Senex Energy Ltd shares crash 10% on $6m lawsuit

Should shareholders in Senex Energy Ltd (ASX:SXY) be worried about pending litigation against the company from a subsidiary of Ausdrill Limited (ASX:ASL)?

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Shares in Senex Energy Ltd (ASX: SXY) slipped 10% to $0.27 after the company released a non-market sensitive announcement disclosing that Energy Drilling Australia Pty Ltd (“EDA”) had commenced a proceeding against it for breach of contract. EDA is a wholly-owned subsidiary of Ausdrill Limited (ASX: ASL), who has not yet publicly commented on the dispute. Ausdrill shares were down 2% to $0.48 at the time of writing.

Senex asserts that it terminated a contract with EDA for drilling services after ‘material and ongoing breaches of the contract relating to the performance of the relevant rig.’ Senex further claims that it gave EDA a significant amount of time, above and beyond contractual requirements, to rectify the issues.

EDA is suing Senex for wrongfully terminating the contract, and is claiming for compensation of ~$6.7m. Senex stated in its announcement that it had attempted to resolve the dispute amicably but was unsuccessful. Senex will defend the proceeding vigorously, and counterclaim for losses of $1.2m that it sustained as a result of EDA’s alleged breaches.

What’s a shareholder to do?

Fortunately for Senex shareholders, $6.7m is just a fraction of Senex’s ‘cash and cash equivalents’ of $99.6m as of 31 December 2015. With the company’s operations still ongoing and in a sound financial position, Senex appears well placed to weather the storm. I do not intend to make any changes to my shareholding.

It is uncertain exactly what impact will be had on Ausdrill, since presumably the cancelled contract will result in a loss of revenue. If we assume lost revenue is the $6.7m for which EDA is claiming, it’s an insignificant portion of Ausdrill’s $375m revenue in its most recent half-yearly report. However, profit margins are thin and the costs for the drilling equipment and staff must still be paid during their time of idleness which could result in a small hit to profit.

Ultimately, lawsuits can take some time to resolve and either way the stakes don’t appear to be too significant for either Ausdrill or Senex. I would not consider today’s announcement a reason to sell either company.

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Motley Fool contributor Sean O'Neill 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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