Senex Energy Prioritises Gas Assets

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-Focus on western Surat Basin CSG
-But needs to gain scale to reduce costs
-So capex restraint needs to be monitored
 

By Eva Brocklehurst

Senex Energy ((SXY)) has a juggling act to perform. Production fell 3.0% in the June quarter compared with the preceding quarter, primarily because of natural field decline across its Cooper Basin oil fields. The company is yet to provide FY16 guidance but has set its priorities firmly on its Western Surat Basin CSG project, in the face of weak oil prices.

The cash burn rate highlights the strategic dilemma facing management in FY16, in Canaccord Genuity's view. While choosing balance sheet strength over near-term production, the broker estimates a further $20m in cash will still be used up in FY16 along with a 10% production decline.

The stock is seen trading on elevated multiples compared to its peers, which the broker attributes to the allure of potential transformational growth. The broker has a Hold rating and 28c target.

Ord Minnett has downgraded its recommendation to Hold from Accumulate and reduced its target to 29c from 34c. The broker expects FY16 drilling will be subdued and production flat, or lower, as limited development of discoveries is combined with field decline.

Still the broker accepts the western Surat remains one of the few levers to increase production in the medium term as the company's focus turns to CSG and unconventional gas.The project appears to be gaining momentum although funding is still uncertain.

Meanwhile, the Hornet project appears to be more challenging that originally expected. The company hopes to re-start the Hornet-1 well in the first half of FY16. This is important, as Morgan Stanley observes the company is being held back by low oil prices and insufficient production. 

The balance sheet may be sound, and the company keen to preserve cash, but the broker suspects more scale is need to offset the current cost structure. Senex is a higher cost operator than others in the Cooper Basin because of its lack of scale, and this is being exacerbated by the low oil price. Hedging should underpin cash flows for the majority of FY16 production.

Citi maintains a Buy (High Risk) rating, also expecting near-term growth is tied to delivering on the Western Surat. Still, the broker suspects the weak outlook for gas demand could create some challenge in terms of timing. There is a risk to oil production growth the broker maintains, if oil prices remain at current levels. However, there is sufficient cash flow to execute on growth projects and Citi is of the view that the recent underperformance is unwarranted.

The unconventional projects appear long-dated and high on the cost curve and on the broker's estimates, Senex Energy will require a gas price of over $8/GJ ex Moomba to make a 12% return. The company has also reaffirmed four exploration wells are planned for the joint venture with Origin Energy ((ORG)) in FY16.

Macquarie observes progress has been mixed across the gas assets. Not only is Hornet-1 still shut in but the extended production test at Worrior-8, while producing the most gas, suggests commercialisation is unlikely

The broker also maintains cash balances are quickly eroding and the company will probably have to invest in the oil business to, at the very least, maintain its production base, in order to ensure lower unit costs.

There were no surprises for Credit Suisse in the production outcomes but it remains clear that the company is carefully considering its capital allocation, given the external factors which are out of the company's control. The broker awaits further guidance to determine how much impact a need to conserve capital will have on the next 12 months.

The stock is cheap, in Morgans' view. Although a clear catalyst to narrow the valuation gap is elusive the broker retains an Add rating. Investors should be rewarded over the longer term, given the quality of the assets in the company's portfolio, the broker maintains.

Given low oil prices, Morgans expects limited exploration spending in the Cooper Basin. The company is unwilling to draw on debt to fund existing operations and, by retaining a robust balance sheet, should be in a strong position to bring in a partner for the CSG project and capitalise on opportunities as they arise.

FNArena's database has five Buy ratings and two Hold. The consensus price target is 40c, suggesting 50.4% upside to the last share price.
 

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