BPT 1.15% $2.58 beach energy limited

the good the bad and the ugly

  1. 2,005 Posts.
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    The Good, the Bad and the Ugly

    A. The Good

    As I have said, fundamentals would still appear good with BPT.

    This is borne out by the one bright spot in the 31 December 2007 Report: 2P reserves!

    According to BPT Management, BPT produced 4.6 mmboe, but offset that with an estimated 12 mmboe of new reserves, a net increase of 7.5 mmboe. Beach normally provides a formal assessment of reserves at the end of each financial year. However, with these net additions, it estimates that the reserves have built to 94 mmboe by 31 December 2007 (from 89 mmboe at 30 June 2007). This is an 8% build, even after six months of production and the sale to Sojitz of 10% of BMG.

    That is good. Kudos to Hector Gordon and the rest of BPT Management.

    However, they need to produce them as efficiently and effectively as possible.

    If you do not want the "bad", do not read any further!!!

    B. The Bad

    Given the sale of an additional 10% of BMG, oil and gas sales revenue for the full year is no longer on track with my previous forecast (it is unlikely to get past $500 million (number which excludes crude oil trading revenue by the way), a milestone, psychologically important to Mr Market) and production volumes will be less than the holy grail of 10 mmboe (BPT Management has indicated in its latest investor presentation the number 9.5 mmboe, or 30% oil).

    Accordingly, I have cut my personal share price target to $1.65 (previously $1.80 by 2 May 2008) for BPT.

    Also remember, this quarter, the Cooper Basin will be hit due to planned plant shutdown and likely weather related shutdowns in the Cooper Basin (as happened in the corresponding period last year).

    Had BPT retained its 40% interest there was a chance it could have become the Operator of BMG (AZA just out sources most of the technical/ procurement work to a third party, for a project this size and important to each joint venture partner, IMHO it should be done in house. Given what I know, the majority of this outsource will continue under Nexus Management). The question is 'could some of the technical problems have been better handled by BPT had it been Operator?' Now we will never know.

    OK, so you have made it this far without choking on your morning coffee.

    If you do not want the "ugly", do not read past this point!!!

    C. The Ugly

    I did say that I would not be a happy camper if BPT Management did not deliver on results!

    IMHO, BPT Management has not been upfront or forthright in presenting the results. I prefer to have my bad news delivered honestly by Management. Rather it has tried to put a spin on the results by carefully wording (and selectively exhibiting information) in releases, IMHO probably hoping no one would notice or care.

    While it has not been a horrible six months, neither has it been as good as Management has made it out to be!

    Note: the comparison with the previous six month period (rather than the preceding six month period) is a holdover from the days when companies were affected by seasonal variations. This does not hold true for oil and gas companies. For a true comparison, you need to look at both previous and preceding periods to gain an understanding of the results (BPT Management presented only the previous six month period in all its slides in the latest investor presentation – if they had used all six month periods, it would not have been able to claim an "upward trend since 2003").

    Let me take you through my "adjusted" numbers (hopefully the formatting works from Word):


    (1) Oil and Gas Sales Revenue $000 (each six month period)

    ................................................................31-Dec-06.....30-Jun-07......31-Dec-07

    As reported in Income Statement................................................214,400.........257,829........249,223
    Adjusted for crude oil trading *............................0....................0..........-22,200
    Adjusted for real.loss on commodity hedge**..-19,709................0..........-24,555
    "Adjusted" oil and gas sales revenue.....................................................194,691........257,829.......202,468


    * (this has limited impact on net profit, so adjusted)
    ** (this has $Nil impact on net profit, so adjusted)

    Clearly, 31 December 2007 was not a record six month period. The real story is "Adjusted" sales revenue fell off a cliff compared to the preceding six month period (obviously this is not an uptrend).

    Compared to the previous period, "Adjusted" sales revenue only increased 4% over that previous six month period; and this was in a year when A$ realised for each BOE almost doubled (per BPT Management non-hedged numbers).

    This is a significant decrease compared to the 16% increase over that previous six month period BPT Management claimed (taking out only crude oil trading, the percentage increase drops to 6%).

    (2) Oil and Gas Production Volumes KBOE (each six month period)

    ................................................31-Dec-06.....30-Jun-07......31-Dec-07

    As reported in ASX Quarterly.................................4,696..............4,784...........4,583
    Adjusted for crude oil trading...........0.....................0.................0
    "Adjusted" oil and gas production.......4,696..............4,784...........4,583

    Clearly, 31 December 2007 was not a record six month period. It may have been for oil production but only compared to the previous six month period.

