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Mid-Cap

Is it time for a punt on oil stocks? - Senex Energy + Beach Energy + Woodside Petroleum + Santos Ltd

September 23, 2015 | Team Kalkine
Is it time for a punt on oil stocks? - Senex Energy + Beach Energy + Woodside Petroleum + Santos Ltd

Senex Energy Ltd



The company has reported solid oil production in FY 2015, record growth in oil and gas 2P reserves and a step change in the development of a material gas business and looks well poised for FY 2016. The key points for FY 2015 were production up by 1% to 1.39 mmboe, sales revenue down by 32% to $ 115.9 million, EBITDA down 46% to $ 49.5 million, underlying profit down by 87% to $ 5.6 million, statutory loss of $ 80.6 million compared to a profit of $ 37.9 million in the previous year because of a non-cash impairment charge of $ 97 million, oil and gas 2P reserves up by 137% to 94.6 mmboe and liquidity of $ 49 million in cash and $ 80 million in undrawn debt facilities. There was a steep fall in oil prices during the year and, in response, the company took a non-cash impairment charge primarily against non-producing assets in the Cooper Basin.

Commenting on the full-year performance, CEO Ian Davies said that the company had achieved a number of significant milestones and demonstrated solid performance despite the sharp decline in global oil prices which impacted earnings and cash flow. The low cost oil business in the Cooper Basin continued to maintain healthy margins from oil sales and there was solid production from the existing fields. The portfolio in the gas business is looking stronger with an uplift in total 2P gas reserves to 83.3 mmboe from the Surat Basin which was a seam gas asset swap for zero cash consideration. The company enters FY 2016 in a good position because it responded quickly and prudently to the changing market conditions by reducing expenditure both capital and operating, and has protected revenues with a hedging program and an unsecured corporate debt facility that remains untouched. Together with $ 49 million in cash, the company is in a good position to promote a strategy driven by growth.


Capex and Production (Source: Company Reports)

Looking forward, among the key points for FY 2016 is going to be a self funding reduced work programme in the Cooper Basin which will focus on oil production. Prioritisation of coal seam gas in the Surat Basin will enable the company to take full advantage of the opportunities in the East Coast gas market and there will be a continuing focus on commercialisation and financing opportunities here. There will be an advancement of significant unconventional gas exploration with Original Energy which the company being free carried for its share of stage 1 ($ 25 million-$ 35 million for FY 2016). Capital expenditure will be disciplined and in the range of $ 35 million-$ 45 million and net production guidance is 1 to 1.2 mmboe because of lower capital expenditure in the Cooper Basin. We are rating the stock as a Buy at the current price of $0.125.



SXY Daily Chart (Source: Thomson Reuters)
 

Beach Energy Ltd



It has not been a good year for investors in oil and gas producer Beach Energy Ltd with the share price down more than 46%. However, with the oil price at its lowest for many years, for investors looking to buying stocks which are out-of-favour, the oil and gas sector is definitely worth exploring. The company has just completed a comprehensive organisational review which began in April with the group reviewing assets, assessing the organisation and its capabilities, and refreshing its longer-term strategy. Here are some of the key points from the review. The company plans to capitalise on its competitive advantage in the Cooper Basin, through organic and inorganic opportunities, to pursue the significant opportunity that is still available here for oil and gas. It plans to establish a major gas business all the east coast basins to maximise value from the increasing east coast gas demand profile. It plans to implement growth opportunities beyond the Cooper Basin to become a multi-basin producer. As part of the review, the company has re-defined its boundaries of operation to focus closer to home where the company has its best chance for ongoing success. This change has led to the exit from Romania, the sale of Egyptian assets and the “farming down” of the Tanzanian permit.
 

Underlying NPAT (Source: Company Reports)

For FY 2015, macro issues mainly relating to oil pricing resulted in lower revenues, net profit after tax and cash flow. However, the balance sheet as of 30 June 2015 continues to be strong with $ 170 million in cash and available funding of $ 150 million. Sales and production volumes were 10.51 mmboe and 9.15 mmboe respectively which were broadly in line with the record levels achieved in FY 2014. The company achieved high drilling success rates and reduced exposure to international operations to align to changed market conditions. Sales revenues were $ 728 million (down by 31%) with underlying net profit after tax of $ 91 million (down by 605%) and operating cash flow of $ 229 million (down by 61%). The full-year dividend was 1.5 cents per share down by 63%. On average, there was a 35% reduction in the average prices for oil in USD though profitability was partly supported because of the depreciation of the AUD, strong sales volumes, reduced royalty and carbon costs and a disciplined management approach.
 
