University of Wollongong: Financial Analysis of Beach Energy Limited

This report provides a comprehensive financial analysis of Beach Energy Limited, an Australian oil and gas producer. It begins with an executive summary outlining the report's objectives, which include evaluating the company's current financial state and strategic performance. The report then delves into a detailed SWOT analysis, examining Beach Energy's strengths, weaknesses, opportunities, and threats. It further explores two valuation methods: the discounted cash flow (DCF) model and the residual earnings model, to assess the firm's value. The analysis includes discussions of the company's operations, mission, and strategic vision, alongside an examination of its market position and financial performance. Finally, the report concludes with recommendations for improvement and sustainable growth, offering insights into areas where Beach Energy can enhance its financial and operational strategies. The report is a detailed analysis of the financial aspects of Beach Energy Limited.

Running head: FINANCIAL STATEMENT ANALYSIS
FINANCIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note

1FINANCIAL STATEMENT ANALYSIS
Executive Summary
The aim of the report is to analyse the current financial condition of the Beach energy limited
which is one of the largest oil and gas producing company in Australia. The report contain a
brief details of the SWOT analsyis of the company and try to evaluate the strategic
performance of the organisation . Two valuation methods are also explained in this report to
assess the proper value of the firm. In conclusion a recommendation is given regarding the
areas in which the company can make improvements in order to achieve sustainable growth.

2FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................4
SWOT....................................................................................................................................4
Valuation methods.................................................................................................................9
Recommendation......................................................................................................................12
Conclusion................................................................................................................................12
Refrences..................................................................................................................................13

3FINANCIAL STATEMENT ANALYSIS
Introduction
The beach energy limited is leading onshore oil producer with a main gas business in
Australia. Since its inception in the year 1961 beach has 5 producing basins in all over
Australia and New Zealand and it is the main supplier of gas in the east region of Australian
gas market.
The asset portfolio of the company includes the proprietary interest in strategic gas
and oil infrastructure some of these are the Moomba processing facility and the Otway gas
plant, the company has also a suit of highly potential exploration prospect. The mission of the
organisation is to maintain high safety for the workers that are working in the 5 basins from
which gas and oil is explored and also to look after the environment related issues that can
create adverse effect in the bio diversity of Australia. The company has developed a
international standard operated oil business centre in the western flank of the cooper basin
and through its efficient exploring capacity grown as a leading onshore oil producer of the
country.
The drilling programme of the organisation is focused on the major areas of the
western flanks and trying to develop another one in the copper basin. Apart from its drilling
programme breach also have a gas business which comprises the operating and non-operating
on shore and offshore assets located in five different basins in Australia and New Zealand.
From these basins the organisation supply gas to a large market of the east coast market and
the market of the New Zealand. The company contribute almost 15% of the total demand of
gas in Australia from its copper basin, offshore Otway basin and bass basin producing assets.
The company has also get permission to explore in the onshore and offshore Otway basin and

4FINANCIAL STATEMENT ANALYSIS
offshore Bonaparte, Carnavaron and browse basin in Australia and in New Zealand it get
permits of exploration in the Canterbury basin.
The strategic vision of beach energy limited is to achieve growth opportunity
available in Australia and its adjacent countries and create value for the stakeholders. The
group always focus on attaining sustainable growth and provide the best services to its
clients. The company through its effective operational activity has gained the leading position
in the energy sector of Australia and in the future also it will be able to hold its position by
providing better services and creating value of the shareholders assets.
Beach does not only give emphasis on its financial objective only but it also give
equal importance to its social activities also. The company is highly dedicated to make
positive commitments for the wellbeing of the local community within which it continue its
operation. The company by creating local employment and collaboration with other
organisations try to improve the economic condition of the nation.
Discussion
SWOT
The management of the company is using the SWOT analysis to make strategic
decisions, the SWOT analysis is matrix which contains the internal and external factors from
which the strength, weakness, opportunities and the threats of the organisation can be
measured from the SWOT analysis. The internal factors consists the strength and weakness
on the other hand the external factors consist the opportunities and threats. The strengths
indicates the internal strength that the company has to increase its productivity and achieve its
short term objectives. The weakness will address the problems that the company have which

