Global Net-Zero Policies Will Diminish Oil And Gas Demand

Key Takeaways

• Global decarbonization trends and stricter regulations threaten Beach Energy's future demand, profitability, and ability to compete as oil and gas markets contract.
  
• Ongoing reserve replacement challenges and ESG-driven capital constraints raise risks of declining production, unpredictable cash flows, and weaker long-term returns.
  
• Strategic project execution, cost efficiency, and strong financial discipline position Beach Energy for stable long-term growth, resilience to market risks, and sustained shareholder returns.

Catalysts

Operates as an oil and gas exploration and production company.

• Global acceleration towards net-zero emissions and electrification of transport threatens to structurally erode Beach Energy's long-term oil and gas demand, placing its future revenue streams at material risk as the total addressable market contracts.
  
• Heightened policy interventions and decarbonization regulation, such as carbon pricing and expanding renewable subsidies, will likely apply persistent downward pressure on Beach Energy's competitiveness and long-term profitability, leading to margin compression in the years ahead.
  
• Beach Energy faces significant reserve replacement risk, with a declining 2P reserve life now averaging just over seven years; failure to consistently replenish reserves through exploration or acquisition will see long-term declines in production, sales volumes, and earnings.
  
• Increased investor focus on ESG criteria is expected to constrain Beach's access to affordable capital, drive higher financing costs, and undermine flexibility for growth investments, ultimately weighing on cash flow and net profit growth.
  
• Exposure to late-life and concentrated core assets, combined with the risk of cost overruns, underperformance, or delays in capital-intensive developments like Waitsia, will increase operational volatility and further threaten long-term returns on invested capital and cash flow predictability.

Beach Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Beach Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Beach Energy's revenue will decrease by 12.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -2.1% today to 29.9% in 3 years time.
• The bearish analysts expect earnings to reach A$419.3 million (and earnings per share of A$0.19) by about September 2028, up from A$-43.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 6.3x on those 2028 earnings, up from -62.2x today. This future PE is lower than the current PE for the AU Oil and Gas industry at 14.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Beach Energy Future Earnings Per Share Growth

Risks

• Sustained energy demand and tightening gas supply on Australia's East Coast positions Beach Energy as a critical supplier, supporting long-term revenue growth and reducing downside risk to future sales.
  
• The company's strategic focus on cost reduction and operational efficiency has expanded EBITDA margins and delivered robust free cash flow, which provides resilience to pricing volatility and supports stable earnings.
  
• Ongoing developments and successful commissioning of projects such as Waitsia and Otway, alongside exploration upside from prospects like Hercules and La Bella, extend production life and help replenish reserves, supporting revenue continuity and mitigating production decline risk.
  
• Advanced adoption and delivery of carbon capture and storage (CCS) through projects like Moomba enhance Beach's social license to operate, reduce regulatory risks, and help ensure continued access to capital, which bodes well for sustaining long-term profitability.
  
• Beach's strong balance sheet, prudent capital management with low leverage, and strategic flexibility to pursue value-accretive organic investments or acquisitions create opportunities for growth, underpinning future earnings and return of capital to shareholders.

Valuation

• The assumed bearish price target for Beach Energy is A$0.95, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Beach Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.55, and the most bearish reporting a price target of just A$0.95.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$1.4 billion, earnings will come to A$419.3 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of A$1.19, the bearish analyst price target of A$0.95 is 25.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.