Serinus Energy - ahead of quarterly results which should show substantial cash build, Buy

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Serinus Energy (SENX) shares have performed pretty badly considering that oil and gas is currently in a bull market, but I believe that the next set of operational and financial results could be a turning point for investors. Unlike many of the small AIM listed companies in this sector, Serinus actually produces oil and gas already with operations in Romania and Tunisia, as well as having a decent amount of cash in the bank, but the issue always seems to have been the amounts of capital that it has to spend in order to sustain production rates – during 2021 it spent $10.1 million. Last year it averaged 1,649 boepd between its two operations and, although the bulk of that - 1,078 boepd - came from Romania, the assets in Tunisia produced 571 boepd and there is the potential for improvements there, with a workover and pump installation at Sabria W-1, and more to follow as work is completed at other existing wells within this field. When you consider that there is an estimated 445 million barrels of oil equivalent resources at Sabria, and only 1% of that has been produced so far, it certainly suggests that there is upside potential, and especially at current oil and gas prices.

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At least some of that is also likely to come in the near term with a re-entry of the N2 well planned imminently and as long as all goes well - the well was damaged when originally drilled back in 1980, so a workover is being carried out to open up the well bore - then that should be in production during the middle part of this year. In Romania, work has also been ongoing at its Moftinu gas field, with compressors already having been installed at two of its four existing producing wells, and it has also been benefitting from much stronger gas prices on the local market – it averaged $11.45/mcf for the whole of 2021, but during Q4 prices had risen significantly and averaged $31.58/mcf, and that trend has continued so far in 2022. One of the problems with this company is that its operations have always looked promising but have generally failed to live up to expectations and, once you stripped out the capex being spent to maintain production, then financially it always looked far less impressive than the headline figures would suggest – although for 2021 it did record a net profit of almost $6 million all of that actually came from the reversal of a previous provision and it would barely have broken even on its ongoing operations.

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The management has never looked particularly aligned with shareholders either, and seem to have done quite well for themselves regardless of how the company has performed, both in terms of directors fees and also the award of shares under the incentives plan. That still hasn’t changed, and probably won’t, with the CEO Jeffrey Auld having just been awarded more than 3.5 million shares, and a further 2 million or so going to the CFO. Despite all of the issues though, I do believe that the current market cap of £19 million, at a share price of around 1.7p, is too cheap, and especially when you consider that it ended the year with $8.4 million in the bank – although it is worth noting that will all be used, and more, to cover the expected work programme for the current year. It though also has a decent amount of reserves, with 7.77mmboe of 2P, of which 3.79mmboe is 1P, for its Tunisia operations; and an additional 860,000boe of 2P, with 522,000boe of 1P, in Romania. The results for Q1 are due at any time, judging by last year, and I would expect that the market will like them, as they should show a substantial amount of cash build, given the realised oil and gas prices during those three months along with that the company will have had little in the way of capex. On that basis alone, I definitely think that it is worth buying in ahead of these results, and then in terms of a longer term hold, it will all come down to just how well the company performed in terms of net free cash flow, and assessing how much of that will go into the coffers once you strip out Capex on an annualised basis.

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I am holding myself for these results, and will then once I see the actual figures, decide whether to carry on holding or whether to treat it as just a shorter term trade and cash in on any spike in share price that comes after the quarterlies are announced. That will all come down to whether or not the figures make me believe that it can generate decent amounts of cash flow after capex, and that it isn’t all being spent just to keep production at a stable level – if it is all having to be spent sustaining production, and given current oil and gas price levels, then I would find it hard to remain invested as it would suggest that shareholders are never likely to see much of a return, in terms of excess cash being distributed to them, or being sufficient to actually substantially increase production and keep it at higher levels. For now though, I’m happy to remain invested and see what impact commodity prices have had, and it could potentially see a decent share price rise in the coming weeks if the market likes the results.

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Filed under: Serinus Energy, Love Hemp, Cineworld, Joules, Quindell, Argo Blockchain

2022-05-04 12:50:59

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