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SDX Energy weathered the oil price storm, now will 2017 be its best year?

Field development, exploration and even acquisitions could drive SDX Energy's growth through 2017.
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Exploration drilling will start at South Disouq in early 2017

SDX Energy Inc’s (LON:SDX, CVE:SDX) latest quarterly results provide further evidence that the Egypt focussed petroleum firm has weathered the worst of the storm.

Thanks to a quality asset base comprising low-cost production it has been able to keep tight grip on its operations and, crucially, being debt free kept the group away from the perils that befell Egypt peers such as Petroceltic and Circle Oil in 2016.

“We couldn’t control oil prices but we could control costs,” chief executive Paul Welch told Proactive Investors.

“We could keep costs down, at less than US$10 a barrel, and so that meant even in the low, low price environment seen in February we were still cash-flow positive at asset level.

Welch added: “We were cashflow positive, we didn’t have any debt. We were much stronger into this downturn than perhaps some other companies were.”

At the moment the financials are a bit of a distraction for investors who are more readily anticipating new of upcoming drilling in the South Disouq exploration project which is located in an exciting area of the Nile Delta.

South Disouq is located at the southern fringe of what’s known as the Abu Madi-Baltim, a trend that is already host to major gas projects – estimated to have 6.3 trillion feet of gas and a 100mln barrels of liquids.

Perhaps unsurprisingly the primary target here is gas, indeed the concession is presently estimated to contain some 1.3 trillion cubic feet of resource potential.  New seismic work, which is still being interpreted, has however unearthed an unexpected ‘blue sky’ opportunity.

This year’s 3D seismic indicates deeper exploration prospects which, significantly, could hold oil rather than gas.

It adds a new dimension to South Disouq, and is suspected to be the reason the project has suddenly got the attention of high-calibre operators that are now interested in taking a stake in the project.

SDX has 55% of South Disouq, its share of drilling costs are already carried by its partner, and according to chief executive Paul Welch a second farm-out wasn’t part of the plan – nonetheless, the names that have been enquiring causes some pause for thought.

“We’ve been approached by some very serious companies,” Welch said.

“We never had the intention of farming out again because we’ve got 55% and our well cost is carried, so we don’t have to pay for the well, but given the people that have contacted us we may do some type of additional farm-out if it is very attractive.

“If someone wants to offer us a knockout deal, we’re definitely not going to turn it down.”

Plans for South Disouq

It is anticipated that drilling may get underway at the end of January or in early February, subject to a rig contract being sealed and permitting secured before mid-January.

It would be a 30 day drill programme.

The well’s first target is the shallower gas prospect. This is seen to be a continuation of the discoveries in the Abu Madi-Baltim trend and importantly it is substantially de-risked given the correlation to the seismic interpretation and nearby well successes.

The deeper oil prospects, similar to prolific oil reservoirs found in the western desert region, are untested in this northern part of Egypt. Accordingly, the oil prospectivity is less certain and that part of the well in a greater risk.

All told it is a potential high impact well for SDX, albeit neither the company nor Paul Welch have committed to a pre-drill estimate of the specific projects size (mainly because a more comprehensive assessment of the whole South Disouq concession is presently being worked on, incorporating insights from the 3D seismic).

But, there is one indicator of South Disouq’s potential scale; it is estimated that successful wells could potentially flow at rates between 3mln cubic feet per day and 20mln.

It is expected that permitting will allow more than one well to be drilled on the concession, though it is not yet clear if or when more drilling might follow the first well.

Gas infrastructure is only a few kilometres away from the well location, and as such Welch explains that a new discovery could be turned around pretty quickly into initial production. Indeed, he says a start-up within 2017 could even be possible.

Mesada development a key driver for 2017

Whilst the existing production base has sustained the business and South Disouq promises quick-money impact – should drilling deliver good results – the group’s predictable growth comes from the continued development of the Mesada field.

Here, a programme of field upgrades and enhanced recovery via waterflooding aims to lift output, from

It is forecast that Mesada could average between 5,000 and 6,000 barrels per day by the end of next year.

Asset acquisitions could open up further growth

SDX was formed just over a year ago, by the merger of Sea Dragon Energy and Madison Petrogas, and given the recent turbulence through the sector more deals are possible.

When asked about the opportunities currently available, Welch said: “Because of the downturn and because of companies having a significant amount of debt exposure, you now have companies that haven’t weathered the storm well and so there are assets on the market that are going for attractive prices.

“So, we’d like to think that in 2017 we would take advantage of some of those opportunities.”

Discipline will continue to be an important consideration though. “The key for us moving forward is to stick to what we’ve done best which is look for assets that are high margin, so producing at relatively low opex numbers, that will allow us to control costs and develop them in a way that makes sense and maintain a positive cashflow with relatively small amounts of leverage.

“That way we’re prepared to expand in the good times and weather the downturns. And let’s just hope that we are through the worst of it and 2017 is a lot more stable for the oil price than we’ve seen in past couple of years.”

2017 could be the ‘best’ year for the company to date

As City broker Cenkos this morning pointed out the coming year offers the possibility of a significant step-up in production and reserves.

Welch, meanwhile, puts a sharper point on it.

“We’ve been doing a lot to get ready and 2017 is really when we have the ability to execute all these things.

“It is going to be a good year for us … well, I think it is going to be the best the company has had for a long time. So, we’re excited about it.”

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