The massive drop in the crude oil price over the past 12 months has seen some of Australia's largest energy companies suffer savage share price declines.
As the chart below shows, larger producers like Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) have fared considerably better than smaller producers like Senex Energy Ltd (ASX: SXY) and Beach Energy Ltd (ASX: BPT).
Source: Google Finance
The clear underperformer in the sector has been Senex, with its share price falling by more than 60% over the last year.
Although gains in the crude oil price will be the most important factor for Senex's recovery, here are six reasons why Senex could outperform if oil prices rebound:
1. Debt Free – Senex is in a strong financial position to weather the current storm. It has no debt and holds cash reserves of $63 million. Senex has also secured an $80 million debt facility that it can draw down if conditions deteriorate further.
Unlike many other producers, the lack of debt means the risk of asset sales or capital raisings is low.
2. Nimble – Senex has been able to move quickly to respond to the changed oil price environment. Its relatively small operations have allowed its capital expenditure and exploration programs to be scaled back quickly to reduce costs and preserve cash levels.
Senex has cut its capital expenditure by 25% to between $80-$85 million for FY15 and has re-allocated its existing capital expenditure to lower risk opportunities that will maintain current production levels until the oil price environment improves.
Although slower production growth is now anticipated, investors should take confidence out of the fact that management is trying to conserve cash and develop wells that are likely to be profitable in the current environment.
3. Expanding Gas Production – Although oil production makes the largest contribution to Senex's earnings currently, the gas business could be the growth driver in the future. The majority of Senex's 2P reserves are now heavily weighted towards gas and the company is in the early stages of developing its gas assets in the Surat and Cooper Basins.
The results have been encouraging so far and the company has also been able to secure a $105 million joint-venture deal with Origin Energy Ltd (ASX: ORG) in the Cooper Basin that will reduce Senex's risk exposure to the project.
The long-term demand for natural gas is expected to grow strongly and this should provide Senex with the platform to realise the value of its large reserves.
4. Large Reserves – As the company chart below shows, Senex has been consistently growing its 2P reserves over the past five years.
Senex is set to more than double its 2P reserves in FY15 towards 97.6 mmboe (million barrels of oil equivalent) after a swap of assets in the Surat Basin in September last year added more than 56 mmboe to the company's portfolio.
5. Low cost producer – Senex is still profitable at the current Brent crude price of US$58.50 (AUD $79). First half FY15 operating costs, excluding roylaties, were around $31 per barrel. Investors can clearly see that Senex is still operating at pretty good margins even with the huge fall in the oil price.
6. Hedging – Although some investors do not like the idea of hedging, it appears to be a prudent decision considering the short-term uncertainty in regards to the crude oil price.
Senex has entered into a hedging program for FY16 that will provide revenue protection for 1 million barrels of oil. This program will have the effect of guaranteeing the Brent oil floor price over a 12-month period and will only cost Senex US$1.7 million for that certainty.
Foolish takeaway
At the current share price I think the risk-reward proposition for investors is pretty attractive.
Although the short-term outlook for crude oil prices is uncertain, the long-term fundamentals for energy and gas remain solid and Senex has the potential to make a huge comeback – just be prepared for some volatility along the way.
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