Beach Energy’s acquisition of Origin’s Lattice Energy this week for $1.6 billion has given the company an advantage over its mid-tier peers, but analysts warn the deal carries risks.
The acquisition increased its reserves by approximately 200 per cent and its guidance by 150 per cent, presenting a challenge in ramping up its new portfolio while learning to run its new assets.
Morgan Stanley believes the company’s integration and operational risks have now increased as it gets to grips with its expanded portfolio.
“We think the Beach management team is capable but there is no doubt the risk profile has increased,” Morgan Stanley said.
“This transaction will take Beach’s leverage to the high side of investors’ comfort.”
This wariness is further compounded by exposure to assets such as BassGas, which has a history of impairments and reserve downgrades.
Whether the price is fair, however, depends on the gas pricing contracts, which have not been disclosed, and cannot be repriced to the market until after July 2020.
Investment firm Shaw and Partners voiced its concern over the acquisition, stating that while it fits strategically, it was not convinced it was an economically good deal for Beach.
It is a “deal that had to be done, but at high price,” Shaw and Partners said.
“Lattice is a logical fit, but it’s not cheap,” it said.
“Beach have paid $400 million ‘too much’.”
Shaw and Partners recommended selling the stock, putting a price target of 58¢ on the company, well below its 83¢ closing price. Morgan Stanley was more positive, pricing Beach at 80¢.
Beach have paid $400 million ‘too much’ [for Lattice].
Shaw and Partners
While the offshore Otway Gas project has been seen as the deal’s cornerstone, the Thylacine and Geographe fields have declined ealier than expected, facing ongoing drilling, which will be a significant expense. Gas from this field is contracted to Origin and AGL at a fixed pice plus CPI escalation.
Firstly, it gives Beach access to New Zealand’s offshore Kupe gas field, which is likely to be a strong cashflow generator, and viewed by some in the market as the best asset.
It also exposes Beach to half of the Waitsia field in Western Australia, which is considered to be one of the largest onshore conventional gas discoveries in Australia in the last three decades and has reserves of about 232 petajoules, as well as the nearby Beharra Springs gas field.