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In today’s daily we have covered stock research on Three Energy Stocks To BUY.
The S&P 500 was up by 24.86 points or 1.23% to 2045.71.U.S. stocks jumped on Tuesday,led by gains in energy shares as oil prices extended their recent rally, while higher-than-expected January car sales added to the upbeat tone. Merger activity also helped equities, with shares of Office Depot jumping 19.9 percent after the Wall Street Journal reported it was in advanced talks to merge with Staples Inc Staples shares jumped 10.5 percent.
Capital expenditure cuts by major oil producers and industry data showing a drop in the number of US rigs in operation have supported the rebound. Energy stocks were big gainers on both sides of the Atlantic, closely followed by miners as industrial metals prices gained ground. Greek stocks were the day’s star performers as the ATG index jumped 11.3 per cent, led by a rebound for banks. Athens’ 10-year implied borrowing cost fell the most since 2012 as it eased back below 10 per cent.
Staples Daily Chart (Source – Thomson Reuters)
S&P ASX 200 was up by 82.1 points or 1.46% on Tuesday and closed at 5707.40 points. TheAustralian dollar took a tumble following the rate cut; it was trading down 1.8 per cent to US76.60 in afternoon trade. CBA shares pushed past $90 following the rate cut, ending Tuesday up 0.8 per cent at a new closing all-time high of $90.40. Among the other banks,Westpac Banking Corp gained 1.2 per cent to $35.26, Australia and New Zealand Banking Group lifted 2.2 per cent to $34.11 and National Australia Bank rose 1.6 per cent to $36.23.
Telstra shares also benefited from the RBA's move, surging to a fresh 14-year high, finishing the day 2.1 per cent higher at $6.67. Energy stocks performed strongly on Tuesday. Santosjumped 2.6 per cent to $8.21, Origin Energy rose 5.9 per cent to $11.70 and Oil Search finished 4.4 per cent up at $8.33. Beach Energy shares surged the most in more than six years, finishing Tuesday 15.6 per cent higher at $1.1675, after Seven Group purchased a stake in the oil producer, fuelling takeover speculation. Novion shares surged 9.5 per cent at $2.54, as the property group announced it is attempting a merger with Federation Centres to create Australia's second-largest shopping centre landlord with a market capitalisation of $11 billion.
Beach Energy Daily Chart (Source – Thomson Reuters)
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Three Energy Stocks To BUY
DrillSearch (DLS) reported its operational data for December 2014 quarter with production of 0.79mmboe, which is 6% up on September 2014 quarter, and its on-track performance to achieve the lower half of the 3-3.4mmboe guidance. The Western Flank oil production has been strong with the start-up of additional wells. Further, there has been a recoil in wet gas sales after the reduced downtime at the Moomba facility. Increase in volumes with oil hedging benefit resulted into a 12% revenue beat at $70m. The hedge book contributed A$3m of revenue in the quarter. However, the cash balance dipped by $20m to $149m and the capital expenditure of $97mn was more than what market expected. The key factor was the unconventional exploration with the $32mn spend. Nonetheless, it is expected that capex will be materially down in 2H15 as 27 of targeted 40 wells have been drilled including all four unconventional wells. Further, it is noted that only two more wells have to be drilled by November 2017. The recently drilled Bauer development wells (Bauer-16-19) will be active during the March 2015 quarter and are expected to back oil production through end of FY15. 3x new wet gas discoveries including two in the STO JV and one in the BPT JV have been unveiled.
DLS_Northern Gas and Liquids Project Area, Cooper-Eromanga Basin (Source – Company Reports)
The additional hedges put in place extending into FY16 may increase the earnings per share in near future while offsetting the capex spend. Specifically, an additional 927kbbls for FY16 as a US$60/90 collar has been added to DLS’ forward oil hedge book, which is over and above the 2HFY15 remaining ~750kbbls US$70/bbl put options and 176kbbls US$90/120 collar. The Company is likely to come up with more insights on operating costs etc. in February 2015.
Sundance Energy (SEA) for quite some time has been witnessing speculations related to funding of FY15E capex and the broader sell-off of US shale producers. It is to be noted that SEA’s Eagle Ford Shale is among the lowest break-evens of all US shale plays. Eagle Ford with low cash costs of ~US$43/boe, which is below current spot WTI oil prices of US$69/bbl, helped derive ~77% of SEA’s production in 3Q14. If the WTI oil remains at US$69/bbl in FY15, the Company is anticipated to have a strong EBITDAX of US$156m in FY15E. There is good likelihood that SEA secures an increase in its $135m borrowing base to ~$170m irrespective of the recent decline in oil prices. The Company appears to be fully-funded to meet 2015-16 capex. This will help support the drilling activities. The Company’s FY14 gearing has also been low at 15%.
SEA_Production Growth (Source – Company Reports)
A capex and production guidance is due to be provided in early CY15. Focus on the Eagle Ford accounting for ~85% of total capex is the key aspect. The Company is also expected to drill about 20 net wells in 2015. Further, some value accretive acquisitions are expected in the Eagle Ford in the coming few months.
SEA_Total Reserves and Reserves by Basin (Source – Company Reports)
Senex Energy (SXY) was another Company that reported its December 2014 quarter results having instant cuts made to capital and operating expenditure. The Company further announced the FY15 capital expenditure to be lowered by 20% to $85-$90m from $100mn–$120mn along with a 15% staff reduction. In this regards, the FY15 work program has also been trimmed from 26 wells to 16 wells. With nine wells drilled, SXY aims to drill seven more wells in 2H15. The Company indicated that the seven oil wells in 2H15 will focus on appraisal and development opportunities. Martlet North-1 will be the next well drilled, after the Martlet-1 oil well commenced production in December 2014 quarter. The operational results have been stable with production of 0.36mmboe of oil during the December 2014 quarter, which is slightly low from the 0.38mmboe produced in the previous quarter. This may be owing to natural field decline and minimal development activity. However, the results at Hornet and Vanessa are encouraging for longer-term gas opportunities.
SXY_Production Cooper Basin (Source – Company Reports)
The cash balance increased to A$74.9m (with nil debt) which included A$20m payment from QGC following the Surat CSG asset swap. The cash balance is expected to reduce owing to probable completion of drill program and other growth projects. 2HFY15 hedging program (720kbbls under a collar of A$68/84/bbl) coupled with the capex cuts is indicative of SXY remaining in a net cash position by the end of CY15.
More or less, we see the capex and opex cut as a common approach across the energy sector to tackle the soft pricing environment. We also now sense that the oil market will see a sigh of relief from mid-2015 onwards. A little fuelling comes from the latest ASX boomerang after the RBA interest rate cut.
Based on the foregoing, we put a BUY recommendation for DLS at the current price of $0.90, SEA at the current price of $0.515, and SXY at the current price of $0.325.
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