The days of making a quick buck on growing oil and gas producers have long passed. Just look at mid-tier oil and gas producer Senex Energy Ltd (ASX: SXY) which saw shares slashed 9% yesterday after the company released its third quarter report for the 2015 financial year (FY15).
The report included some grim reading like the huge 40% drop in year-on-year sales revenue, despite a slight increase in production. However Senex Energy is a smart operator and here are three important points investors must be aware of:
1. Hedge, baby, hedge
Although sales revenue was hit hard, the result could have been worse if it wasn't for management's proactive approach to hedging oil prices which provided protection during the quarter.
Senex received an average oil price of $72 per barrel over the quarter, compared to $129 per barrel in Q3 2014. This was similar to Beach Energy Ltd's (ASX: BPT) average price of $71 per barrel, but much higher than Cooper Energy Ltd (ASX: COE), which received an average realised price of $63.90 per barrel.
Senex also added additional hedging protection during the quarter for up to 1 million barrels through until June, 2016.
2. Capital expenditure plans sliced
The low oil price environment has further dampened Senex's aggressive growth plans. The company announced a further reduction to capital expenditure to between $80 and $85 million for FY15, down from the $85 – $90 million announced in January, which was a 20% reduction on initial plan.
For investors this will likely translate into slower production growth than initially anticipated, but it makes sense to conserve cash and focus on most the efficient growth options in the current conditions.
3. The company could still be worth buying
In spite of reduced spending, Senex could still be worth buying today. As I argued here, Senex looks very cheap given the company's large 2P oil and gas reserves and is focused long-term on gas production; demand for which is expected to rise steadily over the next seven years and could out-strip supply.
