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Research: Energy & Resources
SDX Energy has announced two successful well results in recent weeks, with additional oil discovered in Egypt and more net pay found in its first Moroccan gas well than expected. The next six months are busy ones for SDX, with eight more wells to be drilled in Morocco to supply a high value gas market. Two wells will be drilled in Egypt to delineate its existing South Disouq discovery and two exploration wells will target prospects that could materially increase the gas resources. In addition, programmes at NW Gemsa and Meseda should materially increase production. Our NAV increases from 64p to 65p/share (increases in absolute terms are partially offset by foreign exchange movements).
Written by
SDX Energy |
Solid well results kick off the campaign |
Well results |
Oil & gas |
19 October 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 Energy has announced two successful well results in recent weeks, with additional oil discovered in Egypt and more net pay found in its first Moroccan gas well than expected. The next six months are busy ones for SDX, with eight more wells to be drilled in Morocco to supply a high value gas market. Two wells will be drilled in Egypt to delineate its existing South Disouq discovery and two exploration wells will target prospects that could materially increase the gas resources. In addition, programmes at NW Gemsa and Meseda should materially increase production. Our NAV increases from 64p to 65p/share (increases in absolute terms are partially offset by foreign exchange movements).
Year end |
Revenue |
PBT |
Cash from operations ($m) |
Net 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 |
35.8 |
4.8 |
22.8 |
23.3 |
(22.7) |
12/18e |
54.9 |
20.2 |
34.5 |
16.1 |
(44.9) |
Note: Figures are as reported
First operated Moroccan well better than expected
KSR-14 was the first well in Morocco to be drilled by SDX since its acquisition of the assets. As a result, the safe drilling operations and better than expected results (20m of net pay was encountered vs 10m expected) bodes well for the rest of the campaign. These results appear to suggest the target may contain at least 50% higher volumes than the 1bcf expected pre-drill. We believe the Kenitra market will be able to absorb all extra gas in the near term. The company is now guiding that the gas will start to flow at the end of Q118, giving time for additional sales and marketing activities to fit with the (high value) gas discovered.
Egypt: Rabul wells add nearer-term volumes
The company was committed to drill the two Rabul wells and we had not expected results to be material. However, the second well (Rabul-2) encountered significantly more net pay than anticipated. As a result, management expects the well will test much more than the 500bopd that Rabul-1 produced and add to production in the coming months (with limited additional costs). The oil is heavy (20° API) and for the moment, we expect the discovery to produce between 1-2mmbbls over time.
Valuation: Increased NAV to 65p/share
We have revised our modelling to include the incremental value from Rabul discovery wells, moving our NAV to 65p/share from 64p/share. We have not increased our expectations for Moroccan production for the moment, though expect to revisit this as more wells are drilled and results announced. The nine-well programme in Morocco could see a 50% increase in gas produced, which, due to prices and tax terms, is very high value. Investors could also see material value created by the four wells planned around the South Disouq discovery. Success could add multiples of the existing discovery reserves in time and feed an increase in production over the current expectations of 50mcfd from the SD-1x discovery.
Morocco
SDX has successfully drilled its first operated well in Morocco. The KSR-14 well encountered 20m of conventional net gas pay over four intervals. The well exceeded pre-drill estimates (around double the net pay) and should lead to an increase in reserves that can be exploited from this well. The well has yet to be tested, but given the numerous production wells already in the field, there should be a high degree of confidence in the well’s potential.
The Moroccan programme will continue with eight more wells due to be drilled before the end of Q118 (the majority of which are development wells). KSR-14 continues a string of good results in the Sebou permit, with a success rate over 80%. As a result of this, and the better than expected results in net pay, we believe investors should have a high level of comfort in SDX’s ability to increase production in Morocco from current levels (around 5.5-6.0mcfd) towards (and possibly over) 10mcfd.
These increasing volumes, the high gas prices ($9-12/mcf) achieved and the benevolent fiscal terms mean the programme should create meaningful cash flows for the company. The management has indicated it will look to contract discovered volumes before the end of Q118, which allows the required commercial sale agreements to be negotiated in conjunction with ever-increasing confidence on reserves.
Egypt: Rabul wells
We had not modelled volumes from the two commitment wells at Rabul, which means the positive results at Rabul-1 and Rabul-2 add to expected 2018 cash flows and value.
