If you're still nursing wounds caused by falling oil prices, you're not alone.
Shares in oil and gas producers like Santos Ltd (ASX: STO) and Senex Energy Ltd (ASX: SXY) were shown no remorse as the price of oil tanked and investors fled. This is understandable given the uncertainty around growth projects and future earnings.
As a shareholder of Senex Energy I wasn't spared, but despite having taken a sizeable loss on my position, I'm sticking with my shares.
Why Senex Energy shares got trashed
Shares in Senex Energy were among the hardest hit when the price of oil started falling. Shares dropped around 68% between June and December 2014, while fellow mid-tier producer Drillsearch Energy Limited (ASX: DLS) dropped 55% and Santos Ltd (ASX: STO) dropped 52%.
One likely reason is that Senex shares were priced at a premium relative to earnings, so had further to fall when investors started bailing out.
Was a premium fair? To a certain extent; yes. Senex is a well-run company and has produced stellar growth over the last five years. Sales revenues, spurred by higher oil prices, rocketed by 16x between 2010 and 2014, from $10.5 million to $171 million. Earnings per share (eps) over the same period grew by 190% and 2P oil and gas reserves jumped 329%.
Another reason Senex fell heavily is the company's reliance on oil revenues to fund future phases of growth, especially developing its sizeable gas assets. This growth may now take longer to execute with recent cuts to capital expenditure and scaled back drilling program.
Why I'm sticking with my shares
In addition to holding no debt (which without doubt saved investors from extra pain as oil prices fell), Senex can continue growing via an attractively placed farm-in agreement with Origin Energy Ltd (ASX: ORG), which will drive exploration and evaluation of tight gas sands in the Cooper-Eromanga Basin.
Gas reserves (2P) currently make up two-thirds of Senex's total reserves, and domestic demand for gas is still expected to grow strongly in the coming five years, driven by the east-coast states.
And then there is the current value. As fellow writer Owen Raskiewicz recently pointed out, Senex has the lowest enterprise value to 2P reserves (EV/2P) ratio against Drillsearch, Santos, Beach Energy Ltd (ASX: BPT) and Woodside Petroleum Limited (ASX: WPL). The company also has greater net assets than Drillsearch, but a lower current market capitalisation.
Even though there is much uncertainty around the future of oil prices, Senex Energy remains a strong company with an achievable long-term strategy. The company looks attractively priced relative to its peers and in my view is worth holding onto.