5FINANCIAL STATEMENT ANALYSIS
create obstacle in the production process and in generating revenue within its own business
environment (Jadoon, et al 2018).
The external factors include opportunities which indicates the areas from which the
company is expecting to get some advantages that can help it to achieve long term goals and
to make its position in the market stronger than its competitors. While the threats reflects
what challenges the company will face from the political and economic condition and also
from its competitors while carrying on its operation (Turner et al 2016). The SWOT analysis
of the beach energy limited is explained in details:
Strength
Distribution and reach
Cost structure
Community of the dealers
Financial position
Weakness
Research and development
High inventory turnover ratio
Quality control
Low morale of the employees
Opportunity
Technological development
Low inflation rate
Green government drive
Threat
New entrants
Technological improvement of the
competitors
Rise in the price of fuel
Strengths
Distribution and reach

6FINANCIAL STATEMENT ANALYSIS
There are is large number of outlets of beach limited is present in all over the sates in
Australia which help it to reach to core customers along with that they have also a huge
distribution network to ensure that its products are available to its customers on time.
Cost structure
The management has been efficiently managed to bring control over the cost opf
production which enables it to produce gas at low cost and provide it at affordable price to its
customer leading to the high popularity of this company (Sigler Parker and Martinus 2017).
Community of the dealers
The strong relationship with the dealers has made it possible for the organisation to
operate efficiently. It not only supply the products at the correct time to the dealers but also
provide necessary training to them to promote company’s products to the retail customers
(Robinson 2017).
Financial position
The company has been able to earn profit for the last years and also able to increase
its accumulated profit reserve which indicates its strong financial condition (Young 2018).
Large assets base
With 5 basins across Australia from which continuous explorations are done, the
company is highly reached with assets which provides better solvency position.
Highly advanced infrastructure
The company has made automation in most of its operation process which ensure the
safety of the workers (Lochner Park and Shin 2016).
Professional labour force

7FINANCIAL STATEMENT ANALYSIS
Beach energy’s main strength is its highly efficient and professional labour force for
which the productivity increases at a rapid pace.
Weakness
Research and development
The company is giving emphasis on this area but the investment made by the
organisation ins this aspect is low than the other competitors for which it become difficult for
the company to bring innovations in the production process in comparison to the other market
players (Abowd McKinney and Schmutte 2019).
High inventory turnover ratio
This indicates that the organisation’s products remained in inventory for long time.
This indicates poor inventory management system of beach energy limited.
Quality control
The management has allocated small funds for its quality control, in the energy sector
quality control is an essential element so the company should allocate more fund in the
quality control process (Bull et al 2016).
Low morale of the employees
In the recent years many professional worker left the organisation due to unfair
politics within the management. This also reduces the morale of the existing workers.
External factors
Opportunities
Technological development

8FINANCIAL STATEMENT ANALYSIS
With the advancement in the technology in various equipment of the mining sector
the company get the opportunity take the advantage of such improved technology and
enhance its productivity (Distadio Ferguson and Lam 2019).
Low inflation rate
The inflation rate in Australia will not increase significantly in the coming days which
give beach limited an opportunity to keep its cost of production at a lower level.
Green government drive
This scheme of the government give beach energy limited to sale its products to the
state government contractors (Robinson 2017).
Government subsidy
The declaration of the government subsidy to the environment friendly companies in
this sector has created a major impact on the production process (Young 2018).
Threats
New entrants
A number of participants entered in the sector has made the industry more
competitive in the recent years (Jadoon et al 2018).
Technological improvement of the competitors
The competitors applied more advanced technology in comparison to beach limited
which become a major threat for this organisation.
Rise in the price of fuel
With the increase in the rise in the price of fuel the company find it difficult to
produce goods at low cost which impacts the revenue of beach limited (Gürel and Tat 2017).

