NAV and forecast update - South Disouq delays

SDX Energy 16 April 2019 Update
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SDX Energy

NAV and forecast update - South Disouq delays

Forecast update

Oil & gas

16 April 2019

Price

32.0p

Market cap

£66m

US$/£0.77

Net cash ($m) at end December 2018

17.3

Shares in issue

204.7m

Free float

91%

Code

SDX

Primary exchange

AIM

Secondary exchange

TSX Venture

Share price performance

%

1m

3m

12m

Abs

(18.0)

(22.9)

(39.1)

Rel (local)

(20.1)

(28.4)

(40.1)

52-week high/low

73.0p

32.0p

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 event

AGM

17 May 2019

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

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

In this note, we update our short-term forecasts and NAV to reflect delays at South Disouq, with first gas postponed from mid-2019 to the end of 2019. Management is confident that first gas will be delivered in Q419, with the pipeline infrastructure largely installed. SDX retains the option to deliver first gas ahead of Q419 through a leased early production facility (EPF), but only a short window exists for this to be commercially viable ahead of the completion of the permanent central gas processing facility (CPF). Conservatively, we assume first gas at the end of 2019, a six-month delay to our previous forecasts. The impact of the South Disouq delay on NAV is small at -3%, as production is deferred, although there is a material impact on FY19 cash flow expectations (CFO -20%). However, the combined impact of the South Disouq delay and lower forecast Moroccan and NW Gemsa volumes reduce our RENAV by c 13% to 86.5p/share. We expect SDX Energy to end the year with $11m in cash and no debt ($10m undrawn). Delays are unlikely to have a knock-on effect on the company’s committed eight- to nine-well H219 exploration programme.

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

57.8

24.6

27.9

11.2

(36.0)

4.3

12/20e

79.3

36.3

53.9

36.4

(30.2)

9.7

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

South Disouq pushed back

South Disouq is a key project for SDX and has the potential to be expanded from the current 50–60mmscfd of gas production to over 100mmscfd as incremental reserves are added. A six-month delay poses questions around the execution strategy and development concept, but ensuring alignment between the state, partners, local and international contractors can be a challenge, even for projects with local technical complexity.

SDX FY18 results in review

Production in FY18 at 3.6kboed was c 10% below our last published forecasts, driven by lower production at NW Gemsa where three wells remain shut in awaiting workover. Production continued to expand in Morocco reaching, more than 6mmscfd gross in March 2019 with the company guiding to a 9–11mmscfd exit rate for FY19. We now forecast average gross sales of 7.4mmscfd, down from 9.5mmscfd based on a slower than previously expected ramp-up in gas sales to new customers.

Valuation: NAV down 13% to 86.5p/share

Our NAV falls by 13%, driven by delays at South Disouq. However, the shares appear to be heavily discounting future growth potential in Egypt and Morocco. We believe successful delivery of South Disouq first gas by end 2019 and growth in Sebou gas sales to a 9–11mmscd exit rate is required to drive a re-rating.

FY19 forecasts reflect South Disouq delay

During 2018, SDX achieved operational and commercial success by growing Sebou gas sales, maintaining Egypt production levels, but South Disouq project execution fell behind management guidance. In Morocco, the company completed its drilling campaign with seven discoveries from nine drilled wells. SDX also acquired and processed 240km2 of 3D seismic leading to further drilling targets for its 12-well drilling campaign, expected to begin in Q319. Please see our update note published on 8 January for further details on upcoming drilling catalysts.

SDX’s FY18 net production increased 10% from FY17 to 3.6kboed, driving an 18% increase in EBITDA to $25.0m while maintaining a healthy net cash position of $17.3m as of 31 December 2018. Exhibit 1 below provides our updated forecasts for FY19 and FY20, and introduces forecasts for FY21, which reflect SDX’s FY18 reported results, South Disouq delays and a small change to our underlying oil price assumptions (gas unchanged). FY18 production was approximately 10% lower than Edison forecasts, due to North West Gemsa well shut-ins and slower ramp-up in Sebou gas sales. For 2019, the delaying to first gas at South Disouq in addition to lower production forecasts for North West Gemsa and Sebou negatively impacts our FY19 production forecast by -49% due to the high-volume nature of the project. This consequently decreases our revenue and EBTIDA forecast to $57.8m and $35.8m respectively.

