Why I’m banking on Senex Energy

Conditions are perfect for this fast-growing energy producer.

It was only as recently as May when the Aussie dollar was buying US$1.03. However over the last three months it has undergone a rapid drop of 11% down to today’s price of US$0.91. This is hugely significant for Australian producers of commodities priced in US dollars, including the oil and gas industry.

Australia has several accomplished energy producers, including Santos (ASX: STO) and Woodside Petroleum (ASX: WPL), who will benefit from this going forward. However the hunting ground for nimble, growing oil and gas producers is ripe at the moment and offers more than just speculative bets on big discoveries.

Senex Energy (ASX: SXY) is focused largely on the Cooper/Eromanga Basin has been making huge leaps in reserves and production over the last three years. Full 2013 year production was up 108% while sales revenues were up 113% to $137 million.

If that wasn’t enough to get excited about, after a 14.6% reduction in operating cost per barrel, the average gross margin per barrel produced was a massive 65%, or $75. Many companies would be envious of such a margin — despite investing $88 million in exploration and 3D seismic data for the year, Senex still ended up with a healthy $127 million in cash and no debt.

The cash stockpile plus operating cashflows from oil production going forward will be enough to cover the cost of an aggressive schedule of exploration in 2013/2014. This will involve drilling more than 30 wells to increase both net reserves and net oil production. Drilling wells can be a risky and cost intensive exercise, but Senex has a good history of success and had an 82% success rate of the 11 wells drilled last year.

Senex’s strategy is to focus on developing the high margin oil side of the business, which will help to fund future exploration of gas prospects the company holds. The strategy times in with potential domestic gas shortfalls on the East Coast which is forecast to push up the price of gas in the years to come.

Foolish takeaway

With growing production and reserves, high margins, reduced costs and a tailwind provided by the lower Aussie dollar, conditions appear strongly in Senex’s favour. While some of these factors may change in the future, management success to date suggests the company will be able to brave such conditions.

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More reading

Motley Fool contributor Regan Pearson owns shares in Senex Energy.

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