SDX Energy — Gas discovered at South Disouq

SDX Energy (LN: SDX)

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17.50

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Research: Energy & Resources

SDX Energy — Gas discovered at South Disouq

SDX has announced it has discovered gas in the Abu Madi structure of the South Disouq SD-1X well. The well came in on prognosis, validating the company’s 3D seismic interpretation, and encountering 65ft of excellent quality net pay with average porosity of 25%. This unlocks 150–300bcf of the estimated 585bcf in the Abu Madi, with the remainder now de-risked in four other structures in the area. We expect this to be a material discovery that will contribute to a significant addition to the company reserves and resources (currently estimated to be 12.03mmboe on a 2P basis), increasing our RENAV from 57p to 76p/share.

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Energy & Resources

SDX Energy

Gas discovered at South Disouq

Drilling success

Oil & gas

19 April 2017

Price

56.0p

Market cap

£105m

US$/£0.8

Net cash ($m) at 28 February 2017

18.3

Shares in issue

186.9m

Free float

59%

Code

SDX

Primary exchange

AIM

Secondary exchange

TSX Venture

Share price performance

%

1m

3m

12m

Abs

21.4

60.6

N/A

Rel (local)

24.9

60.8

N/A

52-week high/low

56.0p

18.0p

Business description

SDX Energy is a North African onshore player listed in Toronto and London. It has plans to increase net production in Egypt (primarily through workovers and waterflood) while 2017 should see a carried exploration well. It has recently added high-value gas production in Morocco.

Next events

South Disouq results

c May 2017

Meseda waterflood ramp-up

Mid-2017

Analysts

Will Forbes

+44 (0)20 3077 5749

Elaine Reynolds

+44 (0)20 3077 5713

SDX Energy is a research client of Edison Investment Research Limited

SDX has announced it has discovered gas in the Abu Madi structure of the South Disouq SD-1X well. The well came in on prognosis, validating the company’s 3D seismic interpretation, and encountering 65ft of excellent quality net pay with average porosity of 25%. This unlocks 150–300bcf of the estimated 585bcf in the Abu Madi, with the remainder now de-risked in four other structures in the area. We expect this to be a material discovery that will contribute to a significant addition to the company reserves and resources (currently estimated to be 12.03mmboe on a 2P basis), increasing our RENAV from 57p to 76p/share.

Year end

Revenue

(US$m)

Reported 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.

Remaining resources de-risked

The biggest risk pre drill was source/migration, as the nearest Abu Madi accumulation was 13km away. SD-1X has now proven the source. This de-risks the remainder of the 585bcf estimated to be contained in four similar structures in the area. Log data gathered across the reservoir indicate good mobility in the sands giving SDX confidence in the ability of the well to deliver on test. The deeper horizons (believed to be oil) are still being drilled. After these have been reached, we expect the gas discovery to be tested and completed as a producer. Given the proximity of the well to gas pipelines, first commercial production could start in late 2017, though this will depend on the characteristics of the gas and whether any treatment facilities will be needed.

Capital investment for development

As we model it, a gas development may require tens of millions of dollars, but SDX can control the timing of investment while cash flows should follow capital spend quickly. SDX’s increased financial strength following the Circle Oil asset acquisition and its current 55% working interest means that it should be in a strong position to develop South Disouq without material equity dilution should it choose.

Valuation: NAV increased, awaiting deeper targets

We increase our risking on South Disouq to 75% on the 150-300bcf proven by the SD-1X well, with the remainder of the 585bcf risked at 40% to reflect the de-risking of the additional structures that will target this resource. We would expect to further review these riskings post testing of the SD-1X well and confirmation of the resources to be initially developed. This significantly increases our valuation to 76p/share. It is clear that this discovery is a material event and success at a scale of say half the 585bcf estimate could triple the SDX’s net 2P resource base.