The Origin gas linked contract has commenced and is, among other things, delivering price increases on legacy contracts. The operations in Egypt have been sold for up to $ 22 million while the company has acquired a 40% interest in ATP 1056 on the south-eastern flank of the Cooper Basin. The impairment charges in the second half of $ 449 million are related to a downgrade of Delhi reserves, the Nappameri Trough Natural Gas Project after the exit of Chevron and the completion of stage 1 and the sale of the Egyptian reserves.
 
We believe that the company which is trading at near its all-time low has some attractive assets and could gain significantly and produce long-term values for investors if oil prices go any higher. Stock prices could hardly go lower and we see a potential upside. We would rate the stock as a Buy at the current price of $0.520.


BPT Daily Chart (Source: Thomson Reuters)
 

Woodside Petroleum Limited



The company has confirmed that it has provided Oil Search with a confidential and non-binding proposal to merge through a Scheme of Arrangement in accordance with the Papua New Guinea Companies Act. It is currently in discussion with Oil Search and there is no certainty that the discussion will result in a transaction. Under the proposal, the shareholders of Oil Search would receive an all scrip consideration of 0.25 Woodside shares for every share held and become shareholders in the new entity. The proposal is subject to regulatory approvals, satisfactory due diligence and the other usual conditions. The proposal is consistent with the strategy of Woodside to maximise value for shareholders, leverage capability and grow its portfolio.
 
The swap offer from Woodside implies a share price of around $ 7.65 per share and is worth around $ 12 billion in total. Both companies are in a trading halt and the offer price represents a premium of around 13.6% at the last traded price for Oil Search. We believe that the premium will have to be much higher especially for an all scrip offer. Alternatively, we could see a cash component thrown in to sweeten the pot for shareholders. We consider Oil Search to be a valuable prize because despite the low LNG prices, the low cost and the large-scale nature of the PNG operations puts them in a position to weather the current cycle comfortably and they will soon be generating plenty of cash. Woodside has a strong balance sheet with low debt to equity but not much by way of growth prospects and it is inevitable that an acquisition had to be made sooner or later. It has chosen one of the best acquisition candidates in the business. Though Oil Search has rejected the proposal, the market speculates for further efforts from WPL for sweetening the offer. It is believed that Woodside Petroleum is considering raising $ 2 billion or $ 3 billion in debt to fund a sweetened bid for Oil Search. An amount of $ 3 billion would raise the value of the $ 7.65 scrip offer by an extra $ 1.97 a share to total $ 9.62 per share.
 
The Company is expected to uphold its dividend payout ratio in the future irrespective of efforts directed towards Pluto expansion.
 
We have no hesitation in rating the stock as a Buy at the current price of $28.8.


WPL Daily Chart (Source: Thomson Reuters)
 

Santos Ltd



Oil and gas major Santos Ltd reported its half-year results for the six months to 30 June 2015 and these results were a bit of a mixed bag with both good news and bad news. The most important feature was that the company continues to be profitable with a net profit of $ 37 million though this was down 82% over the previous year. This reflected the impact of the reduction in realised prices of oil which was USD 60 per barrel during the half-year compared to USD 115 per barrel in the first half of the previous year and higher exploration expenses. The results also highlighted improvements in production and significant cost reductions across the entire business. Strong operating performance particularly from PNG LNG and Darwin LNG underpinned record production growth of 13% though the reduced oil prices resulted in a decline of 15% in revenues to $ 1.5 billion. The cost of production fell by 11%.
 
Group EBITDAX fell 5% to $ 900 million showing the basic soundness of the operations and the number from the Asia-Pacific region was up significantly because of full half-year production from PNG LNG. Both Eastern Australia and WA and NT business units recorded lower numbers because of lower sales volumes and prices. Depreciation and depletion expenses were higher mainly because of PNG LNG as were financing costs reflecting higher debt levels and lower interest capitalisation. Operating cash flow was down 28% to $ 532 million reflecting the low operating results.
 

Net Debt (Source: Company Reports)

In terms of funding, the company had $ 2.2 billion in cash and undrawn debt facilities as at 30 June 2015. Net debt as of this date was $ 8.8 billion and weighted average interest rate on this was 4.05% compared to 4.7% in the previous year. The GLNG project is on track for first LNG in the third quarter of 2015 and within budget. Construction and commissioning of the initial upstream facilities and the 420 km gas transmission pipeline was successfully accomplished. The Board of Directors has decided to pay a fully franked interim dividend of $ .15 per share. Though this was down from $ .20 per share in the previous year, it was a pleasant surprise for investors because they are still getting a dividend yield in excess of 5%. We believe that the company has a strong portfolio of energy assets and the current price of $4.85 justifies our rating of Buy.
 

STO Daily Chart (Source: Thomson Reuters)

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