How long have you held Sundance Energy Australia?
We have owned the stock for three years, buying the stock opportunely when sell offs occurred and taking profits on over-shoots.
What do you like about it?
Sundance Energy (SEA) is one of the ‘new generation’ of unconventional (shale trapped hydrocarbons) oil, liquid and gas producers in North America. It is one of a few that are listed on the ASX.
Through diligent portfolio management, managing director and chief executive officer, Eric McCrady, and his technical team, have assembled a package of premium production acreage in the Anadarko and South Texas/Gulf Coast Basins.
Investors might better know the assets as the Mississippi/Woodford and Eagle Ford play types, respectively.
The key to success in North American shale oil/gas projects centres around the right basin/rocks, a sizeable well inventory, access to infrastructure, a predominant oil/liquids product stream and compelling well economics. Sundance Energy achieves each of these and is armed with significant cash on hand and undrawn debt facilities to enable FY14/15 development capex to be met. The revenue model is solid, with 2014 exit rate production tipped to hit 9000 boepd (barrels of oil equivalent per day) and oil hedging to offset some of the recent crude weakness. We are satisfied that cash flows are remarkably resilient through a variety of spot price scenarios.
Merger and acquisition activity continues apace in this rapidly growing US industry. Exxon Mobil made their first purchase in US shale oil/gas business as recently as 2010. Sundance Energy operates in basins attracting enormous investor interest right now, is sensibly funded for its forthcoming development programme and has the great fortune to have an experienced management team on the tiller. The share price recently pulled back to its 100-day moving average (circa $1.02) in a panicked over-reaction to the past months WTI/Brent correction and represents great buying at present levels.
Is it a liquid stock?
SEA is capitalised at $600mn, so is a very liquid, well-traded name.
How is it better than its competitors?
Its competitors primarily comprise US companies but there are a couple of ASX-listed names. As a professional investor, we attach great weight to the competency and alignment of senior management. We feel this team is as good a management team as any presiding over our investee companies.
The portfolio largely comprises oil/liquids producing assets. This is a superior position to the plethora of competitors, many of which have gas dominant exposures.
The company adopts a very conservative approach to funding its development spending via a cocktail of cash, operating cash flow and a debt component. This is atypical of competitors in this space, many taking the riskier path of 100% debt financing.
What is your target price/when would you sell it?
We do not set target prices but always have an eye to valuation levels. It is easy to work up a valuation per share of $1.60 without any heroic assumptions. This price level would warrant a revisit of valuation, assumptions, oil price outlook etc.
How has the stock performed for you?
We have owned SEA since mid 2011, where the stock range traded between $0.50-$0.65. Eley Griffiths Group has carefully added to the holding along the way as confidence grew with the story and the management team. Our average entry price sits at circa $0.95. It has been a rewarding but volatile experience to date.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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