Small Caps | Apr 16 2020
The ramp up of Roma North and Atlas continues apace, with Senex Energy primed for a strong year ahead despite the slump in the oil price.
-Establishing economic gas reserves
-Domestic stimulus could increase gas demand
-More than 50% of production not linked to oil by FY22
By Eva Brocklehurst
Despite the gloom and doom Senex Energy ((SXY)) managed a rare bright March quarter, beating expectations for production. March quarter gas production was up 61%. The continued ramp up of Roma North and Atlas in the Surat Basin drove the strong quarter. There was also a full quarter of gas production from Gemba in the Cooper Basin.
The realised oil price was $63/bbl as the company benefited from the effect of hedging. While capital expenditure was higher than Macquarie anticipated, the company has indicated that only 85 wells are now required at Roma North versus previous estimates for 100 wells.
This drilling campaign at Roma North is expected to be completed by the end of 2020. Drilling has now focused on Atlas, where the well numbers have also been reduced to 50 from 60. This indicates capital expenditure is likely to decrease too.
Morgans asserts Senex Energy is demonstrating a robust strategy amid no visible capital constraints and despite the collapse in the oil price. The company has completed all major hurdles for emerging gas producers, the broker adds.
Senex Energy has established economic gas reserves, secured a path to market and sourced adequate capital. FY20 production guidance of 1.8-2.0mmmboe and operating earnings (EBITDA) of $40-50m have been reiterated.
Guidance is likely to be achieved, Bell Potter suggests, while Credit Suisse expects the top end of the range will be be reached, particularly as Roma North could attain around 10% above nameplate.
The company continues to receive enquiries regarding gas supply for term domestic contracts and pricing is expected to reflect shortages in the medium term. While oil-linked gas prices will weigh, Atlas moving into fixed-price term contracts will provide support.
Bell Potter notes, by FY22, over 50% of sales will be term contracts with around one third delivered to GLNG. The diversified nature of the sales provide some downside protection and the broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Buy rating and $0.25 target.
Credit Suisse suspects weak LNG prices and risks to demand may be overestimated by the market. The broker reduces uncontracted gas pricing estimates to $6/gigajoule for 2020, but envisages upside beyond that as domestic stimulus could increase demand and prices may spike.
The broker expects that higher production of gas will more than offset lower uncontracted price assumptions and oil production.
Front End Engineering Design (FEED) on Roma North expansion is expected to be completed mid year. However, Credit Suisse suspects the company may wait to build up its balance sheet in FY21 and secure contracts before commencing.
Oil
Credit Suisse is wary of oil prices worsening but believes the company is a little less exposed versus its peers because of its gas business, with more than 50% of production not linked to oil by FY22.
The broker is mindful that if oil prices are sustained below US$40/bbl it could affect the outlook for new drilling at Roma North. but this would be the case for new drilling across the sector. Low oil prices are not expected to affect development of Atlas, where the targeted production plateau is much higher than Roma North and there are long-term fixed-price gas contracts.
Morgans asserts the poor sentiment towards the energy sector has meant the stock sold off aggressively and an opportunity has been uncovered. Ord Minnett also considers the stock in a positive light, noting free cash-flow yield, stable balance sheet and fixed-price contracts provide attractive value.
FNArena's database has six Buy ratings. The consensus target is $0.36, suggesting 91.2% upside to the last share price.
See also, Senex Energy Moves To Calm Investor Nerves on March 13, 2020.
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