SDX Energy — FY20 guidance reflecting increased production

SDX Energy (LN: SDX)

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SDX Energy — FY20 guidance reflecting increased production

SDX Energy provided new production guidance of 6,750–7,000boepd for 2020, representing an increase of c 70% on 2019 rates as the company expects to see the benefit of full year production from South Disouq. The field continues to deliver at a stabilised rate of c 50mmscfed. Meanwhile the Moroccan drilling campaign has added 3.3–4.4bcf of management estimated gross reserves from six successful wells, with the remaining wells including a number of higher risk/reward options. SDX will now focus on South Disouq’s exploration campaign, with up to three wells to be drilled in 2020 which, if successful, have the potential to increase reserves and be quickly tied into the South Disouq central processing facility (CPF). Our valuation moves from a RENAV of 50.3p/share to 53.9p/share (+7%), while our core NAV increases from 45.7p/share to 49.3p/share (+8%).

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Energy & Resources

SDX Energy

FY20 guidance reflecting increased production

Guidance update

Oil & gas

29 January 2020

Price

25.8p

Market cap

£53m

US$1.26/£

Net cash ($m) at 30 September 2019

12.6

Shares in issue

204.7m

Free float

84%

Code

SDX

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

19.8

14.4

(35.3)

Rel (local)

22.5

11.2

(42.1)

52-week high/low

42.5p

16.3p

Business description

SDX Energy is a North African E&P listed in London. SDX produces oil and gas in Egypt and gas in Morocco.

Next events

FY19 results

Q120

Analysts

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

SDX Energy is a research client of Edison Investment Research Limited

SDX Energy provided new production guidance of 6,750–7,000boepd for 2020, representing an increase of c 70% on 2019 rates as the company expects to see the benefit of full year production from South Disouq. The field continues to deliver at a stabilised rate of c 50mmscfed. Meanwhile the Moroccan drilling campaign has added 3.3–4.4bcf of management estimated gross reserves from six successful wells, with the remaining wells including a number of higher risk/reward options. SDX will now focus on South Disouq’s exploration campaign, with up to three wells to be drilled in 2020 which, if successful, have the potential to increase reserves and be quickly tied into the South Disouq central processing facility (CPF). Our valuation moves from a RENAV of 50.3p/share to 53.9p/share (+7%), while our core NAV increases from 45.7p/share to 49.3p/share (+8%).

Year-end

Revenue ($m)

PBT*
($m)

Operating
cash flow ($m)

Net cash
($m)

Capex**
($m)

Production
(kboed)

12/17

39.2

32.8

21.6

25.8

(24.9)

3.2

12/18

53.7

7.1

36.2

17.3

(44.8)

3.6

12/19e

48.1

14.7

30.3

10.4

(38.5)

4.0

12/20e

53.3

13.3

32.6

12.1

(31.9)

6.9

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excludes Circle acquisition ($28.1m).

Updated guidance for 2019–20

SDX expects production to increase significantly in 2020 with the benefit of full year production from South Disouq. The natural gas field located in Egypt was brought into production in Q419, with the performance of the CPF and wells exceeding expectations and leading to an accelerated ramp-up to a plateau of gross 50mmscfed in mid-December. SDX’s remaining Egyptian fields show a slight decrease in production versus 2019, while Morocco production reflects an assumed increase in consumption from existing gas customers during 2020.

South Disouq exploration campaign imminent

In Morocco, SDX drilled eight wells in its ongoing 12-well campaign, resulting in six commercial discoveries, with the well OYF-2 being the first to step out of SDX’s core productive are and confirming it extends to the north. Drilling in South Disouq is due to commence in February. The first two wells will target prospects in the Kafr El Sheikh, which if successful can be tied back at a low cost to the South Disouq CPF. Depending on partners’ discussion, a third well will target the deeper Cretaceous reservoir, high-impact Young prospect.

