The falling price of oil has concerned a number of investors lately, with many companies trading lower than they were a year ago despite significant exploration and production successes in that time.
Positive third-quarter reports from Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) appear to have stopped the rot for those two companies, while more junior producers continue to struggle.
Today it's the turn of Senex Energy Ltd (ASX: SXY) to present its quarterly report to the market, and while there's a lot to like, there are also a number of potential risks.
Here are the main points:
- Q1 FY15 production up 26.7% (sales up 27.6%) on Q1 2014
- Production was Senex's second best quarter ever, after Q4 2014
- Sales revenue rose 7.9% to $46m over Q1 2014, with lower oil prices constraining the rise
- Surat basin asset swap provides three new wells more complementary to Senex's business
- September quarter expenditure was $24 million, down 26% on Q4 2014
Senex's management is targeting production of 3-5 million barrels of oil by FY18, up from around 1.4 million presently.
This is a laudable target and should deliver significant returns to shareholders if successful, however there are several main risks to be aware of.
One in particular is the falling oil price, with revenues for Q1 2015 actually lower than Q2 2014, despite production being some 10% higher.
Senex is safe at the moment, however should lower oil prices persist, the company may have to slow its growth targets to account for weaker cashflows.
Tying in with this is the fact that Senex is likely to require extensive capital expenditure over the next few years to deliver on management's growth targets, and low oil prices may cause the company to take on debt to fund expansion.
A third risk, less immediate but still highly relevant, ties in with the production targets of OPEC nations which are a very important driver of the global price of oil.
Should these nations continue to produce at their current levels while countries all over the globe ramp up oil production, the market may well experience a decline similar to that of iron ore prices earlier this year
In short, while junior producers like Senex have the potential to multiply their size in just a few years, the risks associated with such a purchase are equally large.
Despite adverse market conditions, Senex appears to be on the right track to deliver its growth strategy so far; future quarterly reports will be key milestones for shareholders.
So you're interested in high-risk, high-reward oil stocks?