9FINANCIAL STATEMENT ANALYSIS
Increase of bargain power of suppliers
With the decrease in number of suppliers the existing suppliers increased their
bargaining power resulting into increase of the cost of production (Khan 2016).
Valuation methods
The two methods that seems to be very reasonable for the valuation of beach energy
limited is the discounted cash flow methods and the residual earning model of valuation.
DCF model
The discounted cash flow method is used to forecast the future free cash flow and
discount to present value. This method is best suitable for project based companies and since
beach limited has to invest in various projects it will be effective to use the discounted cash
flow methods to properly measure the financial feasibility of the various projects of the
company. The 2 stage model is used, which means that the growth stage of the company’s
cash flow is segregated into two stages. The first one is the stage where the growth rate is
higher and the second one is the stage where in the growth rate is low. In the first stage it is
essential to make a prediction of the cash flows of the business over the 10 years. In order to
measure this it is required induce the past free cash flow from the last reported value. In this
method it is estimated that the companies with decreasing free cash flow will make their rate
of shrinkage slower, during this period. This assumption has been considered in this valuation
method to reflect that the rate of growth tends to get slower more in the early periods rather
than in the subsequent years of operation (Chen 2019).
Normally it is assumed that the current value of one dollar will be more than the value
in the coming days and for that reason it is essential to discount the values of the future cash
flows to the current estimated value of the dollars. From the calculation it has been observed

10FINANCIAL STATEMENT ANALYSIS
that the present value of the ten year cash flow of the beach energy limited is AU $ 2.40
billion (Khan 2016).
In the next stage the terminal value is calculated, in this stage, the cash flow of the
business after the first stage is measured. In this stage a very calculated growth rate is
considered that does not go beyond the rate of the GDP growth of the country within which
the organisation is operating. In this case generally it is essential to use the 10 year
government bond rate to predict the future rate of growth. Unlike the 10 year growth period
in this method also, it become extremely important to discount the cash flows of the future to
the current value and the cost of equity for this purpose is considered to be 7.9 (Taleb 2019).
By considering all these assumptions it has been observed that the present value of the
terminal value comes to be AU$3.6 billion. So the total value of the organisation is calculated
by adding the sum of the cash flow for the coming 10years with the present value of the
terminal value which is AU$6.0 billion. In the last stage it is required to divide the value of
the equity by the total number of outstanding shares. Considering the current share price of
1.19 the organisation appears about fair value at a discount arte of 10% to the position where
the shares prices of the beach energy limited is traded currently (Kang and Starica 2016).
The assumptions of this model
The calculations that are made for the valuation under this method is largely
dependent on two estimations. Discount rate is the first assumption and the other one is the
cash flow. The DCF method does not consider the cyclicality of the sector, or the capital that
the company may require in the future. So it may not be possible to get a complete overview
of the potential performance of the organisation. From the perspective of a potential investor
of the company the cost of equity is considered as the discounted rate and not the cost of
capital. To evaluate the present value of the cash flow the discounted rate of 7.90 is

11FINANCIAL STATEMENT ANALYSIS
co9nci8dered which is made on the basis of the beta of 0.93. Beta is used as a tool to evaluate
the volatility of the share price of the company in comparison to the market. The beta of this
company is derived from the average industry beta of internationally comparative companies,
with a range of 0.80 to 2.0 which is recognised as a reasonable range of a steady business
(Cifuentes 2016).
The DCF is a very effective model but it is not a complete one on the basis of which
an investor can take investment decisions. There are certain limitation of this model as in this
model several assumptions are made so if the company’s growth rate changes suddenly
which can happen or if the cost of equity changes then for such change the results of the DCF
will automatically change and that create confusion in investor’s mind. For this reason
another method of valuation is considered which is known as the residual earning model.
The residual earning model
The residual earning model is used to forecast the earnings and the expected earning
rate of the organisation on the basis of the opening book value of the company from which it
will be possible to evaluate the residual earnings of the company. This method is also very
effective to compare the performance of the company with the other market competitors. This
method is selected as it includes the values that are mentioned in the financial statements as
well as the value generating drivers like the profitability and the required rate of return. As in
this method many assumptions are not made and the valuation is made on the basis of the
current financial statements so it can give a more accurate result (Bergeron Gueyie and
Sedzro 2019).
Reverse engineering
The reverse engineering method is used to make it sure that whether the estimated
growth rate and the required rate of return that are considered for calculation of the

