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2 signs Senex Energy Ltd shares could be undervalued

Oil and gas producer Senex Energy Ltd (ASX: SXY) could be deeply undervalued according to company head Ian Davies.

Although the share prices of many energy companies have been tracking along with the changes in oil price, Senex Managing Director and CEO Ian Davies still views shares as being cheap and he said at Wednesday’s AGM:

Despite recent improvements, we do not believe our current share price remotely reflects the value inherent in the Senex portfolio, and we continue to work hard to see this realised for our shareholders.

But is it really undervalued?

If you’re sceptical of the idea of a company claiming its share price is undervalued, well good, as an investor you should be. A company’s directors and management have every reason to want to talk up their own share price; it doesn’t mean they are right.

However in the case of Senex I have to agree with Ian Davies’ view that the business’s potential value is not being reflected in its share price. I own Senex Energy shares, but the numbers certainly point to it being under-loved by the market.

There are several ways to cut this. One quick and dirty view is that at $0.24 per share, the company sells for a noticeable discount to its Net Tangible Assets per share of $0.32.

With cash making up around 35% of Senex’s market capitalisation the company also has a ridiculously low Enterprise Value/2P reserves (EV/2P) ratio of 2.2. This compares to 12.2 for Santos Ltd (ASX: STO) – using Santos’ 2P reserves reported back in February.

How is the gap going to be closed?

Senex is working hard to close the gap between price and value. Ian Davies noted at the company’s AGM that through its exploration joint venture with Origin Energy Ltd (ASX: ORG) Senex will be well positioned to exploit opportunities created by the demand for gas on the East Coast, as big LNG projects suck out existing gas for export.

Senex will also be supplying gas to Santos to supplement input requirements for its massive GLNG project, a game changer for the company.

Foolish takeaway

Despite short-term underperformance, I remain positive on Senex Energy’s long-term prospects. As a cost competitive producer the company is well positioned if the price of oil rises and appears to offer a compelling value opportunity in the short term.

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Motley Fool contributor Regan Pearson owns shares of Senex Energy Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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