You may not think it, but now is a great time to buy ASX-listed energy producers.
The price of oil has bombed over the last month as oil producers (especially those in the U.S.) continue to pump out more oil than we currently need. This is forcing down the price of oil and with it the share price of many smaller oil-producing companies.
Energy titans Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (AS: STO) have been largely unaffected due to their high focus on gas and long-term pricing contracts. However smaller companies Drillsearch Energy Limited (ASX: DLS) and Senex Energy Ltd (ASX: SXY) have taken big hits and are now attractively priced for canny, long-term investors. Here are five reasons why:
1. Falling share prices
As the price of oil has been tumbling shares in Drillsearch Energy have plummeted 13% in the last month. Currently trading at $1.35, Drillsearch can be picked up for just eight times FY14 earnings. Senex shares meanwhile have been trashed 15% and trade at $0.56.
Both companies had significant operational growth in FY14 (like Senex's 24% growth in revenue) and both companies have strong outlooks for the years ahead.
2. Currency cushion
Fortunately for Aussie investors while the price of oil may have fallen 10% since July, the AUD has also fallen back against the USD by around 4% in the last two weeks, providing a buffer for energy prices set in U.S. dollars.
3. Oil is only half the story
While oil is a major output for both companies, the real focus is gas production. High-margin oil revenues are a stepping stone to fund development of valuable gas resources to sell into growing domestic and international demand.
4. The right balance
Both Senex and Drillsearch have strong balance sheets and solid cash positions. Combined with growing oil flows the companies are in great shape to fund their respective growth plans and grow earnings for shareholders.
5. Directors are buying
Leading by example, Senex directors have recently been taking advantage of the fall in share price to top up their holdings in the company.
ASX announcements show that Denis Patten added just over 80,000 shares to his interests, while fellow director Ralph Craven added 50,000 shares to his interests this week.
Company directors have intimate inside knowledge of company prospects and their confidence can be seen as a barometer for investors.