Exhibit 1: Edison updated forecasts

Actuals

New

Old

Change

2018

2019e

2020e

2021e

2018e

2019e

2020e

2018e

2019e

2020e

Production (kboed)

3.6

4.3

9.7

9.4

4.0

8.3

10.0

(10%)

(49%)

(2%)

Revenue ($m)

53.7

57.8

79.3

78.9

53.1

73.3

86.7

1%

(21%)

(9%)

EBITDA ($m)

25.0

35.8

53.9

53.8

25.2

50.2

64.6

(1%)

(29%)

(17%)

FCF ($m)

(8.0)

(6.1)

25.2

52.8

(9.9)

7.1

46.9

(19%)

(187%)

(46%)

 

Brent ($/bbl)

71.19

65.15

62.00

65.92

71.40

61.00

64.58

N/A

7%

(4%)

SD gas price ($/mcf)

2.85

2.85

2.85

2.85

2.85

2.85

2.85

N/A

N/A

N/A

Sebou gas price ($/mcf)

10.50

10.47

10.55

10.44

10.50

10.47

10.55

N/A

N/A

N/A

Source: SDX Energy, Edison investment Research

South Disouq first gas

Achieving first gas at South Disouq is a key milestone for SDX to drive production volume and cash flow growth. Gross plateau production at 50–60mmscfd gross (55% SDX working interest) is expected to add c 5.5kboed to group production (group production was 3.6kboed for FY18), at a price of $2.85/mcf. Gas will be sold to the Egyptian Natural Gas Holding Company (EGAS). However, early in April 2019, SDX announced a delay in the start-up for gas production at South Disouq awaiting completion of the main central gas processing facility (CPF), expected to be completed in Q419. Consequently, we update our valuation by delaying South Disouq gas production and revenue by six months to start at end 2019.

Valuation

We value SDX using a conventional NAV approach based on the NPV12.5 of the company’s producing assets minus overheads and net financial liabilities. A full breakdown of our NAV is provided in Exhibit 2, using data available in the company’s last published results, as well as public sources. Key changes from our previous valuation include:

1.

a delay in South Disouq first gas to end 2019;

2.

an increase in short-term oil price assumptions, which move to $65.15/bbl and $62.00/bbl for 2019 and 2020. Our long-term oil price assumption remains at US$70.0/bbl Brent (2022);

3.

lower production at NW Gemsa, due to well shut-ins and awaiting completion of workovers;

4.

reduced production in Morocco from an average 9.5mmscfd gross to 7.4mmscfd gross based on a delay in signing up new offtake relative to previous forecasts; and

5.

a minor change in go-forward FX from US$/£0.78 to US$/£0.77.

We note that SDX is relatively insensitive to oil price assumptions, with the bulk of the valuation consisting of gas sales at five-year fixed contracted prices in Morocco that average $10.5/mcf. Our FX assumption has also changed slightly to US$/£0.77, based on the average of the last six months ending in 31 March 2019. As a result, we have decreased our RENAV to 86.5p/share from 99.6p/share (-13%), with our core value decreasing from 83.6p/share to 70.1p/share (-16%).

Exhibit 2: SDX Energy detailed valuation

Asset

Recoverable reserves

Net risked value @12.5%

Country

Diluted WI

CoS

Gross

Net WI

Net

NPV

Absolute

GBp/
share

C$/
share

%

%

mmboe

mmboe

mmboe

$/boe

$m

Net cash at December 2018

17.3

6.6

0.1

SG&A - NPV12.5 of 3yrs

(18.1)

(6.9)

(0.1)

E&A expense for exploration prospects

(14.2)

(5.4)

(0.1)

NPV of net receivable recovery

16.8

6.3

0.1

Sebou Pipeline residual value (50% cost)

16.4

6.2

0.1

Production

Meseda Base + Workovers + Rabul

Egypt

50%

90%

8.4

4.2

1.6

7.4

28.0

10.6

0.1

Gemsa 2P

Egypt

50%

100%

4.2

2.1

2.1

11.2

23.4

8.9

0.1

Sebou 2P volume + discoveries to be booked

Morocco

75%

100%

0.7

0.5

0.5

34.9

18.2

6.9

0.1

Sebou 12-well programme

Morocco

75%

75%

4.3

3.2

3.2

30.4

73.6

27.8

0.4

South Disouq/Ibn Yunus

Egypt

55%

100%

17.6

9.7

9.7

2.5

24.3

9.2

0.1

Core NAV

35.2

19.7

17.1

8.5

185.6

70.1

0.9

Development upside

Meseda Waterflood Upside

Egypt

50%

50%

5.3

2.6

1.0

5.1

6.7

2.5

0.0

Gemsa - Edison modelling on full field

Egypt

50%

70%

1.8

0.9

0.9

9.9

6.8

2.6

0.0

Exploration (known)

Kafr el Sheik prospect x4

Egypt

55%

27%

33.6

18.5

18.5

1.6

8.0

3.0

0.0

Abu Madi prospect x2

Egypt

55%

23%

5.7

3.1

3.1

1.6

1.1

0.4

0.0

Young oil prospect

Egypt

55%

19%

50.0

27.5

27.5

4.0

20.8

7.9

0.1

Group RENAV

131.6

72.4

68.2

229.0

86.5

1.1

Source: Edison Investment Research. Note: Number of shares = 204.7m, FX = US$/£0.77.

Exhibit 3 breaks down our valuation by asset, showing where our base case core NAV sits relative to the current share price. SDX currently trades at a material discount to our core valuation, despite the South Disouq delay.

