SDX Energy — Aggressive drilling programme in second half

SDX Energy (LN: SDX)

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Research: Energy & Resources

SDX Energy — Aggressive drilling programme in second half

SDX Energy has released its first quarter 2017 results, the first period incorporating its recent acquisition of Egyptian and Moroccan assets. As expected, hydrocarbon sales rose significantly, totalling 2.991mboe/d and more than doubling year-on-year, while oil netbacks also increased markedly to $44.4/boe. During the period, the company successfully drilled the South Disouq well, proving a gas resource that could start production within 12 months. We leave our NAV unchanged at 76p/share, and await the results of testing the well in the coming weeks.

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Energy & Resources

SDX Energy

Aggressive drilling programme in second half

Quarterly results

Oil & gas

22 May 2017

Price

58.00p

Market cap

£108m

US$/£0.8

Net cash ($m) at end March 2017

21.1

Shares in issue

186.9m

Free float

59%

Code

SDX

Primary exchange

AIM

Secondary exchange

TSX Venture

Share price performance

%

1m

3m

12m

Abs

(5.7)

33.0

222.2

Rel (local)

(9.7)

29.1

162.9

52-week high/low

67.4p

20.0p

Business description

SDX Energy is a North African onshore player listed in Toronto and London. It has oil and gas production in Egypt, and Moroccan gas production. A large gas discovery was recently made at South Disouq.

Next events

South Disouq testing

Q217

Development and exploration well programme in Egypt

H217

Analyst

Will Forbes

+44 (0)20 3077 5749

SDX Energy is a research client of Edison Investment Research Limited

SDX Energy has released its first quarter 2017 results, the first period incorporating its recent acquisition of Egyptian and Moroccan assets. As expected, hydrocarbon sales rose significantly, totalling 2.991mboe/d and more than doubling year-on-year, while oil netbacks also increased markedly to $44.4/boe. During the period, the company successfully drilled the South Disouq well, proving a gas resource that could start production within 12 months. We leave our NAV unchanged at 76p/share, and await the results of testing the well in the coming weeks.

Year
end

Revenue
(US$m)

PBT
(US$m)

Cash from operations (US$m)

Net (debt)/
cash (US$m)

Capex
(US$m)

12/15

11.4

11.1

(5.2)

8.2

(5.1)

12/16

12.9

(26.7)

(1.9)

4.7

(11.9)

12/17e

45.5

9.9

29.9

20.9

(22.9)

12/18e

80.9

35.9

56.4

35.1

(44.6)

Note: The financials above include the (unrisked) impact of South Disouq, which we estimate will require substantial capex in 2017 and 2018.

South Disouq discovery progresses

The South Disouq well intercepted 82ft of net pay with an average of 25% porosity and permeability above one Darcy. Condensate to gas ratios are estimated to be up to 70bbls/mmscf, above pre-drill estimates. The well will be tested in the coming month after the rig is moved off location. Furthermore, SDX Energy is already working on development planning and gas marketing to enable early gas production, which it hopes to commence in Q118. The company is preparing for a second exploration well, targeting deeper oil potential.

Production should increase during 2017

Production in Egypt was below end-year 2016 levels due to a delays to the start of the planned 12 well workover programme at NW Gemsa (we leave our full year estimates unchanged, but are watchful of NW Gemsa where production has declined to 5.3mb/d in the period vs 7.8mb/d in Q116). A work programme at Meseda is targeting a notable increase in oil production by the end of the year. Gross production at Sebou in Morocco was 646mboe/d, but SDX is drilling three development wells to increase this and two low-risk appraisal/exploration wells (one targeting a deviated step-out, one targeting an accumulation adjacent to existing production), as well as two exploration wells at Lalla Mimouna. We note well costs are low (<US$1m each), historical success rates are above 75% and that all targets are supported by bright spots calibrated over 3D seismic.

Valuation: Keeping NAV unchanged

We leave our estimates and valuation unchanged at 76p/share. The results of the testing at the significant discovery at South Disouq will give us a better idea of the extent and commercial value of the field. The aggressive drilling campaign in Egypt and Morocco means that SDX is well placed to use its position to materially increase production by year end and grow value over time. In total, the company plans to drill up to 11 wells in Egypt and Morocco.

