This is the first real reporting period where investors get to see the actual impact of lower oil prices.
Even though shares dropped dramatically in sympathy with Brent Crude prices last year, cheaper oil is only just transferring into lower earnings, thanks to the 6-month lapse since the last major report for most companies.
Drillsearch Energy Limited (ASX: DLS) is one of many companies suffering this reporting season, with investors selling out today as they realise just how much of an impact weaker oil has had on the company's revenues.
Here are the main highlights from today's announcement of half-year results:
- Revenue down 27% to $146.7 million
- Net profit after tax down 60% (42% if one-off items are excluded)
- $146.5 million cash at bank, 4% less than this time last year
- Production shrank 13% to 1.5 million barrels of oil equivalent (mmboe) due to natural well decline
- 'Average Total Operating Cost'* of oil dropped 5% to A$32.80 per barrel
- 'Average Realised Oil Price' of product sold dropped 17% to A$105.40 per barrel (including $5/barrel of gains due to hedging)
- Capital expenditure of $95.6 million for the first half was the same amount spent during the whole of Financial Year 2014
- Capital expenditure for the second half of 2015 forecast at $55-$70 million
*Average Total Operating Cost of oil per barrel includes only the direct operating costs of the oil drilling, and doesn't cover corporate or exploration costs
With weaker oil prices expected to prevail for the foreseeable future – recent price spike notwithstanding – Drillsearch is prioritising its capital expenditure to focus on more productive wells that are closer to production.
Cash is king when times are tough in the oil industry, and other producers like Beach Energy Ltd (ASX: BPT) and Senex Energy Ltd (ASX: SXY) are following the same strategy as Drillsearch in order to turn permits into cash flow as soon as possible.
Fortunately Drillsearch is a clear winner on the cash front as well, with a cool $150 million in deposits – though of course this may dwindle as money is spent on project development.
As long as costs can be maintained at their current level, Drillsearch should enjoy strong cash flows that will keep the company sitting pretty through this current bout of low oil prices.
It's difficult to pick the absolute best junior oil producer in Australia since there is a lot of high-quality contenders, but Drillsearch has sound financials and is surely one of the better offerings out there.
