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Senex Energy Video



 

Stock Of The Day - Senex Energy (BUY)

Today’s report focusses on Senex Energy Limited (ASX:SXY), which has drilled eleven wells under the FY15 drilling program in the South Australian Cooper Basin. As part of latest updates, the twelfth well is expected to be spudded at Dunoon-3 in PRL 16 during April. This region has been identified as a low risk near-field oil exploration target in view of SXY’s strategy of deferring higher risk exploration spend and emphasising on development and production enhancing activities.
 

Location of Dunoon-3 (Source – Company Reports)
 
A good uplift is also expected to come from the binding sales agreement with Orca Energy for sale of Orca’s Cooper Basin Assets for about $2,000,000 in cash. The permits and associated JV interest involved are the Komodo’s 20% interest in Burruna oil field being petroleum production license 251 (PPL 251), Komodo’s 20% interest in Fury oil field and petroleum retention license 117 (PRL117), and Orca’s 20% interest in petroleum exploration license 110 (PEL 110). Subject to regulatory approvals, the transaction is expected to be settled by May 2015.


Key Financials (Source – Company Reports)
 
SXY reported a record production for the half year growing 14% to 0.74 million barrels. However, the 27% lower oil price compared to the same period of the previous year took its toll on SXY’s revenues and EBITDAX. EBITDAX was down 29% at $ 33.5 million and NPAT was down 95% to $ 1.6 million. Operating costs (excluding royalties) continued to remain low at $ 31 per barrel which was in line with the previous half year. There was an increase in exploration expenses because of the drilling activity in the Northern Cooper Basin. However, the company was able to accomplish the first sales of gas and gas liquids from the Hornet field and there was exploration success on the Martlet 1 Western flank. In addition, there was no time lost because of injuries and, as a further safety measure, the company launched the Cooper Medivac helicopter service. The company was also able to implement a successful hedging strategy and put in place a floor price to protect oil sales revenues for the second half of FY 2015. On the commercial and strategic front, the company was able to announce the completion of the transaction related to the Western Surat Gas Project. The capital and operating expenditures for FY 2015 have been reduced to take into account the changes in the oil price situation and capital expenditure has been revised to prioritise allocation to the lower risk opportunities.
 

FY15 Guidance (Source - Company Reports)
 
Despite the downturn in the oil price, company operations remain profitable and complete funding is in place for all work operations. The portfolio of producing assets continues to remain cash positive and the hedging strategy has resulted in complete protection of revenues for the second half of FY 2015. The company has also taken pre-tax non-cash impairment charges of $ 87 million to better align asset values to the new market conditions for oil and gas. The effective tax rate has been maintained at 22% and the balance sheet remains strong with good liquidity comprising cash holdings of $ 74.9 million and no debt.
 
As indicated earlier, the capital expenditure guidance for the full year has been slashed by 20% to $ 85-$ 90 million and additional cost savings have been identified amounting to an annualised $ 5 million. Primarily, the cut comes in the wake of the expected decrease in sales and revenues though high grading opportunities and projects critical to growth will not be affected. The company is on track to deliver on the guidance of production already indicated for FY 2015 and the early success in drilling on Martlet-1 is encouraging. The target for the oil reserves replacement ratio is currently under review and will be modified suitably as necessary.
 

Non-cash Impairment and Net Profit (Source - Company Reports)
 
We also note that the company has reported a statutory after-tax loss of $ 65.9 million after adjusting for certain impairment and other charges compared to a profit of $ 25.6 million for the same period of the previous year. The payment charges reflect a conservative view on capital allocation and include the impact on exploration assets as a result of deferred or the halting of forecast activity, the impairment of the value of the Acrasia field and the adoption of a long-term oil price of $ 73 per bbl.


FY16 Oil Price Hedging Program (Source – Company Reports)
 
Quite recently, the Company announced for establishing an unsecured three year debt facility for general corporate purposes amounting to $ 80 million as a further measure to provide financial flexibility and to strengthen the liquidity position. The multicurrency facility will be provided by Westpac Banking Corporation. SXY reiterated that the balance sheet would continue to be conservatively managed and there was no immediate requirement to draw down on the facility. It further believes that the establishment of the facility together with the significant cash position and the hedging program would ensure that the company is on a strong platform going into financial year 2016. The Company has also entered into a series of oil price hedges for FY16 for revenue protection over one million barrels of oil sales. SXY states that the total premium payable for the protection is US$1.7 million, which of course adds to the operating costs.


Senex Energy Chart (Source - Thomson Reuters)
 
It is evident that the outlook for the oil and gas sector is not particularly bright. A major cause is supply and demand which is exacerbated by the efforts of the Organisation of Petroleum Exporting Countries (OPEC) trying to regain market share as well as the efforts of the United States to keep its high cost domestic oil industry going. However, the situation regarding Australian producers looks slightly different. The smaller companies look distinctly undervalued and but are expected to benefit based on revival for oil prices in the medium term. However, the oil market is complex and one needs to exercise some caution before taking any step further.
 
Nonetheless, we see plenty of upside for SXY. The company has high-quality financials, low costs of operations, virtually no debt at present and strong liquidity which means that it should continue to operate profitably. In view of efforts such as the hedging program and so forth, the Company has in a way reduced exposure to oil price volatility and can invest in its assets over 1 to 2 years. Meanwhile, the falling Australian dollar may help balance the effect of plummeting crude oil prices.
 
Based on the above, we put a Buy recommendation for this stock at the current price of $0.41.