2 signs Senex Energy Ltd shares could be undervalued

Oil and gas producer Senex Energy Ltd (ASX: SXY) could be deeply undervalued according to company head Ian Davies.

Although the share prices of many energy companies have been tracking along with the changes in oil price, Senex Managing Director and CEO Ian Davies still views shares as being cheap and he said at Wednesday’s AGM:

Despite recent improvements, we do not believe our current share price remotely reflects the value inherent in the Senex portfolio, and we continue to work hard to see this realised for our shareholders.

But is it really undervalued?

If you’re sceptical of the idea of a company claiming its share price is undervalued, well good, as an investor you should be. A company’s directors and management have every reason to want to talk up their own share price; it doesn’t mean they are right.

However in the case of Senex I have to agree with Ian Davies’ view that the business’s potential value is not being reflected in its share price. I own Senex Energy shares, but the numbers certainly point to it being under-loved by the market.

There are several ways to cut this. One quick and dirty view is that at $0.24 per share, the company sells for a noticeable discount to its Net Tangible Assets per share of $0.32.

With cash making up around 35% of Senex’s market capitalisation the company also has a ridiculously low Enterprise Value/2P reserves (EV/2P) ratio of 2.2. This compares to 12.2 for Santos Ltd (ASX: STO) – using Santos’ 2P reserves reported back in February.

How is the gap going to be closed?

Senex is working hard to close the gap between price and value. Ian Davies noted at the company’s AGM that through its exploration joint venture with Origin Energy Ltd (ASX: ORG) Senex will be well positioned to exploit opportunities created by the demand for gas on the East Coast, as big LNG projects suck out existing gas for export.

Senex will also be supplying gas to Santos to supplement input requirements for its massive GLNG project, a game changer for the company.

Foolish takeaway

Despite short-term underperformance, I remain positive on Senex Energy’s long-term prospects. As a cost competitive producer the company is well positioned if the price of oil rises and appears to offer a compelling value opportunity in the short term.

These Low Interest Rates Could Totally Devastate Your Retirement!

With global interest rates set to remain at these "emergency low" levels for years -- perhaps even decades -- unless you take decisive action NOW, your retirement could be seriously at risk. Click here to learn how to NOT run out of money in retirement.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.