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Research: Energy & Resources
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.
Written by
SDX Energy |
Gas discovered at South Disouq |
Drilling success |
Oil & gas |
19 April 2017 |
Share price performance
Business description
Next events
Analysts
SDX Energy is a research client of Edison Investment Research Limited |
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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 |
Cash from operations |
Net (debt) cash |
Capex |
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.
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