Exhibit 1: Financial summary

Accounts: IFRS, Year-end: 31 December, US$000s

 

2014

2015

2016

2017e

2018e

Total revenues

 

 

24,533

11,372

12,914

45,513

80,874

Cost of sales

 

 

(3,639)

(4,973)

(5,282)

(13,746)

(21,354)

Gross profit

 

 

20,894

6,399

7,632

31,766

59,520

SG&A (expenses)

 

 

(1,768)

(3,746)

(2,457)

(2,809)

(1,665)

Other income/(expense)

 

 

0

(3)

479

0

0

Exceptionals and adjustments

 

(3,831)

(7,676)

(29,089)

(1,000)

(1,000)

Depreciation and amortisation

 

 

(1,602)

(2,057)

(3,266)

(18,068)

(20,929)

Reported EBIT

 

 

13,693

(7,083)

(26,701)

9,890

35,925

Finance income/(expense)

 

 

(1,009)

(96)

4

0

0

Other income/(expense)

 

 

0

18,289

0

0

0

Exceptionals and adjustments

 

0

0

0

0

0

Reported PBT

 

 

12,684

11,110

(26,697)

9,890

35,925

Income tax expense (includes exceptionals)

 

 

(4,328)

(1,063)

(1,503)

(823)

(2,085)

Reported net income

 

 

8,356

10,047

(28,200)

9,066

33,840

Basic average number of shares, m

 

 

376

52

72

178

187

Basic EPS

 

 

0.1

0.2

(0.4)

0.1

0.2

 

 

 

 

 

 

 

 

Balance sheet

 

 

2014A

2015A

2016A

2017E

2018E

Property, plant and equipment

 

 

9,392

18,401

12,605

31,339

50,590

Goodwill

 

 

0

0

0

0

0

Intangible assets

 

 

16,460

23,473

10,623

8,712

13,177

Other non-current assets

 

 

1,999

2,106

2,503

3,077

3,077

Total non-current assets

 

 

27,851

43,980

25,731

43,128

66,844

Cash and equivalents

 

 

17,935

8,170

4,725

20,895

35,137

Inventories

 

 

0

1,188

1,698

1,698

2,638

Trade and other receivables

 

 

3,306

6,678

9,463

38,463

30,770

Other current assets

 

 

0

0

0

0

0

Total current assets

 

 

21,241

16,036

15,886

61,056

68,546

Non-current loans and borrowings

 

 

0

0

0

0

0

Other non-current liabilities

 

 

608

286

290

290

290

Total non-current liabilities

 

 

608

286

290

290

290

Trade and other payables

 

 

1,686

3,556

3,674

18,174

14,539

Current loans and borrowings

 

 

2,207

0

0

0

0

Other current liabilities

 

 

5,142

928

389

389

389

Total current liabilities

 

 

9,035

4,484

4,063

18,563

14,928

Equity attributable to company

 

 

39,449

55,246

37,264

85,330

120,171

 

 

 

 

 

 

 

 

Cash flow statement

 

 

Profit before tax

 

 

12,684

11,110

(26,697)

9,890

35,925

Depreciation and amortisation

 

 

1,602

2,057

3,266

18,068

20,929

Share based payments

 

 

1,064

761

(47)

1,000

1,000

Other adjustments

 

 

1,670

(12,281)

25,742

(1,766)

(2,535)

Movements in working capital

 

 

12,941

(2,183)

(3,440)

3,500

3,118

Income taxes paid

 

 

(4,430)

(4,678)

(766)

(823)

(2,085)

Cash from operations (CFO)

 

 

25,531

(5,214)

(1,942)

29,868

56,353

Capex

 

 

(13,634)

(5,120)

(11,890)

(22,891)

(44,645)

Acquisitions & disposals net

 

 

0

0

0

(30,000)

0

Other investing activities

 

 

1,110

4,836

825

1,192

2,535

Cash used in investing activities (CFIA)

 

(12,524)

(284)

(11,065)

(51,699)

(42,111)

Net proceeds from issue of shares

 

 

0

0

10,127

38,000

0

Movements in debt

 

 

0

(3,702)

(96)

0

0

Other financing activities

 

 

0

0

0

0

0

Cash from financing activities (CFF)

 

 

0

(3,702)

10,031

38,000

0

Currency translation differences and other

 

 

0

0

0

0

0

Increase/(decrease) in cash and equivalents

 

 

13,007

(9,200)

(2,976)

16,170

14,243

Currency translation differences and other

 

 

(615)

(565)

(469)

0

0

Cash and equivalents at end of period

 

17,935

8,170

4,725

20,895

35,137

Net (debt) cash

 

 

15,728

8,170

4,725

20,895

35,137

Movement in net (debt) cash over period

 

 

12,392

(7,558)

(3,445)

16,170

14,243

Source: Edison Investment Research, company accounts. Note: Forecasts currently reflect development of 585bcf of gas at South Disouq – forecasts will be updated post testing once volumes that can be developed from the SD-1X well have been confirmed.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SDX Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SDX Energy and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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