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Research: Energy & Resources
SDX Energy
Written by
SDX Energy |
Volumes to grow by 2017 |
H116 results |
Oil & gas |
25 August 2016 |
Share price performance
Business description
Next events
Analyst
SDX Energy is a research client of Edison Investment Research Limited |
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Given the extensive work programme that will start to bear fruit in the second half of the year, SDX Energy’s Q216 results shouldn’t be seen as an indication of future prospects. Following the results, we have lowered our production expectations for FY16 slightly, but still see a large rise in volumes in FY17. We expect gross FY17 production at Meseda of 8.8mbbls/d (vs H116 average of 3.3mbbls/d), while Gemsa production should remain stable (7.3mbbls/d in FY17 vs H116 average of 7.3mbbls/d). This should drive a sharp increase in earnings and free cash flow generation in FY17. Our revised core NAV of 39p/share (C$0.67/share) does not include the full upside of the programme or risked exploration value at South Disouq (drilling at the turn of the year), which takes the RENAV to 68p/share (C$1.17/share).
Year end |
Revenue |
PBT* |
Operating |
Net (debt)/ |
Capex |
12/14 |
25 |
17 |
26 |
16 |
(13) |
12/15 |
11 |
19 |
(5) |
8 |
(0) |
12/16e |
14 |
(1) |
5 |
7 |
(17) |
12/17e |
24 |
10 |
10 |
15 |
(2) |
Note: *PBT are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Work overs and drilling should drive volume growth
As we discussed in the initiation, we expect net production to grow strongly at the end of the 2016 as Meseda volumes increase materially, driven by workover (eight workovers were completed) facilities upgrades, ESP replacements and waterflood activities. The aim at Gemsa is to keep production at current levels for as long as possible (we assume to H117). This should be helped by the recent development well at Al Amir (SE-24) which tested at 1.7mbbl/d liquids and 3.1mmscf/d gas, which complements the five workovers performed during the period.
South Disouq activities ongoing
Work on South Disouq is ongoing, with 3D seismic acquired ahead of schedule allowing interpretation to start. Delineation of the opportunity (currently thought to be more than a tcf on a p10 basis, and 585bcf on a pMean basis) should allow exploration drilling in late 2016/early 2017.
Valuation: Lowered slightly, still upside
We have reduced our core NAV to 39p/share (C$0.67/share) from 41p/share (C$0.71/share) given the lower production we now expect in 2016 and higher opex costs. However, we continue to believe that these volumes will increase into 2017, transforming the company into a free cash flow generating Egyptian producer, able to fund any discovery at South Disouq or reinvest in further assets in Egypt, which we believe the company is well-placed to approach. Including risked valuation of the upside to the work programme and South Disouq, our RENAV is reduced slightly to 68p/share (C$1.17/share) from 70p.
Results summary
The company’s results in H116 are largely immaterial for valuation purposes given the transformation in volumes that should happen in H216/early 2017 as the work programme starts to affect the production rates. That said, we have reduced our production estimates slightly to reflect lower than expected volumes in H116.
Opex costs of $12/bbl in Q216 are higher than we expected (and much higher than Q116), and we have reflected this in opex expectations for the rest of the year. This increased cost/bbl is a result of the increased work-over activity in Meseda and NWG during the period, which has now been completed, and the consequential lower production in Q216 as the wells were taken offline while being worked over. We have kept 2017 (and onwards) opex the same, although we would expect to see reductions in opex/bbl to start by the end of the year as volumes increase. We note that a $1/bbl increase in opex at Meseda would reduce unrisked NAV there by 8% (and 9% at Gemsa), so we will be watching this closely in coming quarters.
