Senex Energy Ltd (ASX: SXY) shares are in crisis.
In a just a single month investors in the mid-tier oil producer have seen the value of the company annihilated almost 50%, despite the oil price only falling 17% in the same time. At the time of writing shares were changing hands at just $0.14 each.
Why is Senex getting smashed?
The fall in Senex's market value is severely disproportionate to the fall in oil price. However with no material company announcements in the last month one likely scenario is that investors are concerned Senex may be chewing though its cash too quickly.
This would be similar to the fear currently hitting shares of Santos Ltd (ASX: STO), which has lost one quarter of its market value over the last month. Earlier this week Santos was forced to defend rumours that it was planning an equity raising.
Shareholders may be concerned that Senex, which reported no debt and a healthy cash balance at 31 December 2014, will need to dip into its recently established debt facility for funding.
Should you bail out?
So what is a Senex investor to do? Sell down? Cry into their morning cornflakes? Run for the hills??
Unfortunately slumping prices are all part of the cyclical nature of commodities and the consensus outlook for oil price in the near term remains mostly negative.
However it is useful to remember that earlier this year Senex purchased hedging protection for up to 1 million barrels of oil. This represents about 72% of the company's current annual production and provides protection at between US$55 and US$60 per barrel of oil during the 2015 calendar year.
At the current exchange rate that is the equivalent of between $75 and $82 per barrel of oil, while operating costs in the first half of the 2015 financial year were just $31 per barrel.
Long term, all energy producers will continue to perform poorly if the price of oil remains at current levels (or lower), however with a strong management team and significant reserves of natural gas, I'm doggedly sticking with my small holding in Senex for now.
