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Drillsearch Energy Limited shares surge on big growth targets

What happened?

Drillsearch Energy Limited (ASX: DLS) today reported its full year result for the 12 months to 30 June 2015 (FY15) and announced a surprisingly upbeat growth target in spite of the headwind of falling oil prices.

The company reported a 35% fall in revenue to $250 million, but after writing down the value of some of its assets and exploration expenses the company reported a loss of $8.3 million.

Production fell slightly over the 2014 financial year, but it was still a huge year for Drillsearch. The company not only completed its largest work program by drilling 41 new wells, but it also made 12 new discoveries and acquired Ambassador Oil & Gas Limited.

What about going forward?

Surprisingly, the drag of lower oil prices isn’t holding Drillsearch back from ambitious growth plans. Although production guidance for the 2016 financial year is for around the same level as FY15 (between 2.8 and 3.2 million barrels of oil equivalent), Drillsearch is targeting strong growth over the next five years.

The company noted in its announcement:

Subject to the results of ongoing exploration activity, Drillsearch expects to grow its Cooper Basin [production] by 50% over the coming five years, with scope for additional growth if market conditions improve.”

This is certainly good news, however as any oil investor will tell you, growth doesn’t come cheap, and if there is one thing oil and gas companies need right now its cash.

Drillsearch was holding $132 million in cash assets at 30 June 2015, down just 14% on the prior year. The company does hold a moderate amount of long-term debt on its balance sheet, but the cash position is more than sufficient to cover Drillsearch’s reported near-term obligations. Unfortunately, the same can’t be said for Santos Ltd (ASX: STO) at the moment.

Should you buy?

Shares in Drillsearch have far outperformed both Santos and Senex Energy Ltd (ASX: SXY) so far this year, down just 14% compared to a 38% fall for Santos and a 61% hammering for Senex Energy. Combined with its growth aspirations the company looks to be on a strong footing, but is still subject to potential further volatility from the price of oil.

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Motley Fool contributor Regan Pearson owns shares of Senex Energy Limited. 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.

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