Ahead of tomorrow's OPEC meeting in Vienna, shares in oil and gas producers Santos Ltd (ASX: STO) and Senex Energy Ltd (ASX: SXY) are trending higher.
Both Santos and Senex have been chasing the oil price downwards over the past six months, with their shares down 17% and 42% respectively.
Although some are fearful of the potential for huge amounts of supply to come online from North America in the next few years and suggestions tomorrow's OPEC meeting will have little impact on future oil prices, there's reason to be bullish about both of these producers.
Firstly, it should be noted both Senex and Santos are seeking to tap into Australia – and the world's – shortage of gas. Particularly along the east coast of Australia and throughout Asia.
Although the Australian Financial Review reported today that: "Santos itself may also be having a close look at Senex Energy with a view to taking out the smaller Cooper Basin player," both companies have enough on their plates to keep busy for some time.
Senex is currently trading below book value, with no debt and a healthy level of 2P reserves. Between now and 2018, it is seeking to ramp up production considerably as its recent drilling success begins to bear fruit.
Santos is already one of Australia's most economical gas producers but is about to experience a step change. Indeed the PNG LNG project – in which it holds a minority stake – is currently ramping up production and the giant $US18.5 billion GLNG project in Queensland is 90% complete and running under budget, according to the company's investor seminar today.
It anticipates first production from the facility in the second half of 2015, ramping up thereafter. These two projects, combined with increased supply from the Cooper will help it achieve its goal of 80 to 90 million barrels of oil equivalent (mmboe) by 2020.
In 2014 it expects output of 53-55mmboe and 57-65mmboe in 2015.
By 2016, if the oil price averages $US90 per barrel (which is the consensus estimate), Santos expects operating cash flow to jump by 65%. If the spot price pushes back from a recent $US78 per barrel to $US100 per barrel, operating cash flow will double.
In the coming year capital expenditure (capex) is expected to fall to $2.7 billion, down from a forecast $3.5 billion in 2014 and $4.1 billion in 2013.
Also crucial to the success of Santos' profit growth aspirations is maintaining a strong balance sheet. Although it has $2.1 billion in cash and undrawn debt facilities, with gearing expected to peak at no more than 40% in 2015, the company says it will undertake a European hybrid debt issue, similar to Origin Energy Ltd's (ASX: ORG) issue earlier in the year.
This will increase liquidity and refresh more expensive debt, in the face of further volatile market conditions.
Foolish takeaway
Santos has played down the impact of increased supply from the US and is still bullish on the outlook for Asia. Despite lowering forecasts in demand from Asia and increasing the volumes expected from North America, the company anticipates a deficit of 120 million tonnes per year by 2025 and 250 million tonnes by 2030.
Although it's a long way off, if these forecasts hold up, both Senex and Santos could look very cheap at today's prices.
