Senex Energy All the right moves
Another consistent and firm quarterly result from SXY in 3Q21, as it builds on its track record as a capable low-cost onshore gas producer. Above-nameplate production from Roma North (19tj/d v 16tj/d) and ramping up Atlas delivered strong group gas sales of 4.6PJ (vs MorgE 4.5PJ). 3Q21 sales revenue A$35.9m (vs MorgE A$36m), average gas price A$6.8/GJ. Roma North expansion by 1Q’FY22 with Atlas expansion to follow once gas contracted to support capex.
Enjoying sustained production/earnings/dividend growth from its de-risked upstream assets, we maintain our Add rating with SXY a top sector preference. Track record will fuel re-ratings SXY has hardly put a foot wrong in its capital-efficient pursuit of east coast gas production. Now a proven low-cost and capable onshore gas operator, SXY is moving to self-fund organic expansion of its Roma North and Atlas coal seam gas (CSG) operations.
These low-risk and low-cost growth options will bolster SXY’s earnings platform and fuel growth of its dividend. Coupled with conservative balance sheet management and a clear identity on its overarching onshore/organic strategy, we see SXY as well placed to gain increasing market support through the continuing energy complex recovery. Solid operational result SXY posted gas production in 3Q21 of 4.6PJ (vs MorgE 4.5PJ), with Roma North again outpacing its design nameplate at 19tj/d (vs 16tj/d design) and Atlas finishing its ramp up to 32tj/d.
There is a real possibility that SXY carries forward its outperformance at Roma North into its expansion, as well as posting a similar performance at Altas, where SXY has already commented on an impressive uptime at the plant. We expect the prospect of ‘free molecules’ (higher productivity) to remain a source of near-term upside risk for the stock, with Roma North expansion due to come online in 1Q’FY22.
Positioned to supply more gas Given the risk of gas market intervention by the government, SXY is taking a conservative line in waiting to secure customer support (i.e. fixed-price offtake) before committing to the capex to expand Atlas. We see this as only logical and highlighting the obvious fact that the government needs to be careful to not discourage investment in new gas supply (which could trigger a severe gas shortage over the coming years).
Ultimately we expect the need to induce new gas supply will overpower the desire of the government/customers to suppress domestic gas prices. Highlighting an attractive opportunity for companies like SXY who hold large uncontracted gas reserves. Low probability of disappointing A key strength in SXY’s fundamentals is the fact that the company is now ex-major capex spend and has de-risked its upstream operations.
We expect this will see the company enter a phase of FCF generation against a backdrop of a continuing recovery in oil and gas prices. In addition to updating our estimates for the 3Q21 result, we have also lifted our Roma North production assumptions to 19tj/d, slightly trimmed our assumed Atlas gas price (-$0.2/gj), and rolled our model forward.
Net of these changes our target price has been revised marginally to A$4.20 (from A$4.30). We maintain our Add rating with SXY one of our top sector preferences. Key risks to our call include oil price and gas demand.
Company description Senex is an oil and gas producer with operations spread between the Cooper and Surat Basins.
The company’s focus historically was on its Cooper Basin oil operations, however over the last six years these assets have taken a backseat to Senex’s transition into being an east coast gas producer.
Senex now has two wholly-owned coal seam gas (CSG) projects (Roma North and Project Atlas) located in the Surat Basin, with an easy path to market through existing nearby infrastructure and a supportive east coast demand environment for gas.
Roma North is the most advanced, with 35 wells having already been drilled over two previous campaigns, with gas production still ramping up as the wells are progressively de-watered. 2019 will see development activity kick off at Project Atlas, a smaller block that could yield greater value for SXY given its location in a tier 1 CSG region of the Surat.
– By CIMB Bank Research