Q219 has 1 negative surprise and 2 positive surprises. The...

Q219 has 1 negative surprise and 2 positive surprises. The negative surprise was the low realised oil sales price of only A$78.0/bbl. The market thought that a good hedging was in place, but it wasn’t. The management mentioned that most of the hedge would only start kicking in from Q319. Specifically, they hedged 810,000 barrels from FY19 to FY21. The hedged volume for FY19 was 310,000 bbls (starting Dec2018 at A$98 or US$71/bbl), 350,000 for FY20 (at A$96/bbl), and 150,000 for FY21 (at A$93/bbl).

Assume that in Q3 and Q4FY19, Senex produces another 600,000 bbls of oil, the average realised oil price for the rest of FY19 should be around A$92.60/bbl (US$67.10) – taking into account the hedged price of US$71/bbl for 310,000 bbls and the future average market price of US$63/bbl for 290,000 bbls.

2 positive surprises. The first came from the 33% ramp up of Roma North gas. As Santos GLNG’s Roma field to the south has been less productive than planned, the quick and successful ramp-up of Senex’s Roma North represented a significant de-risk for the company.

The second surprise came from the drilling success of Growler 16 and Growler 17 horizontal development well. Together with 2 recent new discoveries, Brequet-1 and Snatcher North 1, all 4 wells could be expected to add another 2,500 bbls per day, or 0.91 mmboe of oil per year, to the 60-40% Senex-Beach JV. (Brequet-1 & Snatcher North 1 = 540 bopd, Growler 16 = 1,300 bopd, and assume Growler 17 = 700 bopd). Owning 60% of the JV, Senex will be entitled to 0.55 mmboe of the 0.91 mmboe new production per year.

Assume that Senex’s old gas and oil wells produces 1.00 - 1.10 mmboe for FY19, the 4 new wells will add another 0.27 mmboe of oil to its production, leading to a total production of 1.27 - 1.37 mmboe for the entire FY19. This represents a growth of 52% - 63% over FY18’s total production of 0.84 mmboe.

For FY18, Senex average realised oil price was A$95/bbl (US$68.8). For Q1FY19 and Q2FY19, it was A$114/bbl and A$78/bbl. For Q3 and Q4 FY19, assuming my calculation of A$92.60/bbl (US$67.10) is right, Senex’s average realised oil price for the entire FY19 will be A$94.30/bbl (US$68.33) – less than 1% lower than the A$95/bbl for FY18.

So, in FY19, if Senex can achieve a 52% - 63% production growth over FY18’s levels but only suffers a slightly lower average sale price, how much net earnings growth can we expect to see for FY19? Time will tell!

Afterthe 10-well drilling program, Senex is left with $24.9 mil of free-carry by BeachEnergy, enough to drill another 10-15 wells in FY2020.