Exhibit 3: SDX Energy valuation waterfall

Source: Edison Investment Research

Financials

SDX retains a robust balance sheet, with cash and equivalents of $17.3m at end FY18 and no drawn debt. The company has access to up to $10m of its RBL borrowing base, which can be drawn down if required. Forecast cash or net debt will be driven by a combination of production start-up at South Disouq, production growth in Morocco and oil prices, as well as phasing of the company’s planned drilling programme. On our base case, we expect SDX to end FY19 with $11.2m of cash, but with a significant range of uncertainty without firm dates for the start-up of South Disouq, timing of Morocco gas sales FY19 exploration wells/costs.

Exhibit 4: Cash flow forecasts and committed capex

Exhibit 5: Group production expectations*

Source: Edison Investment Research

Source: Edison Investment Research. Note: *Assumes South Disouq first gas at end 2019.

Exhibit 4: Cash flow forecasts and committed capex

Source: Edison Investment Research

Exhibit 5: Group production expectations*

Source: Edison Investment Research. Note: *Assumes South Disouq first gas at end 2019.

Exhibit 6: Financial summary

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

 

2017

2018

2019e

2020e

2021e

INCOME STATEMENT

Total revenues

 

39,166

53,679

57,786

79,327

78,950

Cost of sales (direct expense)

 

(10,254)

(11,934)

(15,059)

(17,780)

(16,700)

Gross profit

 

28,912

41,745

42,727

61,547

62,250

SG&A (expenses)

 

(8,793)

(7,270)

(7,634)

(8,015)

(8,416)

Other income/(expense)

 

1,820

1,025

1,914

1,526

1,194

Exceptionals and adjustments

 

(725)

(10,458)

(1,194)

(1,194)

(1,194)

Depreciation and amortisation

 

(17,824)

(17,268)

(11,007)

(17,436)

(15,787)

Reported EBIT

 

3,390

7,774

24,806

36,428

38,047

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

24,632

36,254

37,873

Income tax expense (includes exceptionals)

 

 

(4,541)

(7,021)

(2,564)

(2,186)

(1,865)

Reported net income

 

 

28,278

37

22,068

34,068

36,007

Shares at end of period - basic

 

 

204

205

205

205

205

BALANCE SHEET

 

 

 

 

 

 

 

Property, plant and equipment

 

 

54,445

48,680

68,176

76,379

63,719

Goodwill

 

 

0

0

0

0

0

Intangible assets

 

 

15,231

39,128

44,591

49,184

49,744

Other non-current assets

 

 

2,724

3,394

3,394

3,394

3,394

Total non-current assets

 

 

72,400

91,202

116,161

128,956

116,857

Cash and equivalents

 

 

25,844

17,345

11,199

36,367

89,127

Inventories

 

 

5,157

5,236

6,607

7,801

7,327

Trade and other receivables

 

 

37,656

24,324

25,959

20,767

16,614

Other current assets

 

 

0

0

0

0

0

Total current assets

 

 

68,657

46,905

43,766

64,935

113,068

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

12,976

11,679

10,511

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

16,054

14,757

13,589

Equity attributable to company

 

 

114,619

116,039

139,301

174,563

211,764

Non-controlling interest

 

 

0

0

0

0

0

CASH FLOW STATEMENT

 

 

 

 

 

 

 

Profit before tax

 

 

32,819

7,058

24,632

36,254

37,873

Net finance expenses

 

 

0

0

0

0

0

Depreciation and amortisation

 

 

17,824

17,268

11,007

17,436

15,787

Share based payments

 

 

538

1,194

1,194

1,194

1,194

Other adjustments

 

 

(34,613)

3,224

(1,914)

(1,526)

(1,194)

Movements in working capital

 

 

5,412

8,584

(4,448)

2,700

3,460

Interest paid / received

 

 

0

0

0

0

0

Income taxes paid

 

 

(364)

(1,091)

(2,564)

(2,186)

(1,865)

Cash from operations (CFO)

 

 

21,616

36,237

27,907

53,872

55,254

Capex

 

 

(24,917)

(44,810)

(35,967)

(30,231)

(3,688)

Acquisitions & disposals net

 

 

(24,948)

0

0

0

0

Other investing activities

 

 

760

525

1,914

1,526

1,194

Cash used in investing activities (CFIA)

 

(49,105)

(44,285)

(34,053)

(28,704)

(2,494)

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)

(6,146)

25,167

52,761

Currency translation differences and other

 

 

141

(368)

0

0

0

Cash and equivalents at end of period

 

25,844

17,345

11,199

36,367

89,127

Net (debt) cash start of period

 

 

25,844

17,345

11,199

36,367

89,127

Movement in net (debt) cash over period

 

 

21,119

(8,499)

(6,146)

25,167

52,761

Source: Company accounts, Edison Investment Research

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New Zealand

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United Kingdom

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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

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