.

Experienced new CEO takes charge against persistent issues

Beach Energy (BPT) has consistently faltered in recent years over falling production, failed cash flow targets, delayed projects, and generally disappointing management performance.

New CEO Brett Woods is about to put a firehose through the business beyond the 30% headcount reduction already announced. We anticipate a downward reaction in the share price once the detail of the Strategy Day is revealed on 18 June.

Brett Woods is the latest in a string of CEOs at BPT. He was at Santos since 2013 moreover, was a key part of that company’s turnaround through 2015–2018. He has strong technical background knowledge (geology and geophysics) and is well regarded within the oil and gas industry. His task is to apply that experience to turn around the serial underperformance at BPT.

Strategy Day expectations

There will be three distinct elements to what is presented at the Strategy Day.

1. operational cost changes
2. a reset of strategy
3. a sense of the mergers and acquisitions (M&A) opportunities ahead of the company.

Surprisingly, BPT has not presented a production or spending outlook in over three years. We anticipate the production profile could be cut by around 20%, which is attributable to poor drilling results in New Zealand, later-life risk in the Bass Strait Basin, and a reduction in Western Flank spending.

CEO Woods will likely apply more conservative assumptions across the production portfolio and increase the total spending forecasts due to higher inflation.

Recent and expected changes

The ~30% headcount reduction announced in March includes a new executive leadership team. There is likely to be room for further operating expense (OpEx) cuts as BPT focuses on the east and west coast gas markets as its core business.

Future catalysts

Once the business parameters are reset (and by implication, market expectations), we think there are multiple catalysts in the 2025 financial year that could drive the share price upwards.

In addition to the cost-out program, BPT will ramp up Otway and Waitsia that will de-risk those projects. After that, BPT could consider exploration opportunities by drill bit or pursue acquisitions. On the latter, there may be some cast-offs from Santos that might suit BPT’s portfolio, or perhaps BPT would think about rival businesses like Carnarvon Energy, Cooper Energy, or Strike Energy.

Contract and market opportunities

We note that the legacy 48 terajoules (TJ) per day contract between BPT and Origin expires in mid-2025. This contract could be re-priced upwards, which would add further value.

The Western Australia (WA) DomGas contracts may also roll over into higher-priced contracts. The market is indicating prices circa 12-14 Australian dollars (AUD) per gigajoules (GJ) are possible compared to legacy pricing around five AUD/GJ.

More generally, it is well understood that the east coast gas market is in very short supply and presents further potential upside for BPT.

Investment view

The short-term share price influence is almost certainly to the downside as CEO Woods resets the parameters of the business, and by extension, market expectations which are currently too high.

Our thesis is to take advantage of this by selling BPT and waiting for the details of the Strategy Day in two weeks. Once the market has adjusted to the new plan, we anticipate a suite of catalysts that can drive the share price upwards in due course.

Risks to investment view

The Strategy Day reset may not deliver the outcomes anticipated by management. Oil and gas prices may change more than expected and affect earnings accordingly, both up and down. Management may not be able to execute the new strategy, or the market may not interpret the strategy as intended.

BPT historic production chart

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}