ASX microcaps with blue-chip profiles: Cue Energy

The world's biggest central banks are set to reverse a record string of rate hikes – and stocks towards the small end of town are widely expected to benefit. In this series, we're going to take a deep dive into profitable microcaps with unique businesses and strong balance sheets (which hopefully means no unexpected or nasty capital raises).

Cue Energy (ASX: CUE) operates oil and gas projects in Indonesia, New Zealand and Australia, with a focus on both exploration and production. To summarise its key projects:

• Australia: Interest in three production assets located in the Amadeus Basin in NT. These assets were acquired from Central Petroleum in July 2020 with the following interests: Mereenie (7.5%), Palm Valley (15%) and Dingo Fields (15%).

• New Zealand: Cue holds a 5% interest in Petroleum Mining Permit 38150, which contains the producing Maari and Manaia oilfields, which are located 80 km offshore. The current production from these fields is approximately 5,300 barrels of oil per day.

• Indonesia: Cue holds a 12.5% interest in the Mahato PSC located in Central Sumatra, Indonesia. Field production was 6,400 barrels of oil per day as of 30 June, 2023.

Cue Energy at a glance

• Market cap: $73 million

• Cash on hand: $23.2 million at the end of December 2023

• Debt: Nil

• Shares on issue: 698 million

• Share price performance: Up 72% year-to-date and 75.7% in the past 12 months

Cue Energy five-year price chart (Source: Market Index)

Latest Results

Cue's first-half FY24 results (announced 29 February 2024) was a game changer in terms of share price gain (up 49%) and technicals (breaking out after three days of sideways action). Some of the key numbers from the result include:

• Revenue up 22% to $29.3 million

• Net profit after tax up 34% to $9.1 million

• Rapid $4 million in debt, now debt free

• Issued special dividend of 2 cents per share (a yield of approximately 17%)

• Activities planned for all assets over the next 12 months to increase production from existing oil and gas fields

The special dividend returned $14 million to shareholders, representing 100% of its first half net profit plus $4.9 million in cash reserves.

What makes Cue Energy interesting?

Leveraging higher energy prices: The half-year result noted "strong oil prices are benefitting Mahato and Maari oil sales, which are based on Brent benchmark pricing. Recently announced Australian gas contracts have been signed at prices reflecting current market conditions."

Dividend difference: Cue has been reporting some solid earnings for the past two financial years but the market didn't seem to care ... until it issued the special dividend. Here's a recap of its previous results:

• FY21: Revenue of $22.4 million and gross profit of $11.6 million. Cue suffered a $12.7 million after tax loss due to capex, foreign currency losses and volatile energy prices. The stock finished the results session up 1.5% to 6.6 cents.

• FY22: Revenue up 98% to $44.4 million – The highest annual revenue generated by Cue in more than 5 years thanks to higher production across the portfolio. Net profit jumped 226% to $16.1 million. The stock rallied 20% (from near five-year lows) to 7.2 cents.

• FY23: Revenue up 16% to $51.6 million and net profit after tax of $15.2 million. The stock finished the result session up 8.0% to 6.7 cents.

Sizeable cash position: Cue had $23.2 million cash as of December 2023. Its interesting to see the company pay out 100% of its first-half net profit plus some of its cash at bank. This could mean a couple of things. Here's some food for thought: i) The company has nothing better to do with its excess cash; ii) The company projects are all self-funding and the surplus cash is not required to support ongoing working capital and capex, and iii) does a sizeable cash position set the company up for potential M&A.

A 10 cent stock: Ten cent stocks are a pain to watch because they trade in 0.5 cent increments (e.g. from 10 cents to 10.5 cents). Each tick up or down therefore represents 4-5%. This leads to a stacked order book, where you'll see millions of keen bidders at 10 cents and millions of keen sellers at 10.5 cents.

Putting it all together

Cue Energy is a profitable small cap oil and gas producer that has managed to grow its revenue by more than 200% over the past four years. Despite the growth, the share price traded largely sideways between December 2020 and January 2024. It only re-rated following its half-year FY24 result, which included that special 2 cent dividend. The company has not provided a full-year guidance or dividend outlook. However, management noted its special dividend as a "commitment to capital management." The stock trades around the 10 cent mark, which makes it rather susceptible to ping pong like price action.

Disclaimer – The author does not own any shares in Macmahon. Market Index is not affiliated with any of these companies. The information provided in this article is for educational purposes only. It is not intended to be a substitute for professional advice or recommendations. Always conduct your own research and consult with a qualified processional before making any decisions.