The initial results from the Rabul-1 well, which tested at 500bopd (and net pay of 14.5ft) were incremental. However, the net pay encountered at Rabul-2 of 101.5ft was much better and SDX expects the well (post cleanup and ESP installation) to produce up to 2,500bopd. The reservoir is high quality (porosity of around 20% and high permeability of c 1 Darcy), but the heavy oil (20° API) means relatively low recovery factors could be expected. For the moment, we have modelled the discovery as adding 1-2mmbbls to overall production.
Valuation
We have adjusted our modelling to include the value from production from the recent Rabul discovery, which should generate incremental production volumes from 2018 onwards. At this time, we have not increased our expectations for Moroccan gas despite the better results from KSR-14. For the moment, we await the results of the rest of the Moroccan well programme and indications from the company on its ability to sell any extra gas above and beyond our current modelling (we believe it should be able to). The inclusion of discovered Rabul volumes is partially offset by updated exchange rates. Our updated NAV is 65p/share (previously 64p/share).
Exhibit 1: Valuation summary
Asset |
Number of shares: 204.5m |
Recoverable reserves |
Net risked value at 12.5% discount rate |
|||||||
Country |
WI |
CoS |
Gross |
Net WI |
Net |
NPV |
Absolute |
GBp/share |
C$/share |
|
|
% |
% |
mmboe |
$/boe |
$m |
|||||
Net (debt)/cash – June 2017e |
100% |
100% |
28 |
10.7 |
0.18 |
|||||
Cash in from equity raise |
100% |
100% |
10 |
3.8 |
0.06 |
|||||
SG&A – NPV10 of 4 years |
100% |
100% |
(10) |
(4.0) |
(0.07) |
|||||
Receivable for gas and NGLs at Gemsa |
100% |
100% |
8 |
3.3 |
0.05 |
|||||
Production |
||||||||||
Meseda Base case + Rabul |
Egypt |
50% |
100% |
6.0 |
3.0 |
1.1 |
5.3 |
16 |
6.1 |
0.10 |
Meseda Base + Workovers + Rabul |
Egypt |
50% |
90% |
5.8 |
2.9 |
1.1 |
4.1 |
11 |
4.2 |
0.07 |
Gemsa 1P |
Egypt |
50% |
100% |
3.3 |
1.6 |
1.6 |
9.5 |
15 |
5.9 |
0.10 |
Gemsa 2P |
Egypt |
50% |
100% |
1.4 |
0.7 |
0.7 |
4.3 |
3 |
1.2 |
0.02 |
Sebou 2P |
Morocco |
75% |
100% |
1.2 |
0.9 |
0.9 |
22.9 |
21 |
8.1 |
0.13 |
Sebou - accelerated programme (updated) |
Morocco |
75% |
80% |
1.0 |
0.8 |
0.8 |
11.8 |
7 |
2.8 |
0.05 |
South Disouq SD-1X well - GCA estimate |
Egypt |
55% |
85% |
10.1 |
5.6 |
5.6 |
4.6 |
22 |
8.4 |
0.14 |
Acquired working capital (NPV of 4 yr release) |
Morocco |
100% |
100% |
9 |
3.3 |
0.06 |
||||
Core NAV |
|
|
|
28.8 |
15.5 |
11.8 |
6.1 |
139 |
53.7 |
0.89 |
Development upside |
||||||||||
Meseda Base + Workovers + Waterflood + Rabul |
Egypt |
50% |
50% |
5.5 |
2.7 |
1.0 |
1.1 |
1 |
0.6 |
0.01 |
Gemsa - Edison modelling on full field |
Egypt |
50% |
75% |
1.6 |
0.8 |
0.8 |
4.3 |
3 |
1.0 |
0.02 |
Exploration (known) |
||||||||||
SouthDisouq-Kelvin |
Egypt |
55% |
41% |
15.1 |
8.3 |
8.3 |
3.4 |
11 |
4.4 |
0.07 |
SouthDisouq-Bragg |
Egypt |
55% |
41% |
14.6 |
8.0 |
8.0 |
3.2 |
11 |
4.1 |
0.07 |
South Disouq Upside |
Egypt |
55% |
25% |
11.3 |
3.1 |
3.1 |
4.2 |
3 |
1.3 |
0.02 |
Full NAV |
|
|
|
76.9 |
38.5 |
33.1 |
|
168 |
65.0 |
1.08 |
Source: Edison Investment Research
Financials
The company remains well financed, holding $28m in cash as of June 2017. The active operational programme the company is embarking on across all fronts in H217 and early 2018 should reap substantial gains in adding production and cash flows in time. Development drilling and field improvements in Morocco and Egypt add low-risk cash flows, while exploration wells (two in Morocco, two in Egypt) could add significant value.