Valuation: Core NAV increased to 49.3p/share

Our core NAV increases by 8% to 49.3p/share, driven by rolling forward the discount date, updating production and capital expenditures for FY19 and FY20, and updating the E&A drilling programme, resulting in a RENAV of 53.9p/share, 7% higher than our previous valuation. The current share price appears to be heavily discounting SDX-sanctioned projects, which correspond to c 90% of our RENAV, as well as any future growth potential in Egypt and Morocco.

2020 activity overview

SDX expects production to increase significantly in 2020 with the benefit of full year production from South Disouq. The company will look to build on its 2019 drilling success as it continues its campaign in Morocco and commences drilling in South Disouq. Eight wells are planned in H120, and cover the risk range from appraisal/development wells close to existing infrastructure to the exploration wells in a potential new play fairway.

Delivering on production

The company is guiding that production will be 6,750–7,000boepd in 2020, an increase of 68–74% on the announced 2019 rate of 4,020boepd driven by production from South Disouq. Having delivered first gas from the field in November 2019, performance has exceeded management expectations and production was ramped up to 50mmscfed three months ahead of schedule. Continuing strong performance is reflected in the guidance, adjusted for CPF uptime.

Exhibit 1: SDX Energy updated production and capex guidance

Production (boed)

Capex ($m)

2019

2020e

2019

2020e

South Disouq

630

4,300–4,460

20.2

6.5

Meseda

790

610–630

1.5

2

NW Gemsa

1,800

1,000–1,050

1.3

2

South Ramadan

-

-

1.6

-

Morocco

800

840–860

16.1

15

Total

4,020

6,750–7,000

40.7

25.5

Source: SDX Energy

Elsewhere in Egypt, guidance is lower, with production at Meseda affected by delays in drilling new wells due to approvals and permitting taking longer than previously estimated. The late-life NW Gemsa field is also expected to continue its decline due to increased water cut and falling reservoir pressure. SDX may exit the concession this year if sufficient cost savings are not achieved by the operator. Production is also expected to increase in Morocco to meet an assumed increase in consumption from existing gas customers during 2020.

Morocco drilling targets 15bcf

The 12-well Gharb Basin campaign, targeting 15bcf, has been ongoing since October 2019 and the company has drilled eight wells, resulting in six commercial discoveries to date. Seven of these wells have been appraisal/development wells located close to infrastructure and the company estimates that gross gas reserves of 2.0–2.5bcf have been added to its existing gross Moroccan gas reserves. The eighth well of the drilling campaign, OYF-2, is the first one to step out from the company's core productive area and has confirmed it extends to the north. Both the Upper and Lower Guebbas targets in OYF-2 were encountered, and reservoir thickness and quality were better than pre-drill expectations. Management estimates that approximately 1.3–1.9bcf of gas is recoverable from the horizons encountered. The well will be tested in February. This discovery has also de-risked a further 0.5–1.0bcf of prospective resources in the western compartment of the Lower Guebbas target, which the company expects to recover with a single development well in the future. The rig has now moved to the BMK-1 location, approximately 11km to the north of OYF-2, to further test the extent of the northern expansion of the company's core productive area. If successful, this could de-risk a number of similar nearby prospects. After BMK-1, one more close to infrastructure well and two other potentially play-opening wells in Lalla Mimouna will be drilled to complete the campaign in March.

Drilling imminent in Egypt

Preparations are continuing for two exploration wells in South Disouq and drilling is currently expected to commence in mid/late February 2020. Both wells will target the stratigraphic Kafr El Sheik reservoir, which is already producing successfully from the Ibn Yunus well at South Disouq. SDX estimates that the first well, Salah, is targeting gross P50 resources of 70.6bcfe and the second well, Sobhi is targeting gross P50 resources of 32.7bcfe. The company’s share of the exploration wells costs is estimated at $4.0m. In the event of success, the wells will require short tie-ins (of 8.0km and 5.8km) to the South Disouq CPF, with SDX’s share of tie-in cost estimated at $2.5m and $1.9m respectively. With these volumes it is anticipated that Salah would require two further development wells and Sobhi would require one more well to fully produce the resources.

