Australia | Jun 28 2013
– Senex's drilling program continues to generate positive results
– Company is already highly profitable, and well-funded
– Recent share price weakness seen as a buying opportunity
By Andrew Nelson and Rudi Filapek-Vandyck
Bringing sexy back into the Australian oil and gas sector? This time the privilege is not Justin Timberlake's, but a small cap oil and gas exploration company mainly focused on Australia's Cooper Basin, Senex Energy ((SXY)). You can tell from the company's ASX-code there might be some pre-determined destiny in play.
For those investors who like to take guidance from more tangible signals: Senex has been updating investors with additional good news indications this week and stockbroking analysts love it, adding even more enthusiasm to a swiftly recovering share price. Senex shares almost reached consensus target at around 85c in April, but they subsequently pulled back to below the 50c mark earlier this week.
So far this financial year (FY13), the company has produced around 1.3 mmbbl of oil out of the Cooper. That’s a 112% lift over FY12 levels. Production costs are running below $40/bb. With crude selling at around the hundred dollar mark, the company is currently generating strong earnings and cashflow out of this production. Easy maths.
Credit Suisse is projecting annual production growth levels running at around the 15% mark out to FY16. That's without accounting for current and future exploration work, which is running along at pace as well. In fact, the broker notes the bulk of the cash generated by the Cooper is put right back into the company to fund further drilling to increase reserves and production growth.
Credit Suisse is expecting the company’s 30-well two-year drilling program out to FY15 will add an additional 9 mmbbl of oil by FY16. Based on current drilling success rates, the broker thinks this is an easily realistic goal.
The company is also sitting on 1.2m acres of unconventional gas acreage in the Cooper Basin. Senex has been slowly chipping away at the shallower, liquids-rich shale and tight gas opportunities and has only flow tested three wells so far, working a little more ponderously than peers in the area. The broker notes some recent flow testing has underscored the liquids-rich nature of the company’s operating area.
This all sounds highly promising, but the broker does point out Cooper Basin unconventional gas is presently uneconomic on current gas prices combined with what are low flow rates and pretty steep capex levels per well. Credit Suisse isn’t that concerned, working off the assumption that within a few years' time, Cooper Basin unconventional gas is likely to reach commercialisation – once a little more expertise is gained in the area and gas prices push up to $8–$10/GJ.
The Senex investment story thus does require a leap of faith in the meantime. The increasingly enthusiastic gathering of stockbrokers covering the stock does point out the company has no debt and is sitting on $136m in cash, all on top of the increasingly strong cashflow being generated by Cooper oil.
This being the case, Credit Suisse thinks the company has more than enough in the bank to fund its FY14–15 capex requirements. Given the company is also the operator of its Cooper Basin oil and gas acreage, it can name its own budgets, prices and timelines.
Credit Suisse’s updated risked valuation is 85c. The broker sees an extra 49c of risked upside in unconventional gas in both the Cooper and the Surat Basin in Queensland. On a relative basis, the analysts believe the stock trades at a 46% discount to Cooper Basin peers. No wonder, CS has been communicating to its clientele the share price dive in recent weeks should be treated as a good buying opportunity.
Earlier this week, JP Morgan initiated coverage with an Overweight rating. JP Morgan always thought the company's conventional assets were valuable, but like many it remained cautious in attributing upside to the company's unconventional gas assets. The discomfort was compounded by the relatively small size of the company, JP Morgan pointing out minors in general tend to have a much tougher time in proving up unconventional assets. Recent drilling results and some additional industry discussions have removed these doubts.
JP Morgan now expects the company to either farm-out, look for external funding or maybe a little of both in order to spread out the funding of further Cooper gas exploration in the next 6-12 months and to buy in a little extra expertise. The broker also sees potential for costs savings.
Deutsche Bank analysts have started mentioning "significant value upside" in their research reports, while Morgan Stanley simply used the label "superior growth" in its update published on Friday. Morgan Stanley is not part of the regular FNArena coverage, but it is positive on oil and gas stocks in general (Attractive sector rating) and has retained an Overweight rating for Senex in the sector.
All brokers in the FNArena database have a positive rating for Senex, with the exception of Citi (Neutral) which hasn't updated since February, when the share price was only slightly higher than where it is today and the latest drilling results had not yet been communicated. Most stockbrokers have price targets in the 70-85c range, which is well above where the share price is trading. More success from exploration will only add more future value.
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