Cashflows in 2018 will be affected by the success of the exploration and development campaign. If the two exploration wells at South Disouq are successful, the company will look to rightsize the production facilities and pipelines for the development, which may require the construction of a larger central processing unit (rather than a smaller rental unit). We would expect the company to be able to fund these expenditures from cash flows, although debt could be raised if required.
Exhibit 2: Financial summary
Accounts: IFRS; year end: December; US$000s |
|
2014 |
2015 |
2016 |
2017e |
2018e |
|
Profit & loss |
|||||||
Total revenues |
|
24,533 |
11,372 |
12,914 |
35,809 |
54,894 |
|
Cost of sales |
|
(3,639) |
(4,973) |
(5,282) |
(11,681) |
(17,889) |
|
Gross profit |
|
20,894 |
6,399 |
7,632 |
24,128 |
37,005 |
|
SG&A (expenses) |
|
(1,768) |
(3,746) |
(2,457) |
(3,419) |
(1,065) |
|
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) |
(14,862) |
(14,785) |
|
Reported EBIT |
|
13,693 |
(7,083) |
(26,701) |
4,848 |
20,156 |
|
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) |
4,848 |
20,156 |
Income tax expense (includes exceptionals) |
|
|
(4,328) |
(1,063) |
(1,503) |
(250) |
(1,413) |
Reported net income |
|
|
8,356 |
10,047 |
(28,200) |
4,598 |
18,743 |
End of period number of shares, m |
|
|
376 |
38 |
80 |
204 |
204 |
|
|
|
|
|
|
|
|
Balance sheet |
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
9,392 |
18,401 |
12,605 |
34,395 |
60,048 |
Intangible assets |
|
|
16,460 |
23,473 |
10,623 |
8,695 |
13,188 |
Other non-current assets |
|
|
1,999 |
2,106 |
2,503 |
2,879 |
2,879 |
Total non-current assets |
|
|
27,851 |
43,980 |
25,731 |
45,969 |
76,115 |
Cash and equivalents |
|
|
17,935 |
8,170 |
4,725 |
23,335 |
16,087 |
Inventories |
|
|
0 |
1,188 |
1,698 |
1,698 |
2,600 |
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 |
63,496 |
49,458 |
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 |
90,612 |
110,354 |
|
|
|
|
|
|
|
|
Cash flow statement |
|
|
|
|
|
|
|
Profit before tax |
|
|
12,684 |
11,110 |
(26,697) |
4,848 |
20,156 |
Depreciation and amortisation |
|
|
1,602 |
2,057 |
3,266 |
14,862 |
14,785 |
Share based payments |
|
|
1,064 |
761 |
(47) |
1,000 |
1,000 |
Other adjustments |
|
|
1,670 |
(12,281) |
25,742 |
(1,156) |
(3,135) |
Movements in working capital |
|
|
12,941 |
(2,183) |
(3,440) |
3,500 |
3,155 |
Income taxes paid |
|
|
(4,430) |
(4,678) |
(766) |
(250) |
(1,413) |
Cash from operations (CFO) |
|
|
25,531 |
(5,214) |
(1,942) |
22,803 |
34,548 |
Capex |
|
|
(13,634) |
(5,120) |
(11,890) |
(22,724) |
(44,930) |
Acquisitions & disposals net |
|
|
0 |
0 |
0 |
(30,000) |
0 |
Other investing activities (includes associates) |
|
|
1,110 |
4,836 |
825 |
781 |
3,135 |
Cash used in investing activities (CFIA) |
|
(12,524) |
(284) |
(11,065) |
(51,944) |
(41,796) |
|
Net proceeds from issue of shares |
|
|
0 |
0 |
10,127 |
47,750 |
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 |
47,750 |
0 |
Increase/(decrease) in cash and equivalents |
|
|
13,007 |
(9,200) |
(2,976) |
18,610 |
(7,248) |
Currency translation differences and other |
|
|
(615) |
(565) |
(469) |
0 |
0 |
Cash and equivalents at end of period |
|
17,935 |
8,170 |
4,725 |
23,335 |
16,087 |
|
Net (debt) cash |
|
|
15,728 |
8,170 |
4,725 |
23,335 |
16,087 |
Movement in net (debt) cash over period |
|
|
12,392 |
(7,558) |
(3,445) |
18,610 |
(7,248) |
Source: Edison Investment Research, company accounts
|
|
Research: TMT
We are withdrawing our estimates on Thinfilm. Our previous estimates are now out-of-date and should not be relied upon.