As we approach the final three months of the year 2011, investors everywhere are holding their breath daily in anticipation of the latest brick to be added to the worldwide wall of worry.

The French banks fall as we learn of their exposure to Greek debt.  One sunny morning you read the ECB is ready to step in to do whatever it takes, only to read in the evening that the Germans objected.  

In the midst of all this there are investment advisers warning the retail investor to preserve capital and remain on the sidelines.  However, intelligent investors know there is money to be made in the worst of times.  Consequently, the financial analyst world never stops in highlighting shares that may represent solid buying opportunities, in spite of the world’s troubles.  

However, as more and more shares sell off in dramatic fashion, it is becoming increasingly difficult to find consensus amongst analysts on the prospects for some companies.  Even Australia’s mining giant BHP now has analysts with Hold recommendations along with Strong Buy and Buy recommendations.

Last week in the 18 Share Tips column on TheBull, Sean Conlan of Macquarie Private Wealth shared his view of why he sees a buying opportunity with Beach Energy Limited (BPT.)  Here is what he had to say:

•    While it’s encouraging to see Beach deliver strong operating cash flow and incremental reserves in the Western Flank area, the market will focus on news flow surrounding Cooper Basin shale. Expect the market to gain greater comfort from further encouraging drilling results, subsequently endorsed by a credible farm-in partner along with an independent resource booking.

While not alone in his opinion, Thompson Reuters First Call lists only 2 analysts with a Strong Buy rating on BPT; 1 with a Buy; 5 with a Hold recommendation; and 1 with a Sell rating.  How do share market participants as a whole see BPT?  Let’s look at some numbers.

Market Valuation Ratios/Dividend Yield

  BPT ASX Energy Sector
P/E 21.19 12.32 16.19
P/B 1.02 1.54 1.38
P/S 2.59 1.98 12.46
P/EG 10 1.08 1.73
Dividend Yield 1.5% 5.4% 3.1%


Although the P/E ratio suggests investors are willing to pay a bit of a premium for BPT shares, the P/EG ratio suggests the company’s shares might be overpriced.  The dividend yield is mediocre at best and nothing else here is especially impressive.

If you want to know what is impressive about BPT, take a look at how its share price has performed versus the ASX energy sector (XEJ) over the last 3 months:


While BPT dipped a bit along with the XEJ in those awful days in early August, you can see the share price is now going in the opposite direction – up.  If we extended the charting comparison over a full year, you would see BPT’s share price rose an amazing 35% while the composite price of the XEJ rose a mere 7%.  What is going on with this company?

What makes the share price performance even more surprising is the company’s recent earnings release as headlined in many Australian business sources.  Uniformly, the headlines cited the loss in profit between fiscal year 2010 and fiscal year 2011.  Some even included the staggering number – 97.5 million dollars!

This is hard evidence that the investment community can be forgiving.  If you dig beyond the headlines, you will learn BPT actually showed a 7% increase in operating profit year over year.  The loss was due to a one time impairment write down relating to a property taken out of production status – the Basker Manta Gummy (BMP) project.

The write down on the asset and the legal fees involved totaled more than 158 million dollars, and when removed, BMT showed a net profit after tax (NPAT) for fiscal year 2011 of 41 million dollars.

Navigating through the financial statements for Beach Energy is challenging enough for an experienced financial analyst.  For the retail investor, it is a step or two short of impossible.  Yet common sense begs the question why did the BMP project go bad?

To answer that question one would have to go back to previous financial reports and beyond.  Most investors assume the market has figured it out; as evidenced by the continued rise in share price even after the earnings were released.

While BPT has oil and gas producing and exploration facilities around the world, its primary revenue generating property is in Australia, and as Sean Conlan pointed out, it is in the Cooper Basin operation where the future lies.  In reality, the market is paying for conversion of exploratory assets into producing assets; not for the company’s relatively mediocre existing production.  It all depends on what the drilling finds.

On 7 September 2011 Beach released its monthly drilling report, and the share price rose yet again – appreciating a full 6% in one day.

As you can imagine, if next month’s report is not so positive, the opposite reaction is likely.  Before you go further in considering whether a high risk share like BPT is right for you, you may want to take a moment and read through the recently released drilling report.

You can find the report on the premium website at theBull.  Simply enter the ASX code in the Stock Quote section and check the ASX News Option.  

You probably know that many of history’s greatest investors strongly recommend that retail investors stick with the shares of companies whose business model they can understand.  

If you read through the drilling report and it is as understandable to you as classical Greek, you may want to stop and think for a moment.  If you work with a traditional full service broker who is experienced in evaluating energy sector shares, all might be well.

If, however, you make your investing decisions solely on your own, you may want to consider other opportunities.

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