Exhibit 1: Summary of H116 results
|
Units |
Q116 |
Q216 |
Q215 |
6m2016 |
6m2015 |
Financial |
||||||
Gross Revenues |
USD 000s |
2,789 |
3,384 |
2,900 |
6,173 |
5,715 |
Royalties |
USD 000s |
(679) |
(863) |
- |
(1,542) |
- |
Net Revenues |
USD 000s |
2,110 |
2,521 |
2,900 |
4,631 |
5,715 |
Operating costs |
USD 000s |
(999) |
(1,290) |
(1,004) |
(2,289) |
(1,675) |
Netback |
USD 000s |
1,111 |
1,231 |
1,896 |
2,342 |
4,040 |
Funds from operations |
USD 000s |
-37 |
593 |
1,502 |
556 |
3,370 |
Cash, end of period |
USD 000s |
8,671 |
6,949 |
12,462 |
6,949 |
12,462 |
Working capital (excl. cash) |
USD 000s |
-3,257 |
1,283 |
1,172 |
1,283 |
1,172 |
Capital expenditures |
USD 000s |
5,819 |
6,475 |
1,605 |
12,294 |
1,918 |
Total assets |
USD 000s |
64,907 |
47,231 |
44,333 |
47,231 |
44,333 |
Shareholders' equity |
USD 000s |
54,457 |
38,560 |
41,660 |
38,560 |
41,660 |
Common shares outstanding |
000s |
37,642 |
75,934 |
56,348 |
75,934 |
56,348 |
OPERATIONAL |
||||||
Oil sales |
bbl/d |
606 |
554 |
- |
580 |
- |
Production Service Fee |
bbl/d |
646 |
616 |
783 |
631 |
807 |
Total assets |
boe/d |
1,252 |
1,170 |
783 |
1,211 |
807 |
Brent Oil Price |
$/bbl |
33.73 |
45.54 |
61.72 |
39.63 |
57.77 |
West Gharib Oil Price |
$/bbl |
25.65 |
30.38 |
49.42 |
27.96 |
47.52 |
Net realized price |
$/bbl |
24.46 |
31.8 |
40.72 |
28.01 |
39.1 |
Royalties |
$/bbl |
5.96 |
8.11 |
- |
7 |
- |
Operating costs |
$/bbl |
8.77 |
12.12 |
14.09 |
10.38 |
11.46 |
Netback |
$/bbl |
9.73 |
11.57 |
26.63 |
10.63 |
27.64 |
Implied gross field production |
||||||
Meseda |
bbl/d |
3,390 |
3,232 |
4,108 |
3,311 |
4,234 |
Gemsa |
boe/d |
7,570 |
6,930 |
- |
7,250 |
- |
Source: SDX Energy, Edison Investment Research estimates. Note: We estimate full field production from Meseda and Gemsa. At Gemsa, we use the boe figures (including gas and NGLs) rather than liquids sold for production volumes.
Valuation
Following the H116 report, we have reduced our valuation, driven primarily by lower than expected H116 volume and modestly higher costs as a result of the workover activity in Q216. The core NAV of 38p/share still represents good upside if the company can execute on its growth programme.
Exhibit 2: Valuation summary
Asset |
|
|
|
Recoverable Reserves |
|
Net Risked value |
|
||
Country |
Diluted WI |
CoS |
Gross |
Net |
NPV |
Absolute |
pence per share |
C$/share |
|
|
% |
% |
mmboe |
$/boe |
$m |
12.5% |
|
||
Net (Debt) Cash - post AIM listing estimate |
100% |
100% |
14 |
13 |
0.23 |
||||
SG&A - NPV10 of 3yrs |
100% |
100% |
(7) |
(7) |
(0.12) |
||||
Net financial income (expenses) NPV 2 yrs |
100% |
100% |
0 |
0 |
0.00 |
||||
2016 Exploration |
100% |
100% |
0 |
0 |
0.00 |
||||
Production |
|||||||||
Meseda Base case - Edison |
Egypt |
50% |
100% |
5.7 |
2.9 |
5.4 |
15 |
15 |
0.25 |
Meseda Base + Workovers - Edison |
Egypt |
50% |
90% |
4.9 |
2.4 |
5.7 |
13 |
12 |
0.20 |
Gemsa 1P |
Egypt |
10% |
100% |
6.5 |
0.7 |
6.0 |
4 |
4 |
0.06 |
Gemsa 2P |
Egypt |
10% |
100% |
2.3 |
0.2 |
10.2 |
2 |
2 |
0.04 |
Core NAV |
|
|
|
|
|
|
41 |
39 |
0.67 |
Development upside |
|||||||||
Meseda Base + Workovers + Waterflood - Edison |
Egypt |
50% |
40% |
13.4 |
6.7 |
4.8 |
13 |
12 |
0.21 |
Gemsa - Maintain Plateau at c. 8kboed until H117 |
Egypt |
10% |
75% |
5.0 |
0.5 |
8.8 |
3 |
3 |
0.05 |
Exploration (known) |
|||||||||
SouthDisouq |
Egypt |
55% |
13% |
64.8 |
35.6 |
3.2 |
15 |
14 |
0.24 |
Exploration NAV |
|
|
|
|
|
|
31 |
29 |
0.50 |
RENAV |
|
|
|
|
|
|
72 |
68 |
1.17 |
Source: Edison Investment Research, company financials
Financials
The company ended the period with cash of US$6.9m, which is enough to fund the existing work programme in 2016 and 2017. Importantly, the transformational exploration at South Disouq (expected at the end of 2016/early 2017) is carried and could open up a huge opportunity for SDX if successful. Our revisions imply end of year cash of US$6.6m in 2016, which should grow in 2017 as volumes increase from existing assets. As we discussed in the initiation note, capital resources would be limited in the case of development at South Disouq, but we would expect the company to have a number of avenues to bridge any temporary cashflow deficit.