A third well, Young, targeting a deeper Cretaceous reservoir, could be drilled later in the year depending on the outcome of partnering discussions.

Exhibit 2: South Disouq licence map

Source: SDX Energy

In early February 2020, SDX plans to spud an appraisal/development well in the Rabul area of West Gharib which, if successful, could add approximately gross 200–300bopd of production.


South Disouq 2P reserves upgrade

Gaffney, Cline & Associates (GCA) carried out an independent technical and economic audit to asses South Disouq reserves. This was based on a better understanding of the structure and distribution of the reservoir around the production wells provided by the reprocessing of 3D seismic data that was carried out in 2019.

Exhibit 3: Geoseismic section highlighting the four key reservoirs across South Disouq

Source: SDX Energy and Gaffney, Cline & Associates

The largest contribution to the increase came from Ibn Yunus, where the 2P gas resources increased from 26.8bcf to 46.8bcf. There was also a slight increase at South Disouq’s Abu Madi and Kafr El Sheikh reserves. Together, these resulted in 2P reserves being upgraded to 89bcfe.

Exhibit 4: Ibn Yunus mapping

Source: SDX Energy and Gaffney, Cline & Associates

We provide a more detailed description of SDX Energy’s assets in our outlook note published in December 2019.

Valuation

We value SDX using an asset-by-asset NAV derived from detailed DCF modelling. Core value includes production, development and contingent resources that could be developed, while exploration is valued only if wells are planned and funded in the next 12 months. We apply a 12.5% discount rate given the geographical distribution of the assets and the size of the company. We have updated our short-term commodities prices based on EIA latest estimates. However, our long-term oil price assumption remains $70/bbl in 2022, inflated at 2.5% onwards. We assume Moroccan gas prices of $10.85/mcf in 2020 inflating at 2.5%. Key changes include the updated reserve numbers at South Disouq; in our previous note South Disouq was valued on a management estimate of a 100bcfe 2P reserve base. This was now adjusted to the 89bcfe 2P reserves independently audited by GCA. The c 10% decrease in reserves compared to management’s estimate was offset by rolling forward the discount date and updating 2019–20 production and capital expenditures guidance in Egypt and Morocco.

Exhibit 5: Edison updated forecasts

New

Old

% change

2019e

2020e

2021e

2019e

2020e

2021e

2019e

2020e

2021e

Production (kboed)

4.0

6.9

5.9

3.6

7.3

6.0

11%

-6%

-2%

Revenue ($m)

48.1

53.3

45.3

45.6

55.3

45.7

6%

-4%

-1%

EBITDA ($m)

27.5

31.6

27.7

19.7

29.2

28.1

40%

8%

-1%

 

 

Brent ($/bbl)

64.36

64.83

67.53

63.59

60.10

64.95

1%

8%

4%

SD gas price ($/mcf)

2.85

2.85

2.85

2.85

2.85

2.85

0%

0%

0%

Sebou gas price ($/mcf)

10.59

10.85

11.12

10.59

10.85

11.12

0%

0%

0%

Source: Edison Investment Research

Our updated valuation includes the South Disouq development and drill-ready gas prospects targeting c 275bcf of mean unrisked prospective resource in Egypt. In Morocco, we include our estimates of current discovered resource and we also include Lalla Mimouna discoveries and 12 planned appraisal/development wells in our valuation, targeting 15bcf. Nine of these wells are included in our core valuation, as risks are only around individual wells meeting the minimum threshold for commerciality – we include these at a 75% chance of success for nine of these wells. The remaining three riskier Lalla Mimouna wells step out of SDX’s core area and we assume a 30% chance of geological success.

