BEACH Energy has declared there are “no sacred cows” in its asset portfolio as it reviews its project options in the context of a steeply sliding oil price.
Addressing Beach’s annual general meeting, outgoing managing director Reg Nelson and chairman Glenn Davis also sought to assure investors that the current oil price was likely to improve as early as the middle of 2015.
“I stress…all assets are under review, there are no sacred cows,” Mr Nelson said.
“We always approach corporate activity in a measured manner and that most certainly includes the timing of particular projects within our portfolio.
“It is not a new concept for Beach – all successful companies and asset managers do it.”
Mr Nelson said the company would provide an update on its progress on the asset review in the second half of the 2015 financial year.
“The business is good, the oil price is low but probably only for a short period and this is the time for opportunities,” Mr Nelson said.
Mr Davis also sought to explain the fallout from the recent severing of ties with exploration blocks in Egypt, saying the venture had not been as successful as anticipated and that expenditure on the North Shadwan, Wadi Abu and Mesaha licences would be written off.
“If the search for hydrocarbons is successful, that exploration asset turns into a development asset and it ends up on our balance sheet…unfortunately in the world of exploration sometimes our searches aren’t always successful,” Mr Davis said.
“At least in part of our Egyptian portfolio our search hasn’t been as successful as we would have liked.”
Mr Davis said despite the setback the company had other options in “parts of Egypt which were forming very well at the moment”.
Oil prices “very unsustainable”
Mr Nelson said the recent price decline was “not consistent with economic fundamentals” and the US$95 per barrel breakeven point for most OPEC producing countries was “very unsustainable”.
“Current prices are really unsustainable in the long term from a cost-of-production and even within OPEC,” Mr Nelson said.
“It is reasonable to see Brent moving towards the US$90-US$100 per barrel mark by as early as the middle of next year.”
Mr Davis said Beach was “not in the business of forecasting oil prices” but went on to echo Mr Nelson’s belief that mid-2015 was when “the trend is likely to be back in a positive direction”.
“Despite what people think, we do not think that the story is all doom and gloom,” Mr Davis said.
Reflecting on the company’s declining share price, Mr Davis said the market had overreacted and “we have been oversold”
Mr Nelson said the Saudi-led OPEC price war on US shale producers was part of a move to shore up its market position in Asia.
“The budgetary pressures are impacting all OPEC producers, including Saudi Arabia.”
“That is the main region for them and certainly the growth region in the world,” Mr Nelson said.
“They also want to limit the ability of the US to enter that lucrative Asian market, they want to drive down prices to really curb the output of the higher cost producers, particularly the US.”
Mr Nelson, citing the fact that the US will soon become the world’s largest oil producer, said bringing prices down to today’s level would impact higher cost shale producers and potentially curb shale expansion.
He said there would however be some time lag between projects becoming unprofitable and rig contracts winding down.
Environment to push up prices
Mr Nelson said there were a number of factors pointing to upside for oil demand, including OPEC producers’ break-even demands, their petroleum inventories, and the deepening northern winter.
“We’re at the beginning of the northern hemisphere winter and what happens is refineries have gone through their annual maintenance so their picking up their seasonal increase in production – that is usually quite significant,” Mr Nelson said.
“OECD’s total petroleum inventories currently are still at levels below their five-year average.”
He said the inbuilt stabilising presence of a low-price oil environment would lead to operating cost def lation and increased economic activity.
“While these wont kick in immediately, they do provide some insulation as the oil and gas industry works its way through the current cycle.“
The declining Australian dollar would provide a “level of protection”, and Mr Nelson pointed to Beach’s diversification to LNG production as a further shelter to the oil price decline.
Mr Nelson also pointed to 2002’s low oil prices
Addressing Beach’s annual general meeting, outgoing managing director Reg Nelson was able to find positives for the company, indicating his belief that current low oil prices are unsustainable.
Mr Nelson made reference to the low-price environment of 2002 as a means of demonstrating the company’s ability to compete in a difficult environment.
“As I look back 10 or 12 years, we thought 20 or 30 bucks a barrel was pretty good back then,” Mr Nelson said.
Operational success in a declining market
Chairman Glenn Davis spoke of Beach’s operations performing “extraordinarily well” despite the depressed oil price.
Mr Davis said the 2013-2014 financial year was “by any measure, a fantastic year”, with record sales of $1.05 billion, record production, and record underlying net profit after tax.
“The oil price isn’t quite what we would like it to be but operationally [Beach] is performing extraordinarily well,” Mr Davis said.
“We will take those results any day of the week.”
For the first quarter of the 2014-2015 year, Beach produced 2.4 million barrels of oil equivalent (boe) and sold 2.9 million barrels (boe), both up on the previous quarter.
Beach reported “excellent” exploration results, with 37 wells completed at a success rate of 81 per cent
“But obviously, revenue was down driven in the main by lower oil prices and those prices have continued to fall,” Mr Davis said.
The company found great success in the Bauer field during the quarter, with Mr Davis describing the play as “the magic pudding – it just keeps on giving”.
Mr Davis also cited the new gas sales agreement reached with Origin Energy as a further revenue driver for the company.
“The benefits of that contract to Beach are enormous, in terms of volumes and in terms of price,” Mr Davis said.
“When that contract is triggered the gas prices that we receive for our gas are going to increase dramatically, even in today’s oil price environment and not only is the price going to increase but with our infill drilling program with Santos and Origin in the joint venture, the volumes of gas that we produce will be increasing as well, so we receive the double benefit.”