Treasure Chest: Senex Energy Takeover A Solution For Santos?

This story features SANTOS LIMITED, and other companies. For more info SHARE ANALYSIS: STO

By Greg Peel

Senex Energy’s ((SXY)) share price has fallen 33% since June, largely as a result of the big drop in global oil prices. The company also suffered mechanical failure at key wells during the September quarter, leading to further share price weakness following last week’s quarterly production report release. Throw in otherwise lower than expected production, and Senex has not been much appreciated by the market of late.

To the Citi analysts, the production report offered nothing to be concerned about. Indeed, Citi believes investors are yet to fully understand Senex and its operational strategy focused on adding value through exploration. However, there was also some market disappointment forthcoming when last month Senex announced a Surat Basin CSG asset swap with BG, operator of the Queensland Curtis LNG development.

The goal of a typical explorer/developer is to monetise its efforts by selling off assets the company has brought to a level of potential. The market had been hoping Senex would monetise its assets in the Eastern Surat Basin in Queensland through a direct sale, or at least progress to a flow test that would boost perceived value, but instead, the company swapped two of its Eastern Surat assets for three Western Surat assets previously owned, and left relatively idle, by QCLNG. No cash changed hands. Thus rather than monetising its investment, Senex simply moved it.

For JP Morgan, this was as good an outcome as could be hoped when a direct sale seemed unlikely in the prevailing climate. It also moved Senex closer to its net reserve target. JP Morgan suggested at the time that Senex was the most attractively priced of those energy players with a presence in the Cooper Basin in South Australia, and more recently reiterated that Senex is a strong play on a recovering oil price.

As to whether the oil price is set to recover is another matter. All brokers have been recently downgrading their oil price forecasts, offset to a degree by lower Aussie dollar forecasts, and only last night Goldman Sachs announced it had cut its 2015 average forecast West Texas Intermediate price to US$75/bbl from a previous US$90/bbl.

The share price of Australian energy major Santos ((STO)) has also had a tough time of it of late thanks to the oil price, which has overridden any excitement with regard PNG LNG, which is now flowing, and the rapidly approaching completion of the GLNG development. But another concern for Santos has been the ongoing decline in production for the South Australian Cooper Basin joint venture, of which the company owns two-thirds and is operator. The junior members are Beach Energy ((BPT)) and Origin Energy ((ORG)).

The issue is simply one of maturing assets, which is hardly surprising since the original South Australia & Northern Territory Oil Search entity first developed the Cooper in the 1960s. But it also means that existing infrastructure is not being used to its full extent. That infrastructure links up to pipelines that connect the Cooper and Surat Basins and Gladstone on the Queensland coast, the location of GLNG.

The problem Santos has with GLNG, as it nears commissioning, is a lack of sufficient gas reserves and resources. One solution for Santos would be to acquire Arrow Energy’s Surat Basin gas, but Macquarie believes there is now another option, which would be cheaper.

The Lacerta field, home to Senex Energy’s new assets, lies directly north west of the Roma field, in which Santos has operations and infrastructure including water handling and compression facilities. There appears potential, suggests Macquarie, for Lacerta and Roma production to be optimised to take advantage of a common infrastructure footprint. There is still some lingering geological risk associated with the Lacerta field, but then that’s why it would be a cheaper acquisition.

What’s more, Santos’ share price has only fallen 12% in the time the Senex share price has fallen 33%.

Macquarie thus draws three conclusions in the wake of Senex’ asset swap: (1) the stock remains an attractive proposition on a standalone basis; (2) the company has now become a takeover target; and (3), the most obvious suitor for Senex would be Santos.

“An acquisition of SXY would add mew acreage to [Santos’] mature portfolio with an acceleration of drilling activity (supported by STO’s growing free cash flow) likely to unlock the strategic value of SXY’s portfolio,” says Macquarie.

The broker retains an Outperform rating and 75c target price on Senex. Of the six brokers in the FNArena database covering Senex, only Deutsche Bank (Hold) does not currently carry a Buy or equivalent recommendation. The consensus target price is 69c, suggesting 39% upside from the current trading price.

 

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