Progressive Equity Research
Sector: Oil & Gas
Market cap: £16.7m
Enterprise value: £12m
Analyst: Peter Hitchens
High margin production to fuel growth
In an E & P sector that is suffering from the recent weak oil prices, SDX Energy would appear to be in very fine fettle. On its recent listing in London (May 2016), the company raised US$10 million (net of expenses) to leave it, at the time, with net cash balance of US$14 million. Although the company is spending heavily in the current year to boost production, it should still have net cash at the end of the current year of US$7 million. This gives the management sufficient money to build up the business both organically and through acquisitions. Management wants to build up the company from a modest production level 1,500 boe/day to in excess of 20,000 boe/day – at which point it would become a material acquisition to a major player and, hopefully, generate substantial shareholder returns on exit.
In the short term, the first part of this growth will come through building up its Meseda licence where it has a 50% working interest (19% entitlement interest). This licence accounts for half of the group’s current production. Management has now embarked on a work-over and waterflood programme, which should allow a doubling of gross production (up to 8,500 bbl/day) and hence boost cash flows. Not only does this boost production but also the waterflood programme will allow the management to alleviate the natural decline in production from the original development and allow a very significant increase in reserves. The recovery factor in the field will increase to 35% of the oil in place (from 13% under the current development plan). This should also allow a substantial boost to the underlying asset value. On the NW Gemsa licence (SDX Energy 10% working interest), management have agreed a programme over 2016 to drill two development wells and workover a further nine wells in order to maintain a stable production rate in the field. (see page 12).
The company is also looking at exploration. The obvious potential trigger to production, reserves and value is its South Disouq exploration asset (55% working interest), where the company is intending to probe a potentially significant gas prospect at the end of the current year. This prospect has gross mean prospective resources of 490 BCF of gas and 16.3 mmbbl of condensate (100 mmboe in total). This could prove to be a step change in shareholder value. SDX has additional exploration upside in its Meseda licence and the offshore South Ramadan licence. (see page 16).
Beyond the expansion at Meseda and the exploration potential at South Disouq, management is looking at the full suite of options for expansion i.e. buying production, as well as, appraisal and exploration options. This is a good market to expand with many small players suffering from the weak oil price. Management does not intend to bulk up for the sake of size, rather it seeks opportunities with additional upside to the NPV valuation – similar to its Meseda licence where it is possible, through using its subsurface expertise, to add significant additional reserves and production. The company is looking to build up its Egyptian operations as well as expanding into other North African countries. We believe Morocco and Tunisia could provide attractive growth opportunities for SDX.
The balance sheet of the company is very strong following the placing. Although the company is in the middle of a heavy capital investment programme of approximately US$10 million, SDX Energy should end the year with net cash of approximately US$7 million. Going forward, the company should be in a position to generate free cash flow thus allowing internally generated funds to be used to expand the business.
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