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Senex Energy Ltd takes on its first debt: Here’s what you need to know

It’s no secret that oil stocks are in the doldrums, and the outlook for the sector is gloomy.

Part of the problem is supply and demand, further complicated by the Organisation of Petroleum Exporting Countries (OPEC) which is aiming to recapture lost market share, and the United States, which doesn’t want its high-cost domestic oil production to head back offshore.

At least one investment bank thinks that a number of oil stocks look materially undervalued however, with JP Morgan predicting that junior oil stocks like Senex Energy Ltd (ASX: SXY) are set for a massive re-rating this year.

According to their predictions, Senex Energy could rise up to 78%, while Buru Energy Limited (ASX: BRU) is tipped to rise a staggering 191%. AWE Limited (ASX: AWE) and Santos Ltd (ASX: STO) are also tipped for hefty increases.

(You can read the full coverage of JP Morgan’s forecasts in my earlier article here)

Yesterday’s release from Senex announcing the establishment of an unsecured, three-year, $80m multi-currency facility with Westpac Banking Corp (ASX: WBC) has me wondering if this could be the spark for Senex’s return to grace.

Management previously announced that Senex would slow its exploration plans, and focus on higher-reward opportunities with a view to prioritising short-term production (focussing on improving cash flow).

With $74 million in cash at the end of December, no debt, and a hedging program, Senex was already in a pretty good financial position.

An additional $80m in debt funding on ‘attractive terms’ for ‘general corporate purposes’ seems a curious decision, though management states – and I believe – that Senex has no need to draw on the debt funding.

The funding will allow for additional flexibility over the next few years, providing opportunity for acquisitions or a ramp-up in exploration activity if and when those actions become appealing.

Establishing the facility now also takes advantage of near-bottom interest rates, which may go lower but won’t go that much lower.

Senex thus has the flexibility and financing to keep its operations low-key for as long as markets are subdued, or leverage itself to take advantage of opportunities that might present itself.

While an investment in Senex does have an element of risk, the company looks reasonably valued at today’s prices, and extremely cheap if – IF – oil prices are going to return to former levels around US$100/barrel.

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Motley Fool contributor Sean O'Neill owns shares in Senex Energy Ltd. 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.