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THREE OIL PLAYS OF INTEREST

October 13, 2015 | Team Kalkine
THREE OIL PLAYS OF INTEREST

Drillsearch Energy Limited


 
The company announced its results for FY 2015 and the operating highlights included delivery of a record work programme, production of 3.3 mmboe, an increase in reserves postproduction, decisive measures taken in response to the low oil price environment and strong liquidity by way of $ 171.5 million in cash and undrawn debt. The result highlights lower oil prices realised in line with the global market while additional income was delivered because of the hedging program. The revenues reflect lower prices and production, and a reported NPAT loss of $ 8.1 million though the underlying NPAT was maintained. The adjusted revenues came to $ 271.2 million and the average realised price of $ 89.50 was 29% lower than the previous year. Hedging provided a benefit of $ 20 million and additional hedging has been implemented with effect from November/December. The oil margin was a cash margin of $ 56 a barrel which was 61% lower than the previous year and the average realised basket price for gas was 17% lower because of the reduced liquids price as well as reduced liquids production.


Production Results (Source: Company Reports)

The production guidance for FY 2016 is production in the range of 2.8 to 3.2 mmboe and investment in FY 2015 is expected to deliver the results in terms of oil production in FY 2016. The production is expected to be 85% oil and 15% wet gas. Facilities and wellhead capacity are more than adequate to maintain future production and wet gas discoveries are being commercialised and the production from the Santos and Senex joint ventures will commence in mid-year. Capital expenditure is expected to be in the range of $ 80 million-$ 110 million compared to $ 142 million in FY 2015. The September drilling report revealed that the first well of the FY2016 program, the Washington-1 exploration well in PEL 570 (DLS 47.5%; Santos 35% and Operator; Sundance Energy 17.5%) was drilled to a total depth of 3,660 metres.


Oil and Wet gas Distribution (Source: Company Reports)

The key conclusions may be summarised as a decisive response to the changing market, the maintenance of the underlying profit, the strength of the balance sheet which will become stronger when the refinancing decisions in progress will be concluded, the continued investment in diversified production growth and the high-quality portfolio which has driven production growth of 50% over the last five years.
 
We are impressed by the upbeat targets and guidance for FY 2016 which promise growth and rate the stock as a buy at the current price of $0.610.


DLS Daily Chart (Source: Thomson Reuters)

Santos Ltd


 
The summary of the first half of FY 2015 show that GLNG is on schedule and on budget and that the company has achieved operating efficiencies and cost savings. Production was up 13% to 28.3 mmboe and sales volume by 7% to 30.9 mmboe. In the GLNG project, feed gas was introduced in Train 1 and the project is on track for first LNG by the third quarter and within the budget of $ 16.5 billion. As regards cost savings, unit production costs of $ 13.07/boe were below guidance and capital expenditure was down by 55%. EBITDAX was down 5% to $ 900 million, EBIT was down 36% to $ 226 million, operating cash flow was down 26% to $ 532 million and the net profit of $ 37 million reflected the effect of lower oil prices and the increase in exploration expenses. The interim dividend was 15 cents per share fully franked and the DRP discount 2.5% was fully underwritten.
 

Work Hours (Source: Company Reports)

In the opinion of the company, the oil market is currently oversupplied but, in the medium term, new supplies of oil will be required to meet ongoing demand and offsets the natural decline. 2015 oil demand growth of 1.6mmbbl/day is the strongest in five years and this growth is forecast to remain strong through the second half of 2015 and through 2016. 20 billion barrels of production have been removed because of the 20% capital cuts in the industry and a supply gap is expected to develop in the medium term. The recent decline in oil prices shows concerns about lower economic growth in emerging markets, expectations of higher oil exports from Iran and expected growth in the level of global inventory. The company's production in the first half was up by 13% with PNG LNG and Darwin LNG producing above expectations and the higher production from the Cooper Basin. LNG production in the first half was up by 131% and guidance for 2015 has been maintained at 57 to 64 mmboe.
 

Net Debt (Source: Company Reports)

STO is working on cost-cutting efforts with latest speculations on cutting a further 200 jobs in view of the challenges faced by the sector and the wider economy.
 

STO Daily Chart (Source: Thomson Reuters)

We believe that the company may be emerging from its long depressing spell and the decline in stock prices could provide a buying opportunity for investors who wish to benefit from the upturn. We rate the stock as a Buy at the current price of $5.56.
 

Senex Energy Ltd


 
The company enters FY 2016 after having reported good oil production in FY 2015, record growth in the oil and gas 2P reserves, and a transformation by way of the development of a material gas business. Production was up 1% to 1.39mmboe, sales revenue at $115.9 million and EBITDAX was down 46% to $ 49.5 million. The underlying profit was $ 5.6 million, which was down 87%, and the statutory loss was $ 80.6 million compared to a profit of $ 37.9 million in the previous year because of non-cash impairment charges of $ 97 million. The impairment charge was recorded primarily against the nonproducing exploration assets in the Cooper Basin and in response to the depressed oil price environment. 2P oil and gas reserves grew by 137% to 44.6mmboe and liquidity consisted of cash of $ 49 million and an undrawn facility of $ 80 million. A hedging program has been instituted for FY 2016 oil sales.
 

Gas Pipelines (Source: Company Reports)

Managing director and CEO Jim Davies said that the company has achieved a number of important milestones and delivered strong performance in the context of the sharp decline in oil prices. The low cost business in the Cooper Basin maintained good margins from oil sales achieving solid production from the existing fields and the first Namur oil discovery on the western flank also contributed. The gas portfolio which the company has been maturing for a number of years is looking strong and the reserves receive an uplift from the coal seam gas asset swap in the Surat Basin, which also laid the foundation for the Western Surat Gas Project.
 

Capex and Production (Source: Company Reports)

Then the execution of the $42M asset sale agreement and 20-year 50TJ/day gas sales agreement (GSA) seems to reinforce the performance given the growth and balance sheet augmentation.
 
The key points for FY 2016 are focused on discipline capital spending and cash preservation. There will be a self funding reduced work programme in the Cooper Basin focused on oil production. Coal seam gas in the Surat Basin will be prioritised to capitalise on the East Coast gas market opportunities and the emphasis will be on commercialisation and financing for the Western Surat Gas Project. The net production guidance is 1 to 1.2 mmboe given the lower capital expenditure guidance of $ 35 million-$ 45 million.

 
SXY Daily Chart (Source: Thomson Reuters)

We believe that the company is trying to manage with the low price oil environment given the serious cost-cutting and the strategy of focusing on gas assets when oil prices are low is sound. We believe that there is still fundamental value and consequently rate the stock as a Buy at the current price of $0.165.

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