SDX Energy — Full year results

Energy & Resources

SDX Energy

Full year results

Oil & gas

3 April 2017

Price	49.25p
Market cap	£92m
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	0.5	49.2	N/A
Rel (local)	(0.4)	44.9	N/A

52-week high/low

50p

18p

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	April
Meseda waterflood ramp-up		Mid-2017

Analysts

Will Forbes	+44 (0)20 3077 5749
Elaine Reynolds	+44 (0)20 3077 5713

oilandgas@edisongroup.com

Edison profile page

SDX Energy is a research client of Edison Investment Research Limited

SDX Energy has grown significantly over the past 12 months. To some degree, the full year results of 24 March 2017 are less relevant as an indicator of current operations of the company. The January acquisition of Circle Oil’s Moroccan and Egyptian assets and current drilling of South Disouq stand to add to the production assets of Meseda and North West Gemsa, from which SDX produced 2.1kboe/d in 2016. SDX is in good health, holding $18m in cash as of March and has material new cash flows from the Moroccan gas production. Newsflow from South Disouq will remain the near-term catalyst and could be transformational if successful. We have adjusted our valuation, leaving an updated full NAV of 57p/share.

Year end	Revenue ($m)	PBT* ($m)	Operating cash flows ($m)	Net (debt)/ cash ($m)	Cash from investing ($m)
12/15	11.4	11.1	(5.2)	8.2	(0.3)
12/16	12.9	(26.7)	(1.9)	4.7	(11.1)
12/17e	43.6	8.9	28.5	31.0	(40.3)
12/18e	57.5	24.4	40.5	58.0	(13.5)

Note: *PBT is normalised. Note: the financials above do not include the impact of South Disouq, given its potential impact on the company (but uncertain result).

Moroccan and Egypt ramping up in 2017

At North West Gemsa, the workover and ESP installation programme continues. Meseda’s waterflood operations should ramp up as ESPs are replaced, facilities are upgraded, and two development and two exploration wells are drilled. In Morocco, the company plans an aggressive campaign, drilling up to five wells in H217 in order to supply existing and new customers in a gas-deprived market.

South Disouq results in mid to late April

We have remodelled our indicative South Disouq development to start commercial production in late 2017 and ramp up to reach a six-year plateau of 25mboe/d. With such a large target (585bcfe gross), successful exploration would be transformational, more than doubling cash flows from current levels (should SDX retain its current working interest). Development could be fast and cheap, helped by nearby infrastructure. These factors drive a pre-drill risked (20%) value for the prospect at around 12p/share.

Valuation: Full NAV stays at 57p/share

We have adjusted our modelling to reflect slightly lower than expected production for Meseda and North West Gemsa. Meseda’s waterflood development should ramp-up in 2017 as facilities are brought online, with significant production increases expected by year end. Factoring in these changes and adjusting for full year results, our full NAV is essentially unchanged, at 57p/share. This includes the risked value of South Disouq, which we expect to complete in mid- to late April.

Summary of full year results

Given the changes within the company ($30m acquisition of Circle Oil assets on 27 January 2017), and with macro factors (Brent oil briefly traded at less than $30/bbl in January 2016) over the past 12 months, the 2016 financial results are largely irrelevant to investors.

Reported net loss of $28m was affected by material one-off items (primarily exploration expense and impairments totalling $29.1m). The exploration write-down is mainly due to Bakassi West well failure ($24.4m), while the impairment included a $4.3m charge at North West Gemsa, which is mainly the result of lower oil price assumptions used by the auditors (of approximately $58/bbl going forward). The assets absorbed cash from operations of $1.9m and investments of $12m.

Operationally, the 10% WI in North West Gemsa and 50% interest in Meseda generated average oil and production service fee production of 2,131boe/d. Average realised oil prices were $38/bbl (vs Brent of $45/bbl). Importantly, operating costs of $6.77/boe over the year were down year-on-year (from $14.7/boe). These reductions in opex are crucial for cash generation going forward.

In March 2017, SDX had net production of 2,794boe/d at North West Gemsa, 776bbl/d at Meseda and 663boe/d in Morocco. These compare to our 2017 full year estimates of 2,532boe/d, 950bbls/d and 810boe/d respectively. We expect North West Gemsa production to decline slightly. Increases are expected at Meseda due to waterflood operations and in Morocco because of expanded development and exploration drilling.

South Disouq

The South Disouq well was spudded in mid-March and is expected to reach target depth in mid- to late April. The well is targeting a 585bcf gas accumulation (320bcf net to SDX’s 55% WI), but recent work has identified deeper, oily targets within the Abu Roash and AEB horizons (proven as prolific producers in the Western Desert) that would be valuable additions to any gas discovery. The majority of wells costs are carried by partner IPR (45% WI).

The prospect lies close to three major gas and oil trunk lines (5-11km); any discovery can be developed cost effectively within a relatively short time frame. The company believes target depth to first production can be achieved “in months”.

According to the company, a number of proposals have been received from operators looking to farm-in to the licence. This will enable the company to make appropriate decisions over risk reduction and capital investment in the event of a discovery.

Exhibit 1: South Disouq is close to the Mediterranean coast and on trend with production	Exhibit 2: Multiple targets of gas and oil

Source: SDX	Source: SDX

Exhibit 1: South Disouq is close to the Mediterranean coast and on trend with production

Source: SDX

Exhibit 2: Multiple targets of gas and oil

Source: SDX

We have updated our illustrative discovery at South Disouq. We assume 90% gas/10% condensate with a total size of 585bcfe. We assume first production in late 2017, ramping up over time as more wells are drilled and facilities are brought online. Well costs of around $3-4m imply life of field capex of $3/boe, although costs of wells/facilities/supporting infrastructure will be better known once the gas characteristics are better understood. We assume opex of $4.5/boe and a plateau of around 25mboe/d of around six years. These assumptions are subject to considerable uncertainty.

