Small Caps | Jun 18 2019
Brokers expect the sale of gas processing infrastructure at the company's Roma North field will strengthen Senex Energy's balance sheet, allowing the market to price in a greater portion of the future earnings profile.
-Tolling agreement covers an initial six PJ/annum at Roma North with options to expand
-Senex Energy earnings less linked to oil as gas exposure increases
-Queensland government increases onshore gas royalty to 12.5%
By Eva Brocklehurst
Senex Energy ((SXY)) will sell its gas processing infrastructure at the Roma North gas field to Jemena. The $50m sale and toll agreement strengthens the balance sheet and will allow the company to recycle capital into other projects.
Morgans believes it will remove any remaining funding concerns in the market as the company increases its drilling activity at Roma North and Project Atlas. The gas plant is in the final stages of construction and the tolling agreement covers an initial 6PJ/annum at Roma North, with the company holding an option to expand to around 9PJ/annum.
The company also has a provision for further expansion of the plant, which Morgans envisages is likely in the longer term. The broker expects the market will start to price in a greater portion of the future earnings profile as it obtains confidence around execution.
Credit Suisse agrees the sale will strengthen the balance sheet and make the company more resilient to lower oil prices. The broker now envisages Senex Energy as resistant to sub-$50/bbl oil prices under basic capital expenditure assumptions. There was some concern in the market about the need to raise capital but the broker assesses this is now unlikely and the sale and toll agreement should offset any concerns.
Morgans agrees, having never accepted a view that Senex Energy might require further funding, because a major debt package was obtained on favourable terms. A significant portion of near-term Cooper Basin production is also hedged at healthy prices. Morgans believes the market is undervaluing the organic earnings growth profile, as production from flagship projects steadily increases.
Earnings Outlook
The earnings profile starts to look particularly attractive from FY21 and Bell Potter calculates there is around $40-60m in capital left to spend of its FY19 guidance, estimating that, in FY20, the company will incur expenditure of $85m. Operating cash flows will provide additional cash offsets.
Credit Suisse upgrades to Outperform from Neutral on the back of the sale, partly offset by the risk of a higher royalty. While upgrading, the broker has made no change to the fundamental outlook. Rather, the decline in the share price following the drop in the oil price is considered overdone, particularly as Senex Energy earnings become less linked to oil from 2020 as its gas exposure increases.
Credit Suisse believes Senex management appreciates the east coast gas market opportunity better than most and will benefit from structurally higher prices from a portfolio of uncontracted gas. The main concerns centre on risks associated with the production ramp-up in the next 12 months and the sustainability of CSG production over the longer term.
The company has indicated it will be prioritising capital for longer-life gas developments over the higher-returning but shorter life oil production. Canaccord Genuity remains of the view that the market is being too harsh in its valuation of the Roma North asset. Moreover, with the Atlas Project production to be sold under fixed-price-plus-CPI arrangements, and a very strong hedge book, the broker believes the stock's relationship with oil should now be breaking down.
Morgan Stanley considers the transaction is designed to improve the balance sheet rather than be seen as a value-accretive deal. No actual toll was disclosed but the broker calculates, if Senex Energy were to pay around $1.50/GJ this would approximate $9m in annual fees to Jemena based on around 6PJ/annum. This is not likely to be paid all in one year as production rates are expected to build over time.
Queensland Royalty
The Queensland government has increased the onshore gas royalty to 12.5% from 10% effective from FY20. Credit Suisse models this as a negative impact of up to -5% on earnings, although notes the government has left room for exempting domestic gas usage. Hence, only half the impact is assumed in the valuation.
Canaccord Genuity tends to the view that changes, particularly with respect to domestic supply, could occur, although incorporates a 12.5% royalty into its valuation models. The broker, not one of the eight monitored daily on the FNArena database, has a Buy rating and $0.53 target.
Bell Potter, also not one of the eight, has a Buy rating and $0.47 target, supported by a positive outlook for the Australian east coast gas market and international energy markets more broadly. The broker expects significant earnings in free cash flow over the medium term for Senex Energy.
FNArena's database shows three Buy ratings and three Hold. The consensus target is $0.44, signalling 46.7% upside to the last share price.
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