Australia | Nov 30 2012
-Senex success with Spitfire
-More upside if connected to Growler
-Strong oil production growth
-Unconventional gas potential
By Eva Brocklehurst
Oil and gas sector performer Senex Energy ((SXY)) has stepped up a notch in broker opinion after the company confirmed a new oil field in the western flank of the Cooper Basin, South Australia. Spitfire 2 well testing was hailed a success and the company plans 2-3 follow-up appraisal wells early next year. According to JP Morgan, this could demonstrate a discovery of over one million barrels (mmbbl) for the field, or more if the reservoir is linked to the Growler field at just 2km to the east.
While Senex' production profile and potential are reflected well in the share price, the company's extensive conventional acreage, and substantial exposure to shale, in this very productive region is considered cause for scrutiny and Deutsche Bank has initiated coverage. Deutsche notes a shale position in the southern Cooper Basin's unconventional fairway offers a potential game-changer for Senex over the medium to long-term, and considers this a key to creating value. The PEL 516 permit in this fairway is 100% Senex. Two wells drilled this year confirmed liquids-rich shale gas and low carbon dioxide levels. Deutsche considers the upcoming 18-month appraisal well program as a catalyst for de-risking the flow-rate potential of this resource. However, the broker believes progress on de-risking unconventional flow rates, or stronger-than-anticipated oil reserve growth, will be required to underpin a higher share price and commences coverage with a Hold and price target around 75c.
The Cooper Basin, straddling the border of South Australia and Queensland, is Australia's largest onshore energy precinct and Senex has several permits and interests in joint ventures across the region. Spitfire is in PEL 104, in which Senex hold a 60% interest and is operator. Beach Energy ((BPT)) holds the remainder. Senex is focused on three areas: oil and unconventional gas (shale) in the Cooper and coal seam gas in Queensland's Surat Basin. The coal seam gas play, for Deutsche, offers exposure to rising gas prices from 2015/16 but there is limited visibility on development timelines and this revenue stream is likely to be a longer-dated driver of value. Senex plans pilot production wells in this area in 2013/14. However, it's the exposure to liquids-rich shale gas in the southern Cooper Basin that offers substantial upside potential, according to Deutsche, subject to demonstrating commercial flow rates.
Deutsche's forecast for Senex FY13 oil production is 1.3mmbbl, which would be up 113% year-on-year and ahead of company guidance at 1mmbbl. It would be driven by a sustained ramp-up from Growler and Snatcher oil fields. Deutsche estimates a 54% internal rate of return across the western flank, where Senex is undertaking its largest drilling program to date (20 wells). From this, there is substantial reserve upside potential. De-risking FY13 oil exploration drilling would increase Deutsche's target to around 80c. The broker expects strong production growth and reserve upgrades will continue, given the company's high exploration success rates. Senex raised its oil production to 601,647 barrels as at June 30 2012, compared with 14,579 barrels two years earlier.
JP Morgan has ratcheted up its outlook for the stock after Senex announced results for the Spitfire-2 well. It likes Senex for its Cooper oil business, with that area's low risk incremental expansion potential, as well as its well placed CSG fields. The broker also prefers the wet and low carbon dioxide unconventional gas potential compared to the company's rivals. The broker has a Buy rating on the stock and has raised its price target to 89c. However, JP Morgan notes Spitfire-2 hit 6.5m net pay in the well established mid Birkhead Formation at 1,714-1,721m depth, so considers the discovery is more an appraisal success than an exploration success. The broker foresees at least one of the follow-up appraisal wells will be designed to test a connection to the Growler field and it is this potential extension of the Growler field all the way to Spitfire which would yield further upside in value.
The key risks to the Buy recommendation, cited by JP Morgan, include failure to define new oil targets or achieve a success rate that is typical of the Cooper Basin (40-50%) and a failure to show unconventional flows could reach commercial rates. Senex has an 85c consensus target with a range of 63c to $1.12 on the FNArena database. The stock is rated a Buy by CIMB and JP Morgan and a Hold by Deutsche Bank. Citi has a Sell rating, citing full value against the broker's low-market 63c target.
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