Given the ramp-up of production and the company’s greater financial capacity after the fund raise and Circle assets acquisition, we apply a higher CoS of 20% (from 13.0% previously), as it has more capacity to fund its own development rather than required dilutive farm-down deals. This leads to an increase in South Disouq’s value to the company.

Exhibit 3: Proximity of targets to pipelines

Source: SDX

The success and subsequent development of South Disouq would transform the cash flow generation of the company. If SDX were to retain its current 55% working interest, it would have to fund material near-term capital investments, but may then see cash inflows that would dwarf current cash generation, as seen below.

Exhibit 4: Modelled production rates at South Disouq (100% WI basis)	Exhibit 5: Modelled net cash flows for SDX (55% WI basis) for South Disouq

Source: Edison Investment Research	Source: Edison Investment Research

Exhibit 4: Modelled production rates at South Disouq (100% WI basis)

Source: Edison Investment Research

Exhibit 5: Modelled net cash flows for SDX (55% WI basis) for South Disouq

Source: Edison Investment Research

Valuation

We adjust our valuation to account for reduced production expectations from Meseda and North West Gemsa in 2017 and take the actual end-year cash figure. Reductions to core NAV are partially offset by an increase in value of the South Disouq well, where we have increased our volumes to match the 585bcfe as given by the company and raised our estimated CoS slightly. This results in a full NAV essentially unchanged at 57p/share.

Exhibit 6: NAV summary

Asset	Number of shares: 187m			Recoverable reserves				Net risked value
	Country	Diluted WI	CoS	Gross	Net	Net attributable	NPV	Absolute	GBp/share	C$/share
		%	%	mmboe			$/boe	$m	DR of 12.5%
Net (debt)/cash - Dec 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 4 years		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 NW 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
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
South Disouq	Egypt	55%	20%	96	53	52.9	2.5	27	11.5	0.19
Full NAV				122.9	66.7	61.3	1.8	132	56.5	0.94

Source: Edison Investment Research, company accounts

Financials

As of December 2016, SDX Energy held $4.7m in cash. After the acquisition and equity raise, SDX held $18.3m as of 28 February 2017. Together with the cash generation capability of the Egyptian and Moroccan assets, this puts the company in a robust financial position.

Exhibit 7: Cash flows with and without South Disouq

Source: Source: Edison Investment Research. Note: there are significant capital investments in 2017 and 2018 that are offset by cash outflows. Depending on the eventual timing of investments and production, the actual cash flows in 2017 and 2018 may swing notably.

Exhibit 8: Financial summary

Accounts: IFRS; year end: December	$’000s	2014A	2015A	2016A	2017E	2018E
Total revenues		24,533	11,372	12,914	43,638	57,501
Cost of sales		(3,639)	(4,973)	(5,282)	(13,221)	(14,558)
Gross profit		20,894	6,399	7,632	30,417	42,943
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)	(17,670)	(15,872)
Reported EBIT		13,693	(7,083)	(26,701)	8,938	24,405
Finance income/(expense)		(1,009)	(96)	4	0	0
Other income/(expense)		0	18,289	0	0	0
Reported PBT		12,684	11,110	(26,697)	8,938	24,405
Income tax expense (includes exceptionals)		(4,328)	(1,063)	(1,503)	(823)	(2,085)
Reported net income		8,356	10,047	(28,200)	8,115	22,320
Basic average number of shares, m		376	52	72	187	187
Basic EPS		0.1	0.2	(0.4)	0.0	0.1

Balance sheet
Property, plant and equipment		9,392	18,401	12,605	17,273	15,831
Goodwill		0	0	0	0	0
Intangible assets		16,460	23,473	10,623	11,772	13,375
Other non-current assets		1,999	2,106	2,503	3,077	3,077
Total non-current assets		27,851	43,980	25,731	32,121	32,283
Cash and equivalents		17,935	8,170	4,725	30,950	57,995
Inventories		0	1,188	1,698	1,698	1,870
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	71,111	90,635
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	84,379	107,700


Cashflow statement
Profit before tax		12,684	11,110	(26,697)	8,938	24,405
Depreciation and amortisation		1,602	2,057	3,266	17,670	15,872
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	3,886
Income taxes paid		(4,430)	(4,678)	(766)	(823)	(2,085)
Cash from operations (CFO)		25,531	(5,214)	(1,942)	28,519	40,544
Capex		(13,634)	(5,120)	(11,890)	(11,486)	(16,034)
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)	(40,294)	(13,500)
Net proceeds from issue of shares		0	0	10,127	38,000	0
Movements in debt		0	(3,702)	(96)	0	0
Cash from financing activities (CFF)		0	(3,702)	10,031	38,000	0
Increase/(decrease) in cash and equivalents		13,007	(9,200)	(2,976)	26,225	27,045
Currency translation differences and other		(615)	(565)	(469)	0	0
Cash and equivalents at end of period		17,935	8,170	4,725	30,950	57,995
Net (debt) cash		15,728	8,170	4,725	30,950	57,995

Source: Edison Investment Research, company accounts. Note: excludes South Disouq due to distortionary nature of development in the case of drilling success.

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