Last week I sold my remaining shares in oil and gas producer Senex Energy Ltd (ASX: SXY), a company I have been a long-time supporter of.
To me there was a lot to like; high margin existing production, a big portfolio of on-shore gas assets and a strategically smart management team, led by Managing Director and CEO Ian Davies.
As it can go with investing, I put my money where my mouth was and was justly punished when oil prices collapsed.
Still, in such a capital intensive industry, Senex to me has been a success where Santos Ltd (ASX:STO) has fallen; funding sensible work programs with minimal debt exposure and leveraging the resources of other companies to help fund major exploration and development, substantially lowering risk.
The Senex Energy share price has been a far better performer than Santos over the last 12 months and has tracked very closely with Beach Energy Ltd (ASX: BPT), but even today the market capitalisation of Senex is barely above the value of its net assets.
Why quit now?
"You can quit any time. Why quit now?"
For all its virtues, it is clear the market will not re-value Senex Energy shares until the gas business starts to produce material volumes and there is a meaningful return for investors. Company guidance suggest this could be 12 months away.
Then too, there remains the ongoing exposure to commodity price risk. I can't predict commodity price cycles any more than the next man and after writing this piece earlier this year I have realised that getting older and having a family means commodity risk is a risk I am no longer willing to take.
Ultimately for me though, Senex just doesn't fit the profile of a high return, long-term compounding business I want to own. This compounding is where the real power of investing lies and I have difficulty reconciling that with Senex Energy's growth prospects over the next 10-20 years.
In the short term Senex has a potential advantage of a lot of increasing demand for natural gas. But I also feel that there remains a risk of the market being flooded with low-cost shale gas if the price rises much above the marginal cost of production.
Foolish Takeaway
Senex Energy has always been in my view, a well-run company and the share price may prove to bounce strongly when the business starts to produce returns for invests over the coming years.
I would certainly consider owning Senex again if the company's share price was to fall significantly below the value of its net assets, as it did back in January last year. But my changing investment profile means that it's time for me to cut my losses and focus on highly cash generative, compounding businesses.