    (3) Oil and Gas Sales Volumes KBOE (each six month period)

    ..............................................31-Dec-06.....30-Jun-07......31-Dec-07

    As reported in ASX Quarterly....................................4,670...........5,130.............4,489
    Adjusted for crude oil trading..............0..................0..............-217
    "Adjusted" oil and gas sales volume.......................................4,670............5,130.............4,272

    Clearly, 31 December 2007 was not a record six month period. It may have been for oil production but only compared to the previous six month period.

    (4) Net Profit after Tax $000 (each six month period)

    ..............................31-Dec-06.....30-Jun-07......31-Dec-07

    Net profit after tax...............23,705..........86,075..........58,769
    Remove BMG sale..................0.........-71,010.........-64,169
    Remove BMG tax effect at 30%.......................................0...........21,303..........19,251
    "Adjusted" Net Profit after Tax.................................23,705...........36,368..........13,851

    BPT Management devised an internal plan which saw the company offload 10% of its remaining core investment in BMG (this came only 6 months since the last offload), which enabled it to realise the value of part of the asset in the short term and meet their "profit expectations".

    Without it, net profit after tax would have dropped to $13.8 million and this would not have looked good as a headline for the Press Release.

    As is clearly shown, for the last 2 periods we have been completely dependent on one-off core asset sales and in the last period to an increasing oil price to get our profit.

    Reconciliation of Accumulated Profits

    Balance at 30 June 2006................................-14,009
    Profit (period 1 July 2006 to 31 Dec 2006)........23,705
    Profit (period 1 July 2006 to 31 Dec 2006).........86,075
    Dividends paid...............................................-13,271
    30 June 2007 Accumulated Profits.....................82,500

    (5) Cash Flow from Operations $000 (each six month period)

    .................................................31-Dec-06.....30-Jun-07......31-Dec-07

    Cash flow from operations...................................29,927...........82,028............51,579
    Cash flow from investing...................................................................................7862
    Cash flow from financing............................................................-28151
    Net increase in cash.......................................................................................31,290
    Cash beginning of year..........................................................................................74,720
    Cash at 31 Dec 2007........................................................................................106,010

    Adjust for BMG sale proceeds...................................................-123882
    Apparent Overdraft....................................................................-17,872

    It is clear that without the proceeds from the first 10% sale of BMG, we could have been in overdraft at the bank.

    Clearly, 31 December 2007 was not a record six month period for cash flow from operations. It may have been but only compared to the previous six month period.

    More importantly, cash flow from operations (what I always refer to as "free cash flow" in my posts) is not being generated in great licks.

    Will it be enough to sustain the commitments we have (the following are my estimates based on best guess, where I have indicated)?

    Cash at 31 Dec 2007...............................................................................$106 m

    Estimated Cash Outflows (fixed expenditure commitments):
    Tax payment for BMG asset sale (assume no tax loss offset)...........................-19
    Dividends (first half)......................................................................................-6
    Dividends (second half, estimate)...................................................................-7
    BMG development expenditure (30% share of $300 million estimate)...............-90
    Exploration spend (no forecast provided by BPT, estimate)..............................-50
    Other development expenditure (estimate).....................................................-20
    Payment for plant and equipment (average of last two periods)........................-45
    Debt repayment (per current liabilities on balance sheet).................................-77

    Expected cash inflows:
    10% proceeds from BMG sale (second)..........................................................123
    Cash flow from Operations (has to be at least this number, remember we have 20% less of BMG now)***............................................................................................................85
    Cash at 31 Dec 2008 (assume to be Nil in this example)................................$ 0 m

    *** I am not suggesting this will be the number, merely the number to get cash out of overdraft (i.e. a balancing figure).


    Based on the example above, there is not going to be a lot of "free cash flow" to spend on production acquisitions or additional exploration UNLESS it generates more than $85 million over the next year from the above example.

    Remember, at this time and based on current information, Beach then has $196 million still to pay on the loan in the next year after that.

    We appear to be funding fixed commitments by selling core assets.



    Going forward, I will be asking BPT Management to provide the following additional disclosures to enhance transparency:

    1. In reports and presentations, I would like to see comparison made to the preceding 6 month period (not just the previous corresponding period).

    2. For 30 June 2008, I would like to see a Segment Reporting note in the accounts that breaks down the sales revenues, assets, profits into the geographic regions (New Zealand, Albania, Spain, Australia) and into segments (geothermal, CSM, oil/gas, crude oil trading) regardless of materiality.

    3. Crude oil trading: disclose revenues separately, along with associated costs to purchase to see what the true impact is on net profit.

    Cheers

    P.S. If you do not spend the time and energy doing your "homework" on the shares you own, then you probably should not be holding that share, IMHO.
 
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