Exhibit 6: SDX Energy detailed valuation

Recoverable reserves

Net risked value @ 12.5%

Asset

Country

Diluted WI

CoS

Gross

Net WI

Net

NPV

Absolute

Per share

%

%

mmboe

mmboe

mmboe

$/boe

$m

p/share

Net cash at December 2019e

10.4

4.0

SG&A – NPV12.5 of three years

(19.4)

(7.5)

E&A expense for SD exploration prospects*

(9.2)

(3.6)

NPV of net receivable recovery

13.3

5.2

Sebou pipeline residual value (30% cost)

9.8

3.8

Production

Meseda base + workovers + Rabul

Egypt

50%

90%

7.6

3.8

1.5

7.6

26.0

10.1

Gemsa – to be abandoned in 2020

Egypt

50%

100%

2.0

1.0

1.0

1.4

1.4

0.5

South Disouq

Egypt

55%

100%

14.4

7.9

7.9

3.9

31.1

12.1

Sebou 2P + Sebou vols to be booked

Morocco

75%

100%

0.9

0.7

0.7

20.5

14.0

5.4

LM discoveries and 2019/2020 shallow wells

Morocco

75%

75%

3.3

2.5

2.5

27.0

49.6

19.2

Core NAV

28.2

15.9

13.5

127.1

49.3

Exploration (known)

Kafr El Sheik prospects x2

Egypt

55%

32%

17.2

9.5

9.5

1.6

4.8

1.9

Young gas prospect

Egypt

55%

13%

27.0

14.9

14.9

1.6

3.0

1.2

Lalla Mimouna three wells

Morocco

75%

23%

0.9

0.7

0.7

27.0

4.2

1.6

Group RENAV

73.4

40.9

38.5

139.1

53.9

Source: Edison Investment Research. Note: Number of shares = 204.7m; FX = US$1.26/£. *Assumes Young prospect drilled in 2020

As a result, our RENAV moves from 50.3p/share to 53.9p/share (+7%), with our core value standing at 49.3p/share. We note that our valuation has a significant core value component at 90% of our RENAV, and only 10% attributed to exploration and appraisal. This is materially different from the current share price of 25.8p/share. As can be seen in Exhibit 7, based on the current share price, the market is not pricing in all of SDX’s producing assets, nor its risked prospective resource

Exhibit 7: SDX Energy valuation waterfall

Source: Edison Investment Research. Note: Share price on 22 January 2020.

Financials

We forecast year-end 2019 net cash of c $10.4m and, as of end September 2019, SDX’s European Bank for Reconstruction and Development (EBRD) loan facility of $10m remains undrawn. The amount available under the EBRD facility was recently reduced to $7.5m, in line with the facility’s amortisation schedule, and discussions are underway to extend and re-establish the $10m availability under the facility. Based on the capex projections that underpin our production forecasts and SDX’s committed exploration programme, the company is fully funded and we forecast positive free cash flow from 2020. We do not foresee the need for further equity capital at this stage, unless incremental growth capex, over and above our forecasts, is dedicated to new projects or acquisitions.

Exhibit 8: Capex and cash flow forecasts

Source: SDX Energy, Edison Investment Research

Exhibit 9: Financial summary

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

 

2017

2018

2019e

2020e

2021e

INCOME STATEMENT

Total revenues

39,166

53,679

48,130

53,281

45,322

Cost of sales (direct expense)

(10,254)

(11,934)

(13,164)

(13,472)

(8,742)

Gross profit

 

28,912

41,745

34,966

39,810

36,580

SG&A (expenses)

 

(8,793)

(7,270)

(7,634)

(8,015)

(8,416)

Other income/(expense)

 

1,820

1,025

1,336

984

754

Exceptionals and adjustments

 

(725)

(10,458)

(1,194)

(1,194)

(1,194)

Depreciation and amortisation

 

(17,824)

(17,268)

(12,598)

(18,132)

(16,271)

Reported EBIT

 

3,390

7,774

14,876

13,452

11,454

Finance income/(expense)

 

(129)

(542)

0

0

0

Other income/(expense)

 

29,558

(174)

(174)

(174)

(174)

Exceptionals and adjustments

 

0

0

0

0

0

Reported PBT

 

32,819

7,058

14,702

13,278

11,280

Income tax expense (includes exceptionals)

 

(4,541)

(7,021)

(1,591)

(1,432)

