60 percent.
That's how much shares in mid-tier oil and gas producer Senex Energy Ltd (ASX: SXY) have fallen in the last 12 months.
And while other onshore producers like Drillsearch Energy Limited (ASX: DLS) have shown signs of recovery as the price of oil has crept back, Senex shares have languished. In fact shares are almost 15% below the company's net tangible asset price.
I have been openly (and stubbornly) optimistic on the long-term prospects for Senex, viewing it as one of the best placed onshore energy producers around. Yes, those headlines; 'Is Senex Energy Ltd a screaming bargain?', '5 big reasons to buy Senex Energy Ltd today' and, eventually, 'Here's why I'm sticking with my Senex Energy Ltd shares', all mine.
But did I get it wrong? Has the impact of falling oil prices been too much for Senex? And is the company really as lame as the share price would suggest? Let's look at the key points.
To start with, let's consider current value. Fundamentally, Senex's share price today should reflect the present value of the company's future earnings.
Given the huge fall in the price of oil, down 45% on 12 months ago, and that at least 90% of Senex's recent production is oil, at a flat rate of production Senex's future earnings will understandably take a hit.
Growing production was always central to my thesis on Senex. The company has significant energy reserves, but still needs to invest in capital expenditure to get it out of the ground. Lower cash flows today mean a longer wait for investors to see the potential returns.
Still growing
But here's the thing; Senex's assets are still producing bundles of cash. The company's operating costs, excluding royalties, are around $31 per barrel compared to the current oil price of US$63 ($81).
The company's work programs are fully funded and include a smart farm-in deal with Origin Energy Ltd (ASX: ORG) which will fund up to $105 million in expenditure in exchange for a share of the Cooper Basin-based licence, reducing the demand on Senex's cash. So the show will go on.
So too will the growth. Although currently relying on oil production Senex's total mix of energy reserves is 86% weighted towards gas, with just 14% in oil.
Given the long-term demand for LNG is expected to outstrip current forecast rates of production by 2022, Senex's gas could be in hot demand both domestically and from local exporters.
So, was I wrong?
Senex's future earnings have been delayed by the slower development of existing reserves, but not lost. With a long term focus on gas, positive operating cash flows, extremely cheap assets and a fully funded development program I still (stubbornly) believe that Senex has the potential to offer great returns in the coming years. Just be prepared for some volatility along the way.
