In the past three months, the share price of Drillsearch Energy Limited (ASX: DLS) has plummeted 28.9%. Is this a great opportunity to pick up a value stock at a low price?
Drillsearch is an Australia-based oil and gas explorer and producer focused on the Cooper-Eromanga Basin. The company operates businesses through three segments: Oil Projects, Wet Gas Projects and Unconventional Projects. Drillsearch is exploring and developing oil projects in the Cooper Basin, targeting numerous, high-return oil exploration projects to drive short-term growth.
Wet gas is natural gas that contains significant amounts of liquid hydrocarbons – condensate (a light oil) and LPG. Drillsearch is focusing its exploration activities on two key project areas; the Central Cooper Basin – Nappamerri Trough Shale Gas Fairway, and in the Southern and Western Cooper Basin Unconventional Gas Fairway.
The company holds 18 permits and six tenements with a net permit interest of 15,000 square kilometers. Drillsearch holds at least a 50% interest in 17 of these 24 areas and operates 14 permits.
Revenues and net profits
According to Drillsearch's annual reports (below), from 2011 to 2014 its revenues grew by 200% per annum from $14 million to $387 million. From 2012 to 2014 its net profits grew by 180% per annum from $9.9 million to $71 million after a loss of $5.6 million in 2011.
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 |
| Revenue | 14,436 | 22,409 | 102,227 | 387,020 |
| Net Profit | (5,634) | 9,979 | 45,057 | 71,523 |
Source: Annual Reports
The cash flow statement
As shown in the table below, from 2011 to 2014 Drillsearch had negative 'cash flow after investing' totalling $143 million. The company does not pay dividends, so after other financing cash flows, Drillsearch had a funding shortfall totalling $146 million.
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 | Total |
| Cash flow from operations | 5 | 10 | 19 | 246 | 280 |
| Cash flow from investing | (7) | (35) | (257) | (123) | (422) |
| CF after investing | (2) | (25) | (238) | 122 | (143) |
| Dividends | 0 | 0 | 0 | 0 | 0 |
| Other Financing CF | (3) | >1 | 0 | >1 | (3) |
| Funding Shortfall | (6) | (25) | (237) | 123 | (146) |
Source: Annual Reports
Capital Structure
In order to partially fund this shortfall in cash flows over the past four years, Drillsearch had to raise new equity of $171 million and increase its borrowings by an additional $119 million. Its return on equity for the past two years has been around 20%.
| Amounts in Millions | 2011 | 2012 | 2013 | 2014 | Total |
| New equity | 49 | 20 | 99 | 3 | 171 |
| Debt | 0 | 0 | 129 | (10) | 119 |
Source: Annual Reports
Competitive Advantage
According to the company's annual report, Drillsearch sustains its competitive advantage by fostering a diverse workforce. Diversity is an integral part of Drillsearch's ability to attract, retain and develop the best talent, promoting a work place conducive to the appointment of well-qualified employees, senior management and Board candidates.
Its goal is to create an environment where there is appropriate diversity to maximise the achievements of corporate goals. Drillsearch's appointment of people of diverse gender, ethnic and cultural background to the Board and to senior positions within the company is evidence of their dedication to building a strong and diverse workforce.
Drillsearch recognises that its people are their most important asset, and it subsequently seeks to create an environment where innovation and diversity of thought is cultivated. Drillsearch is committed to maintaining and promoting a corporate culture which embraces diversity in order to maximise the achievements of its corporate goals.
2015 Outlook
According to the company's 2015 quarterly presentation in June, highlights included:
- Safety – 32% reduction in TRIFR in FY2015
- Revenue – $250.5 million revenue impacted by weaker oil prices and lower production
- Production – 3.0 mmboe – Western Flank tie-ins boost Q4 performance
- Total Wells – 41 – Record work program in FY2015
- New discoveries – 12 – Platform for appraisal and development activity in FY2016
- Drilling Success Rate – 47% – Includes 10 Bauer development wells to support future
Verdict
While there's a lot to like about Drillsearch, it's difficult to have confidence in any stock where revenues are dictated largely by global oil prices.
Drillsearch's revenues have dropped in 2015 due mainly to weaker oil prices and lower production
More importantly however, are these two statements in the company's latest quarterly report which make me nervous about investing in Drillsearch:
"Subsequent to the end of the quarter, Walter Simpson was appointed Acting Chief Executive Officer whilst a global search is underway to find a permanent successor to Managing Director and Chief Executive Officer Brad Lingo, who left the company by mutual agreement on 3 July 2015 after six successful years in the role."
And,
"The company is considering its strategic direction and new growth opportunities. While the Cooper Basin will continue to remain the company's core focus, we will also consider other opportunities if they deliver superior growth to shareholders."
Drillsearch remains on my watch list for now, and I'll revisit it again in another 12 months.