(1,559)

Reported net income

 

28,278

37

13,111

11,846

9,721

Shares at end of period - basic

 

204

205

205

205

205

BALANCE SHEET

 

 

 

 

 

 

Property, plant and equipment

 

54,445

48,680

68,723

77,605

63,979

Goodwill

 

0

0

0

0

0

Intangible assets

 

15,231

39,128

44,974

49,813

50,287

Other non-current assets

 

2,724

3,394

3,394

3,394

3,394

Total non-current assets

 

72,400

91,202

117,092

130,812

117,659

Cash and equivalents

 

25,844

17,345

10,444

12,139

39,857

Inventories

 

5,157

5,236

5,000

5,117

3,320

Trade and other receivables

 

37,656

24,324

19,459

15,567

12,454

Other current assets

 

0

0

0

0

0

Total current assets

 

68,657

46,905

34,903

32,823

55,631

Non-current loans and borrowings

 

0

0

0

0

0

Other non-current liabilities

 

4,506

4,572

4,572

4,572

4,572

Total non-current liabilities

 

4,506

4,572

4,572

4,572

4,572

Trade and other payables

 

19,459

14,418

14,000

12,600

11,340

Current loans and borrowings

 

0

0

0

0

0

Other current liabilities

 

2,473

3,078

3,078

3,078

3,078

Total current liabilities

 

21,932

17,496

17,078

15,678

14,418

Equity attributable to company

 

114,619

116,039

130,344

143,385

154,300

Non-controlling interest

 

0

0

0

0

0

CASH FLOW STATEMENT

 

 

 

 

 

 

Profit before tax

 

32,819

7,058

14,702

13,278

11,280

Net finance expenses

 

0

0

0

0

0

Depreciation and amortisation

 

17,824

17,268

12,598

18,132

16,271

Share based payments

 

538

1,194

1,194

1,194

1,194

Other adjustments

 

(34,613)

3,224

(1,336)

(984)

(754)

Movements in working capital

 

5,412

8,584

4,683

2,375

3,650

Interest paid / received

 

0

0

0

0

0

Income taxes paid

 

(364)

(1,091)

(1,591)

(1,432)

(1,559)

Cash from operations (CFO)

 

21,616

36,237

30,250

32,564

30,082

Capex

 

(24,917)

(44,810)

(38,488)

(31,853)

(3,118)

Acquisitions & disposals net

 

(24,948)

0

0

0

0

Other investing activities

 

760

525

1,336

984

754

Cash used in investing activities (CFIA)

 

(49,105)

(44,285)

(37,152)

(30,868)

(2,364)

Net proceeds from issue of shares

 

48,510

114

0

0

0

Movements in debt

 

(43)

(197)

0

0

0

Other financing activities

 

0

0

0

0

0

Cash from financing activities (CFF)

 

48,467

(83)

0

0

0

Increase/(decrease) in cash and equivalents

 

20,978

(8,131)

(6,901)

1,695

27,718

Currency translation differences and other

 

141

(368)

0

0

0

Cash and equivalents at end of period

 

25,844

17,345

10,444

12,139

39,857

Net (debt)/cash start of period

 

25,844

17,345

10,444

12,139

39,857

Movement in net (debt) cash over period

 

21,119

(8,499)

(6,901)

1,695

27,718

Source: SDX Energy, Edison Investment Research


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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United States

Edison 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. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, 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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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In our last note, we commented that Sureserve was in the ‘show me’ stage and we expected it would gain traction with investors once it had delivered full-year results. The stock has risen from 30p at the time we made the comment to 50.5p as of yesterday’s close. FY19 results beat our expectations across the board (revenues, EBITA, EPS, net debt and divisional performance), affirming Sureserve’s transition to a service-based business underpinned by regulatory requirements. Over the next decade we see increased opportunity as the UK policy on energy efficiency gets more attention. We have increased our FY20e EPS forecast from 4.4p to 5.1p and introduce our 2021 forecast. Our fair value estimate increases from 45p to 65p.

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