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New Gas Horizons Beckon For Senex Energy

Small Caps | Sep 06 2017

This story features SANTOS LIMITED. For more info SHARE ANALYSIS: STO

New horizons beckon Senex Energy, which has won a prospective CSG acreage in Queensland's Surat Basin, and re-awaken broker enthusiasm for the stock.

-Strong production upside envisaged from a high-quality asset
-May need to spend $80m to access the distribution infrastructure
-New acreage expected to have an attractive cash-flow margin

 

By Eva Brocklehurst

New horizons beckon Senex Energy ((SXY)), which has won a prospective CSG acreage in Queensland's Surat Basin and will pay nil consideration for this next leg of growth.

The gas market remains tight and the release of this acreage, given the gas is meant exclusively for the domestic market, suggests to brokers that volumes will be highly sought after once regulatory approvals are finalised early next year.

The block, at 58 square kilometres, is material for a company the size of Senex Energy. An additional 201PJ of 2P reserves is expected by mid 2018 and production is to start in 2019. The company does not expect the award of this tender to delay its Western Surat gas project, which is to commence production in FY18.

The block adjoins producing CSG fields owned by the QCLNG project, which previously relinquished the acreage, while the Queensland government appears to be intent on boosting domestic gas supply in a timely manner.

As a result, Credit Suisse struggles to understand the muted market reaction to the news from a value perspective. While much remains to be learnt about the ultimate economics, production guidance suggests around an 18-year reserve life at 11PJ/annum (30TJ/d) and assumes a $5/GJ cash margin from 2019. This is above the current share price and signals to the broker a low-risk asset could be worth more than current market capitalisation.

Beyond this, Credit Suisse also envisages the company being a target for Santos ((STO)). In this scenario, Western Surat gas can still be diverted from GLNG and there is a potential extra 11PJ/a from this block. This would also allow even more Cooper Basin gas to be freed up for the domestic market. The broker suggests this is a rare, large opportunity in the sector.

Citi's view runs along similar lines regarding a misunderstanding of the quality of the asset. The broker believes the comparison with neighbouring fields signals further upside, and a high-quality resource will mean lower capital intensity for development. The broker observes the stock is one of the most leveraged to the domestic gas market through its two CSG assets.

Citi assumes a 50% risk weighting for these assets in its target price of $0.35 per share and makes conservative estimates around costs, gas prices and well performance, considered particularly important given the early nature of appraisal/development. The broker upgrades to Buy/high Risk from Neutral/High Risk.

Infrastructure Issue

Macquarie also upgrades Senex Energy to Outperform from Neutral, believing the forecast 30TJ/d plateau can be achieved by 2023, based on the type of wells in the area. The broker suspects it may be difficult for the company to access surrounding infrastructure, considering volumes are not to be used for LNG sales and amid long-dated negotiations on access agreements.

As a result, Macquarie assumes the company will need to spend the full $80m on infrastructure to access the domestic market. Upstream drilling capital expenditure of $100-120m is guided and the company has suggested $80m for infrastructure will be required if it cannot secure access to surrounding plants.

Macquarie calculates the main risks surround reserve development, as limited wells have been drilled on the permit to date, as well as infrastructure excess.

Credit Suisse suggests the concerns about gaining access to the infrastructure could be misplaced, as any LNG project being seen to prevent gas reaching the domestic market would not sit well in the current political climate.

Canaccord Genuity suggests the acreage is top tier and considers this a material gain for the company. On a non-risked basis, the broker values the additional gas at $161m or 11c per share.

Furthermore, given the political focus on domestic gas supply, this broker also does not buy the argument that access to infrastructure will slow the pace of development. Canaccord Genuity, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Buy from Hold and raises the target to $0.36 from $0.30.

Despite numerous infrastructure options, at this stage, Morgans assumes the company goes it alone and factors in $100m of capital expenditure on wells and infrastructure to deliver the 30TJ/d. On these metrics, and with a similar operating expenditure base to the Western Surat, the broker expects the new acreage will have an attractive cash flow margin of around $4.50/GJ.

The broker maintains an Add rating, considering the company now less exposed to oil price risk through this additional gas acreage.

Drilling costs per well are expected to be similar to Western Surat although the wells are likely to be slightly deeper. The company has already received expressions of interest from domestic gas customers for 130TJ/d and final gas supply contract are expected to be finalised next year ahead of final investment decision.

Valuation

Deutsche Bank suspects the newly acquired acreage is of higher quality and more productive than the company's existing Western Surat CSG position. Given the possibility of variability on CSG geology, even between short distances, the broker will make a further assessment before incorporating the newly-acquired acreage into valuation.

Macquarie agrees the project is far better than any other in the company's portfolio and, with a 50% risk factored in, values the project at $110m and believes it has the potential to deliver around 2mmboe per year at plateau. The broker includes the project in its core valuation.

FNArena's database shows four Buy and two Hold ratings. The consensus target is $0.36, signalling 9.4% upside to the last share price. This compares with 31c ahead of the announcement. Targets range from $0.27 (Morgan Stanley, yet to comment on the acquisition) to $0.48 (Morgans).
 

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