Small Caps | Mar 13 2020
Senex Energy, having been battered along with other energy stocks, has decided to point out how well its operations are performing and, in doing so, calm investor nerves.
-Well reductions enable lower capital expenditure and operating expenses
-Hedging substantially de-risks exposure to commodity prices
-Outlook for more stable cash flow as the CSG asset ramps up
By Eva Brocklehurst
Despite the current turmoil, Senex Energy ((SXY)) shines brightly among energy sector stocks as key developments are nearing plateau production, forecast for FY22. A large proportion of its future production is gas, and the company has limited exposure to the volatility in benchmark commodity prices because of its fixed-price contracts.
Nevertheless, the stock has been battered so the company took the opportunity to show how operations are performing and, in doing so, calm investor nerves. With well performance ahead of expectations this has positive implications for capital expenditure and operating expenses.
Ord Minnett points out the impact from lower sustaining capital expenditure more than offsets reduced near-term earnings forecasts. One of the concerns the broker had was the quality of the Queensland assets, but better-than-expected sub-surface performance has meant a reduction in the number of wells needed to fill both the Roma North and Atlas compression plants.
Roma North has now achieved 16 TJ/day, exceeding the company's forecasts. Production at Atlas and Roma North has outperformed, allowing the drilling campaign to be reduced to 50 wells at Atlas from the original 60 and 35 at Roma North from the original 50.
The reduction in wells is partly offset by increased capital expenditure on water treatment facilities. All up, the company expects a -$15m reduction in Surat Basin capital expenditure. Production growth from Atlas will reduce earnings leverage to oil prices in favour of term supply agreements into the east coast domestic gas market.
Of the company's FY22 guidance for more than 3.6mmboe Atlas is expected to account for around 2mmboe. Management has signalled peak debt will occur in the September quarter and once the assets achieve full production free cash flow should be $100-110m.
Ord Minnett considers the stock extremely attractive at current prices and the free cash flow estimates also imply a 33-37% yield. Hence, the broker upgrades to Buy.
Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, also has a Buy rating with a $0.47 target. The broker considers the stock cheap, although notes in the current environment investors appear to be erring towards those that are generating cash flow now with higher levels of earnings certainty.
Canaccord Genuity also notes the company has raised the potential for capital management post completion of the Surat Basin gas developments, although it intends to pursue growth in brownfield operations before doing so. In the second half details of the potential expansion at Roma North by 8TJ/day are expected to be finalised.
De-Risked
Citi also upgrades to Buy, believing the stock has materially de-risked, and suggests the share price is now inferring assumptions that do not add up. The base business valuation appears to be at a 40% premium to the last closing share price.
Citi explains that typical project finance will not have the usual covenants applied until a project is completed and monetising the debt. Yet, because of hedging, even if oil prices were US$20/bbl, the ramp up of cash flow from Atlas means Senex Energy can still cover its FY20 and FY21 expenditure.
Morgan Stanley calculates that at US$50/bbl oil the free cash flow yield for Senex Energy will approximate 9-10%, increasing to 13-14% at US$60/bbl. Importantly, the length of the reserve position is long, at around 20 years once production reaches full capacity.
The main risk is the portion of gas that is yet to be contracted at Atlas. The company has indicated that around 40% of Surat Basin gas is uncontracted in 2022. Still, Morgan Stanley expects prices will remain healthy, just below those contracted 12 or so months ago.
The weakness in global LNG markets is likely to feed through to lower domestic gas prices and Morgan Stanley suspects the debate for Senex Energy will shift to the value of the gas assets from the production assessments.
The company has highlighted breakeven at a Brent oil price of less than US$30/bbl, which includes sustaining capital expenditure. FY20 production guidance was reaffirmed at 1.8-2.0mmboe with operating earnings guidance of $40-50m provided. Net debt is expected to peak at less than $80m in the first quarter of FY21.
Bell Potter believes the recent weakness in the share price provides an "excellent" opportunity to acquire a stock with an outlook for more stable cash flow as the CSG asset ramps up.
Meanwhile, the medium-term supply of gas to Australia's east coast is challenged and the broker expects prices will be supported by term contracts. This should provide substantial earnings and growth in free cash flow over the next two years.
Bell Potter, also not one of the seven, has a Buy rating and $0.44 target. The database has six Buy ratings and the consensus target is 42.8c, signalling 104% upside to the last share price.
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