Going with the Senex flow

The potential for Senex Energy to develop as a major gas producer is what attracts some investors, but the immediate reason for the stock deserving an outperform rating is something far simpler: strong and growing oil output.

With one of the biggest tenement “footprints” in the Cooper Basin of central Australia, Senex is well positioned to capitalise on the re-awakening of the region as a supplier of oil and gas from conventional and unconventional reservoirs.

A whiff of what’s to come at Senex could be detected in the company’s September quarter production report released late last week, which included 300,000 barrels of oil that generated $39.3 million in revenue.

That’s small beer when measured against Australia’s biggest oil and gas producers such as Woodside (21.9 million barrels of oil equivalent for the September quarter) and Santos (13.4 million barrels). But the key to Senex is the rate at which it will grow, which is not something the oil majors can promise. Their production rates have plateaued, especially at Woodside.

Over a full year, Senex is expecting to produce oil at a rate of between 1.4 and 1.6 million barrels which, at the lower rate, indicates annual revenue of around $175 million given the current average price being received of $125 a barrel.

Depending on the cash burn from a busy exploration program that has featured 10 wells since June 30, and another 20 planned for the current financial year, Senex is on track to post a reasonable profit of between $60 million and $70 million.

If Senex hits its production and profit targets over the next 12 months something quite interesting might happen on the stockmarket. It only needs to add 10c to its current share price of 78c to join the ranks of stocks capitalised at more than $1 billion.

For much of the past 12 months Senex has traded between 60c and 75c, with a brief peak at 85c in April and a sharp slump to 47.5c during the widespread June sell-off that hit most listed stocks.

When I last mentioned the stock (Gas price rises, share prices rocket) it was trading at 71.5c, having recovered strongly from its June 21 low point.

The next 12 months should see Senex continue to rise as production and exploration news builds from conventional oil output and from the search for unconventional (shale) gas. This could see the company become a supplier to the increasingly hungry markets of Sydney and Melbourne.

In last week’s September quarter report, Senex said its production rate of 300,000 barrels of oil was expected to grow by a “material” amount in the current quarter “as new (oil) wells are completed and brought on line”.

Production rates from individual wells in Senex’s tenements are not high, but collectively they elevate the company into the mid-ranks of Australian oil output.

If there was a gap in last week’s quarterly, it was the limited news on the company’s gas exploration effort. This was largely restricted to assessing the Hornet gasfield which, in theory, contains a substantial gas resource but does require more drilling and production testing.

In the same way that Beach Energy has introduced Chevron, one of the world’s biggest oil companies, as a partner in its unconventional central Australian gas search, Senex is also looking to spread the cost, and risk, of the unconventional search. It described this in the September quarterly as introducing “the right partner at the right time”.

Senex chief executive, Ian Davies, said in the quarterly that the current financial year had started with strong oil production from existing wells, while exploratory drilling had delivered two oil discoveries, with six wells suspended for future oil production.

“Our plan to drill more than 30 oil wells during 2013-14 got off to a flying start in our Southern Cooper-Eromanga basin permits, with new oilfields discovered at Burruna and Dunlop during the quarter,” Davies said.

“Senex continues to be in a strong financial position, with our extensive oil drilling program for the year fully-funded by oil revenue. At September 30 we had no debt, $105 million in cash and a further $20 million expected from the sale of our interest in the Cruisiner oil field and associated permits.”

The consensus view of brokers following Senex is that its shares are expected to reach 85c over the next 12 months, while some of the more optimistic assessments see it going higher.

Although none of the analysts see the $1 billion market capitalisation target as an objective in itself, the importance of Senex passing that milestone is the way it should deepen the stock’s pool of potential investors. With 1.14 million shares on issue, the $1 billion mark will be achieved when the stock hits 88c.

Macquarie Equities has a 97c price target based on the company’s oil production forecasts, but would also like Senex to release more detail on its hunt for unconventional gas in the shale beds of the Cooper Basin and coal-seam tenements the company has in Queensland.

“Following a healthy start to the oil production program and with proposed production additions expected next (December) quarter it appears Senex is on track to deliver on its 2014 financial year production and reserve targets,” Macquarie said in an October 25 report.

“That said, apart from highlighting favourable economics for the initial Hornet tight gas development there were limited updates on the gas portfolio,” Macquarie said.

Other investment banks are more cautious in recommending Senex as an investment. Deutsche Bank rates it a buy with a 12-month price target of 85c (12c less than Macquarie), but is impressed with the oil production plans and the hunt for a gas partner.

J.P. Morgan and Goldman Sachs have neutral ratings on the stock, with price targets of 77c and 80c respectively.