Exhibit 3: Financial summary
|
|
$'000s |
2014 |
2015 |
2016e |
2017e |
2018e |
2019e |
Dec |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
||||||||
Revenue |
|
|
24,533 |
11,372 |
13,623 |
24,235 |
26,683 |
28,872 |
Cost of Sales |
(3,639) |
(4,973) |
(7,004) |
(9,362) |
(7,923) |
(6,876) |
||
Gross Profit |
20,894 |
6,399 |
6,619 |
14,873 |
18,760 |
21,997 |
||
EBITDA |
|
|
19,126 |
2,650 |
3,021 |
13,592 |
16,936 |
19,724 |
Operating Profit (before amort. and except.) |
17,524 |
593 |
(1,300) |
9,814 |
14,032 |
17,752 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(2,767) |
(6,915) |
(27,700) |
0 |
0 |
0 |
||
Share based payments |
(1,064) |
(761) |
(1,000) |
(1,000) |
(1,000) |
(1,000) |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
13,693 |
(7,083) |
(30,000) |
8,814 |
13,032 |
16,752 |
||
Net Interest |
(1,009) |
18,193 |
16 |
13 |
30 |
55 |
||
Profit Before Tax (norm) |
|
16,515 |
18,786 |
(1,284) |
9,827 |
14,062 |
17,807 |
|
Profit Before Tax (FRS 3) |
|
12,684 |
11,110 |
(29,984) |
8,827 |
13,062 |
16,807 |
|
Tax |
(4,328) |
(1,063) |
(86) |
(2,035) |
(2,888) |
(3,641) |
||
Profit After Tax (norm) |
12,187 |
17,723 |
(1,369) |
7,793 |
11,174 |
14,166 |
||
Profit After Tax (FRS 3) |
8,356 |
10,047 |
(30,069) |
6,793 |
10,174 |
13,166 |
||
Average Number of Shares Outstanding (m) |
376.5 |
37.6 |
79.8 |
79.8 |
79.8 |
79.8 |
||
EPS - normalised (p) |
|
|
3.2 |
47.1 |
(1.7) |
9.8 |
14.0 |
17.7 |
EPS - normalised and fully diluted (p) |
3.2 |
47.1 |
(1.7) |
9.8 |
14.0 |
17.7 |
||
EPS - (IFRS) (p) |
|
|
2.2 |
26.7 |
(37.7) |
8.5 |
12.7 |
16.5 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
85.2 |
56.3 |
48.6 |
61.4 |
70.3 |
76.2 |
||
EBITDA Margin (%) |
78.0 |
23.3 |
22.2 |
56.1 |
63.5 |
68.3 |
||
Operating Margin (before GW and except.) (%) |
71.4 |
5.2 |
-9.5 |
40.5 |
52.6 |
61.5 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
27,851 |
43,980 |
28,672 |
26,694 |
24,328 |
22,406 |
Intangible Assets |
16,460 |
23,473 |
8,973 |
9,153 |
9,207 |
9,212 |
||
Tangible Assets |
9,392 |
18,401 |
17,593 |
15,435 |
13,015 |
11,089 |
||
Investments |
1,999 |
2,106 |
2,106 |
2,106 |
2,106 |
2,106 |
||
Current Assets |
|
|
21,241 |
16,036 |
11,475 |
23,015 |
36,194 |
51,853 |
Stocks |
0 |
1,188 |
1,188 |
1,588 |
1,344 |
1,166 |
||
Debtors |
3,306 |
6,678 |
3,678 |
6,543 |
7,204 |
7,795 |
||
Cash |
17,935 |
8,170 |
6,609 |
14,884 |
27,646 |
42,892 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(9,035) |
(4,484) |
(4,484) |
(7,254) |
(7,893) |
(8,464) |
Creditors |
(6,828) |
(4,484) |
(4,484) |
(7,254) |
(7,893) |
(8,464) |
||
Short term borrowings |
(2,207) |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(608) |
(286) |
(286) |
(286) |
(286) |
(286) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(608) |
(286) |
(286) |
(286) |
(286) |
(286) |
||
Net Assets |
|
|
39,449 |
55,246 |
35,377 |
42,169 |
52,343 |
65,509 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
25,531 |
(5,214) |
4,951 |
10,075 |
13,300 |
15,296 |
Net Interest |
0 |
0 |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
0 |
0 |
||
Capex |
(12,524) |
(284) |
(16,712) |
(1,800) |
(538) |
(50) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
||
Financing |
(615) |
(565) |
10,200 |
0 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
12,392 |
(6,063) |
(1,561) |
8,275 |
12,762 |
15,246 |
||
Opening net debt/(cash) |
|
(3,336) |
(15,728) |
(8,170) |
(6,609) |
(14,884) |
(27,646) |
|
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(1,495) |
0 |
0 |
(0) |
(0) |
||
Closing net debt/(cash) |
|
(15,728) |
(8,170) |
(6,609) |
(14,884) |
(27,646) |
(42,892) |
|
Source: Edison Investment Research, company accounts
|
|