Senex Energy Ltd (ASX: SXY) shares look pretty good to me at $0.12 each – though I can't help but feel a little sad thinking of the ones I bought last year at $0.60.
The fall in oil and gas prices punished earnings this year, and it's no surprise Senex's share price has been punished as well. However, I feel that there are a few bright points – as well as a few serious risks – for long-term investors:
- Revenue fell 32% to $115.9m
- Statutory Net Profit After Tax fell to a loss of $80.6m (profit of $37.9m in 2014)
- Underlying Profit of $5.6m, down 87% from $44.7m in 2014
- Production of 1.39mmboe (million barrels of oil equivalent) up 1% on 2014
- Average realised price of A$88 per barrel in 2015
- Cost of sales per barrel of $40.64 ($41.43 in 2014)
- Proven and Probable (2P) oil and gas reserves of 94.6mmboe up 137% from 2014
- Forecast production of 1-1.2mmboe in 2016, as well as hedging guaranteeing floor oil price of A$75/barrel, assuming AUD-USD exchange rate of $0.75
- Capital expenditure of $35-45m forecast for 2016, funded from existing cash + cash flows
- Cash of $49 million, zero debt and undrawn available loan facilities of $80m
So What?
Assuming the situation remains the same over the next 12 months, revenues and profits are going to fall further as the hedged floor price of A$75 per barrel (until 30 June 2016) is some 15% lower than in 2015. This is, of course, far better than accepting the going rate of ~A$53/barrel.
Senex managed to cut costs considerably during the year, with administration expenses falling roughly 40% while the cost of sales per barrel also fell roughly 2% on lower royalties due to lower sale prices. One item that jumped out at me was the CEO's salary of $831,000 per annum before incentives, which seems quite high for a small company like Senex.
In the short term, management appears to have a sound strategy in place, focussing capital expenditure on the company's gas assets while oil prices are so weak. The emphasis is on maintaining positive cash-flow and prioritising its best assets while simultaneously laying the ground- work for rapid scale-up if and when the market improves and when financing becomes available.
Management hinted that Senex will need more money in the form of cash or debt in order to properly capitalise on its extensive reserves, although capital expenditure for 2016 will be fully funded from existing reserves.
Now What?
Any buy of the company at today's prices is a high-risk, high-reward bet on where oil and gas prices are going in the future. Senex had a rough year selling oil for A$88/barrel, it's going to have a rougher year in 2016 if it has to sell at A$75/barrel, and if today's prices persist more than 12 months (into 2017), selling oil at A$53 per barrel is going to be quite terrible for shareholders.
On the flip side, if oil goes back to $100/barrel there is potential for the company to multiply its share price in a short length of time. So while I think the company could be a good investment, I will be doing a lot more research into the oil and gas markets before making a purchase.
