Oil and gas producer Senex Energy Ltd. (ASX: SXY) has seen its share price rally almost 20% year-to-date as investor sentiment is becoming increasingly positive. This is likely because of a recent upturn in the oil price, with Brent Crude trading around US$63 today, up from its five-year low of US$45.13 in January this year.
But are these signs of big returns to come or should investors think twice before jumping into this hot mid-cap oil stock?
Low oil prices over the past 10 months have caused many headaches among oil and gas producers, and Senex Energy is no exception. The challenges could be seen in Senex's most recent quarterly report, which showed negative results across a wide range of key performance indicators. Quarter-over-quarter performance saw sales revenue plummet 21%, following a decrease in both sales volumes and average realised oil price of 11.4% and 11.1%, respectively.
The weakening AUD against the greenback had partially offset the lower average price received (price-per-barrel is measured in USD), however the impact had been marginal. Further to this, hedging instruments put in place to counteract a price downturn only managed to provide a benefit of $3 per barrel.
In line with a guidance revision released in January, Senex Energy also saw capital expenditure fall by a total of 47.7% quarter-over-quarter. This precaution has been taken to preserve balance sheet strength and ensure adequate cash flow is maintained throughout this period of low oil prices. Although this will help provide essential liquidity over the short term, as with all energy producers, a lower capex will impact Senex Energy's ability to maintain its strong oil reserves over the medium term.
Despite this, investors should not simply focus on the current tough market conditions surrounding what is arguably one of the most attractive mid-cap oil and gas producers on the ASX. Although difficulties in the energy sector are having a drastic impact on current performance, Senex Energy is well placed among its peers to weather the storm.
Unlike a large proportion of similar sized producers, Senex Energy carries minimal debt, boasts a relatively low cost of production and benefits from a healthy amount of oil reserves. On top of its $63 million cash balance, a new debt facility of $80 million was established in April to provide further fiscal security, which it has stated it currently has "no requirement to draw down on".
Foolish takeaway
All in all, the recent rally in both the oil price and investor sentiment is not likely to continue over the short to medium term. The difficulties shown in Senex Energy's most recent quarterly report are still looming and the current quarter's performance is predicted to show only marginal improvement.
As significant volatility is still present in the oil and gas market, investors would be wise to think twice before committing their hard-earned funds. For those predicting a turnaround in oil prices over the medium to long term however, Senex Energy should be well placed to outperform its peers in the future.
