A new deal between fast growing oil and gas producer Senex (ASX: SXY) and the South Australian government could be the start of a strong growth run for the company. It also makes Senex a great company to watch this reporting season.
The deal grants Senex rights to turn petroleum exploration licences (or PELs) it holds over around 10,000 square kilometres of the Cooper-Eromanga Basin into more secure petroleum retention licences (or PRL) for up to 15 years. The retention licenses are required in South Australia to develop resources and extract any oil and gas discovered.
For its part, Senex has guaranteed it will invest around $200 million in exploration and appraisals over the 15-year period, creating jobs and a cash injection into the local economy. Importantly for Senex, the deal also creates a clear pathway for future growth, setting out the area to be explored over a given period and the necessary expenditure required.
The area of focus — the Cooper Basin — is also the site of attention by other companies, including Santos (ASX: STO) and Beach Energy (ASX: BPT), and is seen as relatively low risk because of its proximity to existing infrastructure, including APA Group's (ASX: APA) Moomba to Sydney gas pipeline. This lowers costs and speeds up cash flows from new discoveries.
Senex has had a strong growth run over the last year. Production and revenues are up over 100%, while guidance for the 2014 financial year is for growth of up to 28%.
One big factor that differentiates Senex is the protection it has designed around its balance sheet. The company has no debt and held $127 million in cash at 30 June 2013, the majority of which will be put towards the lower-risk oil business.
Cash flows from the company's current oil production, which grew 95% last financial year to $137.3 million, help to fund continued exploration and the structure should help to stave off the need for rising additional funds from shareholders.
Foolish takeaway
The 15-year deal could be the start of a new phase of growth for Senex. But for the next week focus will be trained on the company's full year 2013 results which are set to be released on 28 August.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.
