It’s rare to come across a company so well-suited to the current moment as Serinus Energy (LON: SENX). Here’s a firm with low-cost and producing gas and oil projects in Tunisia and, crucially, Romania at a time of sky-high prices in Europe. Adding to the appeal is that fact that, while some of the major players in the industry are pledging to cut down on production, demand for oil and gas persists.
Despite the astronomically high gas prices in Europe, Serinus is currently trading at a bargain price after an unexpected result from drilling at a single well in Romania.
The opportunity for investors to make the most of the share price drop and invest cheaply in a profitable company producing and selling natural gas and oil will not last forever. Least of all at a time when wholesale prices in Europe are up 250%.
Jeffrey Auld, the firm’s chief executive officer, guides ValueTheMarkets through the opportunity on offer.
Making the most of Europe’s gas price surge
Gas prices in Europe have skyrocketed recently. This is due to a combination of high demand in Asia and low stock levels after last year’s bitter winter depleted stores. Prices are up 250% from January and 70% since August. Auld highlights the “lack of investment” in gas from Europe.
While high prices are a pain for consumers and small suppliers – with five UK suppliers going bust in the space of only five weeks – it’s undeniably a positive for Serinus.
That’s especially true when it comes to the company’s gas operations in Romania. Says Auld:
“Gas prices in Europe have been rising very, very sharply so our gas production in Romania is strong revenue for us.
“Equally, we’ve got the cost of the business in line such that we can be cashflow positive above about $24 a barrel. So when we’re at $78-$75 a barrel, you can imagine the revenue position is quite attractive.”
With Serinus getting more than $50 per barrel above that $24 mark now, the company is in an excellent position.
The firm’s tight cost control also shines through in its half-year report. Published a little over a month ago – the report shows it spent just $5.9 million on capital expenditures over the six-month period. That included $5.2 million spent in Romania to drill, complete, and tie-in the M-1008 well, as well as some drilling costs for the Sancrai-1 well.
While Sancrai-1 did discover gas, an additional testing program was not able to record flow. Currently, the well is suspended pending additional technical studies to explain the high total gas readings found when drilling.
In terms of the strategy ahead, Auld explains:
“I was personally very surprised, as we had such good gas shows on the way down and there is gas there. But we’ll figure it out and we’ll figure out what the next step is. That next step is always driven by a capital allocation and return equation. So we’ll figure out where the best return is and we’ll pursue that.”
Of course, it is unfortunate that the well might not be as fruitful as hoped. But it’s important to remember that this is the first gas show for the company in Romania outside its producing Moftinu gas field. Indeed, as Auld points out, “the first well on the Moftinu field never produced a cent of commercial gas”.
So, even if a single well is not a success, when it comes to the bigger picture, it’s still a positive when it comes to exploration over the 729,000 gross acre Satu Mare Concession – where Serinus has 100% working interest.
Serinus Energy’s model inspires the best from Romanian and Tunisian teams
Serinus’ model involves separate business units for its Romanian gas and Tunisian oil and gas operations. This model insulates the company from the vagaries of different markets.
As Auld notes, one advantage of this approach is that it means Serinus is “not beholden to one commodity price in one region”. This creates a “portfolio effect” that protects revenue.
Another major advantage is that there’s a “high level of competition for capital” between the units. The competition pushes these units to be the best they can be.
“If you’re the head of the business unit in Tunisia, and you want to do something, you know that someone in Romania is trying to take that money away from you. So, your analysis and your plans need to be that much better and that creates a stronger competition for capital. And, we believe, a stronger return-based business.”
This strategy combined with higher prices to create a 20% revenue jump in the half-year to $15.9 million. Gross profit was $2.1 million, swinging from a loss the year before. Ebitda for the period was $5.5 million from $5.0 million.
This all comes together to make the company’s current share price, along with its £24.1 million market cap, somewhat surprising, even given the difficulty around Sancrai. Indeed, this is a company with producing assets in more than one jurisdiction. It’s only a matter of time before other investors take notice.
As Auld comments:
“If you look at North America, oil and gas companies trade with a terminal value of about six times Ebitda while oil and gas companies in London are trading with the terminal value of zero. We traded at one times next year’s Ebitda, one times cashflow, that’s unheard of.”
The case for Serinus gets stronger when considering cashflows, which came to $5.9 million from operating activities, up from $3.1 million.
Auld remarks that “cashflow generation is overlooked right now”. But the company remains “positive on the global macro for gas”, which makes up 80% of Serinus’ product. After all, as Auld says, “we liked the economics of gas we have long before these price spikes”.
Serinus reaps benefits as CEO predicts gas price spikes “every year”
Auld believes the price spikes seen this year are likely to continue “if Asian demand for natural gas continues at the rate we’ve seen”.
He explains that:
“We’re going to see this every year where European storage is the last one to fill up. North American storage will fill first, then Asian storage will bid, and European gas storage will be the last one to fill up. If that’s the case, then Europe will be exposed to higher gas prices.”
And there’s also the reality that some of the major producers have been slashing their production. BP, for example, is to cut its oil and gas production by at least 1 million barrels of oil equivalent per day by 2030 – a 40% drop from 2019 levels.
Certainly, there are potential future benefits with Serinus if gas prices stay high and competitors keep reducing production.
But what’s on offer here isn’t just the potential for future price spikes… Right now, the firm is producing and selling oil and gas – the latter of which is commanding very high prices.
“We’re not an exploration company. That’s really, really important to us. We’re not taking tens of millions of dollars and gambling it on a hole, we’re taking tens of millions of dollars and making it into more tens of millions of dollars. We’re keeping it as simple as we can, so that manifests itself in the cashflow. This is a business that has a lot of existing assets, and it’s just reaping the benefits.”
Not only that, but Serinus is producing said oil and gas cheaply, making the proposition solid even at lower prices.
While the Sancrai-1 news sent the share price sharply lower in August, the price is picking up. The chance to jump in and take advantage of the dip won’t wait around forever.
