SDX initiation

SDX Energy (SDX) is a London/Toronto-listed company with interests in two producing onshore fields in Egypt. Crucially for a small E&P, it will be cash flow positive in 2017 and is unlikely to return to the market for more equity to develop assets. The current work programme (of new wells, workovers and water flood) could see a more than doubling of recoverable volumes and is both cheap and relatively low risk. Once this work starts to bear fruit (later in 2016/17), the low-cost production will put SDX in the enviable position of being able to largely fund development of exploration prospects, while giving it resources and operational credibility to add further assets in Egypt. Our analysis indicates that the share price is more than supported by current operations, giving upside potential for the near-term production increases we see as likely and free exposure to exploration upside.

Meseda and NW Gemsa provide value upside
SDX’s plan to change pumps and institute a water flood at Meseda (50% WI) should take production to over 8mboe/d (gross), while US$8m gross investment at NW Gemsa (10% WI) could see it maintain production for a year or more. After this, the fields should produce free cash flow, even down around US$30/bbl in 2017.

Exploration is a catalyst
This cash flow generation and operational expertise gives the management options. Material, near-term (carried) exploration drilling at South Disouq is targeting 65mmboe of gas/condensate, which would lead to a re-rating for investors if successful. SDX holds a high working interest (55%) and development would likely be low cost and quick (the asset lies close to existing infrastructure).

Valuation: Existing portfolio more than supports price
Our analysis indicates the shares are supported by existing production. Successful re-invigoration at Meseda/NW Gemsa should lead to unlocking further (low-risk) value. Our core NAV of 41p/share includes risked value for the reinvigoration programme but could see further upside (to 56p/share) if the water flood programme is effective (not including risked exploration value at South Disouq). Value from any acquisition(s) will hinge on the size/price and possible upside of the targets, but SDX should be well placed to take part in consolidation within Egypt given the large number of opportunities in-country. Its policy of accepting payments in Egyptian pounds reduces payment risk and funds internal growth in the mid-term, but could limit potential for dividends/other corporate activity in the longer term.

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