These 2 oil producers are still making huge 60% margins

Yes, the price of oil has fallen to its lowest level in four years, but let’s take a step back and look at how beaten-down energy companies are really doing.

Two of the most heavily sold-off energy producers are Senex Energy Ltd (ASX: SXY) which has lost 42% of its market value in the last three months, and Drillsearch Energy Limited (ASX: DLS), which is down 32%.

Big falls, bigger margins

The big falls are surprising for two reasons. First, because the price for Brent crude is down just 26% since July and this doesn’t include the 7% buffer created by the fall in the Aussie dollar over the same time.

Secondly, the two companies are relatively low-cost energy producers and are still making attractive margins on each barrel of oil sold.

Senex Energy Managing Director and CEO Ian Davies reported at the company’s AGM this week that Senex has a cost base of $31 (US$26.75) per barrel, excluding royalties. This implies a gross margin of 66% at an oil price of US$79.27 per barrel (at the time of writing).

For its part, Drillsearch noted at its AGM that the company’s ‘cash breakeven’ cost was US$25 per barrel – a margin of 68%. This likely excludes royalties and reflects costs presented by the company for the second half of FY14 in the chart below:

DLS Gross Oil Margin HY14

Source: Drillsearch 2014 Half-Year Briefing presentation

These are likely higher margins than Beach Energy Ltd (ASX: BPT) which Morningstar recently estimated had operating costs “around US$40 per barrel”.

Existing infrastructure

Costs for on-shore oil producers creep up when developing smaller fields which offer lower economies of scale. However the infrastructure rich Cooper Basin region means Senex and Drillsearch have great access to existing pipelines and infrastructure which keep costs down.

Cheap companies

Granted, the falling oil price justifies lower company valuations because the future earnings of these companies are going to be lower than previously which reduces the present value of each company.

However, given the significant falls in market value relative to oil price, and the strong, long-term growth prospects of both Senex and Drillsearch, and the possibility that the price of oil could edge up in the future, both companies could be attractive to long-term investors.

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Motley Fool contributor Regan Pearson owns shares in Senex Energy.

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