12FINANCIAL STATEMENT ANALYSIS
discounted cash flow and the residual value is correct or not. In order to avoid the uncertainty
that may occur due to wrong estimation of the future cash flow in the DCF model the reverse
engineering model suggests to consider the current value of the share price of the company
and by working backward the DCF from its share price it will be possible to evaluate the
amount of cash the company should generate to justify the current share price (Green Hand
and Zhang 2016).
Recommendation
Based on the recent earning capacity of the organisation it can be said that the share
price of the company is growing to fall further with an expectation that the earning will fall
further to 4.2% in the coming financial years in comparison to the last 5 years growth rate. At
present with the twelve month profit of AU$ 577 million the predicted growth rate indicates
that the profit will fall down to AU$553 million by the end of 2020. From the long term
prospect it can be said that the investor can make invest in this company as the future
prospect of the company is good and it can improve its current financial condition by
implementing more advanced technology and by investing in new projects.
Conclusion
From the above discussion it can be said that although beach energy limited is
considered as the leading oil producer of the country but in the current financial condition of
the organisation is not well and the organisation has to make improvements in that aspect in
order to increase the value of the stakeholder’s wealth. From the valuation methods bit can be
observed that the company is undervalued as the earning capacity of the company is falling
down. So in that context it can be said that BPT should take some quick measures to recover
from this current situation and regain its market position.

13FINANCIAL STATEMENT ANALYSIS
Refrences
.
Abowd, J.M., McKinney, K.L. and Schmutte, I.M., 2019. Modeling endogenous mobility in
earnings determination. Journal of Business & Economic Statistics, 37(3), pp.405-418.
Bergeron, C., Gueyie, J.P. and Sedzro, K., 2019. Earnings multifactor process, residual
income valuation, and long-run risk. Journal of Theoretical Accounting Research, 15(1),
pp.23-43.
Bull, J.W., Jobstvogt, N., Böhnke-Henrichs, A., Mascarenhas, A., Sitas, N., Baulcomb, C.,
Lambini, C.K., Rawlins, M., Baral, H., Zähringer, J. and Carter-Silk, E., 2016. Strengths,
Weaknesses, Opportunities and Threats: A SWOT analysis of the ecosystem services
framework. Ecosystem services, 17, pp.99-111.
Chen, C., 2019, September. Research on Valuation Method of Internet Enterprise. In 2019
3rd International Seminar on Education, Management and Social Sciences (ISEMSS 2019).
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Cifuentes, A., 2016. The discounted cash flow (DCF) method applied to valuation: Too many
uncomfortable truths. Available at SSRN 2845341.
Distadio, L.F., Ferguson, A. and Lam, P., 2019. Wealth effects of farmout arrangements in
the oil and gas industry. Available at SSRN 3444028.

14FINANCIAL STATEMENT ANALYSIS
Green, J., Hand, J.R. and Zhang, X.F., 2016. Errors and questionable judgments in analysts’
DCF models. Review of Accounting Studies, 21(2), pp.596-632.
Gu, F. and Lev, B., 2017. Time to change your investment model. Financial analysts
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Gürel, E. and Tat, M., 2017. SWOT analysis: a theoretical review. Journal of International
Social Research, 10(51).
Jadoon, Q.K., Roberts, E.M., Henderson, R.A., Blenkinsop, T.G. and Wust, R.A., 2018.
Mineralogical variability of the Permian Roseneath and Murteree Shales from the Cooper
Basin, Australia: Implications for shale properties and hydrocarbon extraction. Journal of
Petroleum Science and Engineering, 165, pp.850-872.
Kang, J. and Starica, C., 2016. On the consistent inference of the economic relation of the
residual earnings valuation model.
Khan, M.T., 2016. It Is Smart Only If It Is Sustainable. Environmentally Friendly Business
Strategies As A Source Of Creating Bigger Value Pool And Reducing Negative
Environmental Impacts.
Lochner, L., Park, Y. and Shin, Y., 2016. Earnings Dynamics and Returns to Skills.
Phadermrod, B., Crowder, R.M. and Wills, G.B., 2019. Importance-performance analysis
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Australian Cities Conference, Adelaide (pp. 28-30).

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Taleb, L., 2019. Real Option Analysis versus DCF Valuation-An Application to a Tunisian
Oilfield. International Business Research, 12(3), pp.17-30.
Turner, I.L., Harley, M.D., Short, A.D., Simmons, J.A., Bracs, M.A., Phillips, M.S. and
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