Valuation

For our valuation we assume that 225bcf is proven by SD-1X (being the mid-point of the current management estimate of 150–300bcf), and apply a CoS to this of 75%. We believe this risk to be reasonable given the confidence in gas mobility in the reservoir indicated by log data and that the well can be tied in immediately to existing infrastructure. In addition, SDX is fully funded for the development and we expect the Egyptian authorities to be supportive given the country gas shortages. The balance of the 585bcf is included as additional appraisal upside and risked at 40% in view of the de-risking of the remaining structures by SD-1X. At present, we assign no value to the deeper Abu Roash and AEB horizons, but will review this if oil is encountered in the case of success.

Exhibit 1: NAV summary

Asset

Number of shares: 187m

 

Recoverable Reserves

 

Net risked value

Country

Diluted WI

CoS

Gross

Net WI

Net

NPV

Absolute

GBp/share

C$/share

 

%

%

mmboe

$/boe

$m

12.5%

 

Net (debt) cash - December 2016

100%

100%

5

2.0

0.03

Cash raised minus acqn minus costs

100%

100%

7

3.1

0.05

SG&A - NPV10 of 4yrs

100%

100%

(11)

(4.6)

(0.08)

Net financial income (expenses) NPV 2 years

100%

100%

0

0.0

0.00

2017 exploration

100%

100%

(4)

(1.7)

(0.03)

Receivable for gas and NGLs at Gemsa (as yet not invoiced)

100%

100%

2

0.6

0.01

Production

Meseda Base case - Edison

Egypt

50%

100%

3.9

2.0

0.7

6.2

12

5.2

0.09

Meseda Base + Workovers - Edison

Egypt

50%

90%

4.5

2.3

0.9

6.0

12

5.3

0.09

Gemsa 1P

Egypt

50%

100%

4.1

2.1

2.1

9.4

19

8.3

0.14

Gemsa 2P

Egypt

50%

100%

1.9

1.0

1.0

9.9

10

4.1

0.07

Sebou 2P

Morocco

75%

100%

1.0

0.8

0.8

34.6

26

11.3

0.19

Acquired working capital (NPV of 4 year release)

Morocco

100%

100%

15

6.2

0.10

Core NAV

 

 

 

15.5

8.0

5.4

9.9

93

39.9

0.67

Development upside

South Disouq SD-1X well

Egypt

55%

75%

38

21

20.6

2.5

39

16.9

0.28

Meseda Base + Workovers + Waterflood - Edison

Egypt

50%

40%

9.1

4.6

1.7

4.0

7

3.2

0.05

Gemsa - Edison modelling on full field

Egypt

50%

75%

1.2

0.6

0.6

5.7

3

1.1

0.02

Sebou - accelerated programme

Morocco

75%

40%

0.9

0.7

0.7

7.9

2

0.9

0.02

Exploration (known)

South Disouq additional appraisal (gas only)

Egypt

55%

40%

59

32

0.0

2.5

33

14.1

0.24

Full NAV

 

 

 

122.9

66.7

29.0

2.7

177

76.0

1.27

Source: Edison Investment Research

Financials

SDX is well capitalised, with $18.3m cash in February and increased cash flows from the additional assets in Egypt and Morocco from the acquisition of the Circle Oil assets. Development of the gas horizons at South Disouq will likely take tens of millions of dollars, which we currently model as being spent in 2017 and 2018 but results in a steep production ramp-up.

We caution our modelled scenario is based on an assumed 585bcf (gross) development at South Disouq, a proportion of which will not be confirmed with the SD-1X well. However, success in the gas horizons (pending successful flow testing) is a material event for SDX and could lead to a step change in cash flows.

Exhibit 2: Financial summary – including South Disouq (unrisked)

Accounts: IFRS, Yr end: December, USD: Thousands

 

2014A

2015A

2016A

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)

R&D costs

 

0

0

0

0

0

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

 

 

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

Non-controlling interest

 

 

0

0

0

0

0

 

 

 

 

 

 

 

 

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

Interest paid / received

 

 

0

0

0

0

0

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

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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