Deal with Jemena
After considering multiple proposals Senex Energy (SXY) has signed an agreement with Jemena, for the latter to build, own and operate a gas processing facility with initial capacity of 40 TJ per day (with firm baseload of 32 TJ per day. In return for a predetermined tolling agreement from SXY for 220 PJ of gas over a 25 year term. This is 9% above the P50 reserve estimate for Project Atlas that sits at 201 PJ, but reflects SXY's confidence in being able to achieve the contracted volume based on the fact that the agreement only covers half of the gas in place (GIP), and further supported by the results of its nearby neighbours.
We expect SXY will book some additional 2P reserves with its annual reserve update, with further growth to follow drilling.
Tariff ~A$1.60/GJ assumed
The tariff rate was not disclosed, but based on a forecast post-tax IRR of c6.5% to Jemena we estimate an average tariff rate of cA$1.60/GJ over the life of the project. This rate, even if close to accurate, is in our view materially lower than the cost of debt or equity available to SXY, leaving us with the view that the deal is value accretive.
The key timeline for Atlas remains unchanged, with environmental approvals expected mid-2019 and first gas by the end of 2019. Our forecast cA$1.60/GJ tariff applies to the 32 TJ per day baseload, while a higher (predetermined rate) has also been set on the additional 8 TJ per day of pipeline capacity. Further expansion in 8 TJ per day increments is available (at a tariff rate not yet negotiated).
Another valuation upgrade
Yet another value accretive deal from SXY, who has carefully positioned itself to be a major beneficiary of the rising East Coast gas market through a series of deals to secure CSG acreage, lower funding requirements and create a path to market for its gas. Our valuation and share price target increases (clients can login to view) on the cheaper funding outcome resulting from the Jemena deal, and increased risk weighting on Atlas to 90% (from 75%), decreased future assumed debt load and increased cost of debt assumed.
The unknowns for Project Atlas are the number of well locations and production plateau rate.
Despite its recent share price rise we believe attractive upside is still possible and Senex Energy (SXY) remains one of our key sector picks. The key risk remains oil price volatility.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
Morgans Corporate Limited was a Participating Broker for the Block Trade of shares in Senex Energy Limited and received fees in this regard.
A Director of Morgans Financial Limited is a Director of Senex Energy Limited and will earn fees in this regard.
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