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.