Small Caps | Oct 29 2019
Senex Energy continues to evolve as a key east coast gas producer, with an extensive drilling program planned across the Surat Basin assets.
-Material upside once Roma North and Project Atlas are at plateau rates
-Accelerated capital investment program in the Surat Basin
-First sales from Project Atlas expected by year end
By Eva Brocklehurst
The ramp-up of CSG production at Roma North was the highlight of the September quarter for Senex Energy ((SXY)), offsetting a decline in Cooper Basin oil production. A key milestone was the commissioning of the Roma North gas processing facility with output topping a daily rate of 11 TJ/d.
Production of gas in the quarter was up 28%, largely from the ramp up of Roma North, which supports Morgans' view that existing production wells have reached desorption levels that allow for the majority of gas to be produced. The broker increases forecast Roma gas output to 11.6 TJ/d for FY20 and lowers debt load assumptions.
While this is not tier 1 ground, the broker believes it holds good supporting economics with all-in costs of around $5/gigajoule. Moreover, given the advanced pace of development, the financial performance should start to become clear to the market over the next 1-2 years.
Senex Energy's revenue was lower than Macquarie forecast for the quarter because of lower average realised sales prices although the production trend is still heading in the right direction as Roma North ramps up and Project Atlas readies for start-up in the next quarter.
Sales revenue and production were to the downside of Citi's estimates as well. The broker describes the ramp-up of CSG as "noisy and error prone" and assesses the value of assets lies in plateau production not dewatering. Citi acknowledges it over-estimated gas deliverability because of some operating issues related to water handling. These are being resolved and stronger production is expected in following quarters.
Credit Suisse points out no guidance has been provided because of the uncertainty associated with the ramp-up of gas production, although envisages material upside once Roma North and Project Atlas are at a plateau, targeted for the end of FY21, and assuming sustainable cost structures are achieved.
The broker also suggests the company's prized uncontracted gas supply position is likely to benefit from higher prices post 2021 while acquisition of new acreage adds to the growth potential.
In the near term, nevertheless, risks during the ramp-up could bolster negative sentiment and reduce the upside. There is also little in the way of guidance on well workover frequency and costs. The main drivers of value, in Credit Suisse's view, include oil prices, and the risks and costs at Roma North in particular, as this appears to have a less prolific subsurface area.
Senex Energy has committed to an accelerated capital investment program within the Surat Basin, including completing 110 wells and Bell Potter is now more positive about Roma North, noting the expansion opportunities. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $0.48 target, supported by a positive outlook for the Australian east coast gas and global energy markets.
Project Atlas
First sales from Project Atlas are expected by the end of the year and the drilling campaign should be completed by mid 2020. Macquarie calculates this should lead to an 18 PJ/annum initial production plateau by the end of FY21. Gas is currently being flared prior to commissioning of the Jemena processing plant next month to deliver into sales agreements from January 1, 2020.
Substantial earnings and free cash flow growth are expected over the next two years for Senex Energy. Morgans assesses the business has long held value appeal through the potential of the gas assets and this is now becoming a reality as drilling campaigns accelerate.
FNArena's database has two Buy ratings and three Hold. The consensus target is $0.45, suggesting 24.4% upside to the last share price.
See also, Senex Outlook Fuels Re-Rating Hopes on July 24, 2019.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
