Small Caps | Jul 24 2019
FY21 will be a watershed year for Senex Energy and several brokers expect the stock to re-rate as gas production increases and LNG spot prices recover.
-Attractive outlook for Queensland gas projects but risks still exist
-10 wells to be drilled at Roma North and brought online in current quarter
-Senex Energy likely to get preferential access to acreage
By Eva Brocklehurst
Senex Energy ((SXY)) has attractive characteristics for many brokers, being on the cusp of ramping up its energy portfolio. The company has an integrated plan for its Queensland gas projects, expecting to complete the entire drilling campaign by mid 2020.
Commissioning of Roma North is near completion and the asset is now selling sales gas to the GLNG joint venture. At Project Atlas, drilling will commence next month with further sales gas expected by the end of the year. These two projects are expected to add around 48 TJ/day to Australia's east coast markets by the end of FY21. Moreover, Macquarie expects the stock to re-rate as first gas flows are announced from Project Atlas.
Senex Energy executed three agreements at Project Atlas in the June quarter. Up to 24PJ of gas will be sold to domestic manufacturers from FY20-28. Credit Suisse would like to witness shorter-duration contracts, so the company can gain further upside exposure as LNG spot prices recover from 2021.
Yet, the broker envisages material upside once Roma North and Project Atlas are at plateau production rates, likely at the end of FY21. Ord Minnett, too, is cautious about the quality of some of the assets.
Production fell from a recent peak in the March quarter to 1.2mmboe in the June quarter, as natural field decline and maintenance in the Cooper Basin was partially offset by growth in Surat Basin gas. Revenue was softer because of a higher proportion of gas sales.
Ord Minnett reduces earnings estimates to account for a lower oil production outlook. Senex Energy reported net production of 308,000 barells of oil equivalent for the quarter, -8% below the March quarter and -21% below the broker's forecasts.
The company expects to complete the facility sale at Roma North in September, adding further $50m in liquidity. Additional cash will come from the Cooper Basin and the ramp up of current projects. Hence, Bell Potter suggests the company is well funded for future developments. The broker, not one of the seven monitored daily on the FNArena database, has a Buy rating and $0.47 target.
Canaccord Genuity, also not one of the seven, retains the view that the company has more than enough financial flexibility to manage its current investment plans and has a Buy rating and $0.53 target. The broker was buoyed by the decision by Jemena to acquire the Roma North gas processing plant, considering the acquisition another external validation for this project.
Risks
Credit Suisse downgrades to Neutral from Outperform, as the share price has recovered, after a drop that caused the upgrade on pure valuation terms previously. Also, risks in the near term could dampen sentiment, the broker assesses, and counter any upside.
There are risks with Roma North, despite the progress being made. Credit Suisse does not believe the ramp up is "amazing", given the 35 wells drilled to date, and would like to dissect more details on well workover frequency and costs, which could materially affect the valuation.
While noting a total of 10 wells are expected to be drilled at Roma North and brought online during the first quarter of FY20, Ord Minnett, too, is cautious, specifically regarding the quality of some of the Queensland assets.
Attractions
The company's appeal in Credit Suisse's view, lies in its uncontracted gas supply position which could likely to benefit from higher gas prices, while new acreage is unlikely to be a near-term catalyst, hence no value is attributed to Artemis in the near future.
The company was awarded the Artemis block at a recent tender. Canaccord Genuity notes initial exploration is likely to focus on the north-east corner where there is 30-40PJ potential. Upside is expected to come from the higher risk and more technically challenging south-east.
The company's position as a local motivated explorer should enable preferential access to acreage, another attractive characteristic Credit Suisse assesses. Morgans views the company's operations in CSG comparable to a mining concern, where development capital expenditure is sunk and construction completed before earnings growth becomes substantial.
A typical CSG well takes, on average, 12-18 months to de-water before the majority of gas is liberated. Hence, Morgans also expects FY21 will be an important year for the business and earnings growth should reach a point where the company is trading on just 5.0x enterprise value/EBITDAX (operating earnings before exploration expenses).
The market appears unwilling to look that far ahead, so Morgans believes now is a good time to accumulate the stock before the attractive earnings profile comes into focus. Senex Energy has two Buy and four Hold ratings on FNArena's database. The consensus target is $0.433, signalling 20.4% upside to the last share price. Targets range from $0.36 (Ord Minnett) to $0.55 (Macquarie).
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