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SDX Energy Inc: THE INVESTMENT CASE

Upbeat Egyptian newsflow providing boost in transformational year for SDX Energy

The AIM-listed group transformed itself at the start of the year with the US$30mln acquisition of the Egyptian and Moroccan assets of failed fellow AIM firm Circle Oil
Egyptian pyramids
INVESTMENT OVERVIEW: SDX The Big Picture
However, it has been a pre-existing asset, the South Disouq licence in Egypt which has been creating the most excitement recently

The first five months of 2017 have been a pretty busy and successful time for newsflow from Africa-based explorer SDX Energy Inc. (LON:SDX) (CVE:SDX) and its share price has responded well, jumping over 70% in the year to date.

The AIM-listed group transformed itself at the start of the year with the US$30mln acquisition of the Egyptian and Moroccan assets of failed fellow AIM firm Circle Oil, accompanied by a US$40mln fund-raising via a placing at 30p per share.

The Circle assets deal saw SDX’s net production increase by almost 250% to 4,705 barrels oil equivalent per day, while reserves rose by 64% to 12.03mln barrels oil equivalent.

WATCH: SDX Energy boss 'very pleased' with better than expected well test

However, it has been a pre-existing asset, the South Disouq licence in Egypt which has been creating the most excitement recently.

Yesterday, SDX hailed a “highly positive” test of its SD-1X exploration well on the South Disouq asset, which flowed with a better-than-expected 25.8mln standard cubic feet of dry gas.

 The well has now been shut in for initial build-up work but the firm is hoping to get SD-1X into commercial production as soon as possible.

Commenting yesterday on the test results, SDX’s chief executive Paul Welch said: "Underpinned by the strong local gas demand, today's news is highly positive and confirms the overall success of the recent SD-1X campaign.”

He added:  “Not only do we have this excellent result in the upper Abu Madi section, we also remain very upbeat about the oil potential in the deeper Cretaceous horizon, where a working petroleum system was also discovered.”

The company owns 55% of South Disouq and is operator of the licence for the field.

‘Great strides’ made across the group’s portfolio

But South Disouq remains just one strand in the SDX story.

Earlier in May, Welch had lauded the “great strides” made across the group’s portfolio at the start of 2017 as he unveiled results for the three months ended March 31.

The SDX boss noted that the start of the year had brought good momentum, and added that the company was looking forward to capitalising on the opportunities ahead.”

He said the group is “extremely active” across the rest of its North Africa portfolio, which will include development and exploration drilling in Morocco in the next quarter.

The company is advancing a programme of five new wells for the second half of the year at the Sebou asset in Morocco - including three development wells and two exploration wells - and it intends to increase gas volumes to existing customers and agree contracts with new customers.

Meanwhile, at the Lalla Mimouna asset in the country there are plans for two exploration projects in the second half.

In Egypt, aside from South Disouq, SDX was upcoming work programmes including a 12-well work-over programme planned at the North West Gemsa and new drilling at the Meseda asset in the country.

Net revenues, net cash strong in first-quarter

For the first three months of 2017, SDX reported net revenues of US$8.1mln, up from US$2.1mln in the same period of last year, as realised average oil prices improved drastically to US$44.38 per barrel compared to US$24.46 in the same quarter of 2016.

Net cash generated from operations rose to US$3.1mln, from US$1.8mln, and the company ended the period with US$21.1mln of cash and equivalents.

The company reported comprehensive income of US$26.9mln, with the Circle assets acquisition accounting for a US$29.5mln gain.

At the beginning of May, broker Cantor Fitzgerald upgraded its valuation for SDX Energy to reflect the success of the SD-1X exploration well.

Repeating a ‘buy’ recommendation, Cantor lifted its target price for SDX to 83p per share, up from 78p previously, offering some 45% upside to the current share price of around 57p.

Analyst Sam Wahhabi said: “In our view, SDX’s shares offer investors a low cost entry point to a growing producer with a high impact, fully funded exploration and appraisal programme.”

He added: “In the current climate, we continue to advocate companies that pursue low cost development /production strategies and SDX has certainly delivered on this criterion, with further running room in the share price to come in our view.”

Meanwhile, in research published at the end of April, Capital Network analyst Lionel Therond said he reckoned that only part of the estimated current value of South Disouq is priced in the SDX share price, leaving at least 35p of potential risked upside.

WATCH:  Capital Network's Lionel Therond on SDX Energy

Therond also said he believes that SDX “benefits from an experienced management team with CEO Paul Welch (ex-Shell, Pioneer, Chariot and Sea Dragon Energy) and CFO Mark Reid (ex-BNP-Paribas, Aurelian and Chariot), and a special mention for Ahmed Moazz, a former Vice-Chairman of EGPC and current Head of SDX Energy’s Egyptian office who is a significant asset when negotiating with Egyptian authorities.”

Given that experienced management team, and the potential for further positive newsflow from  South Disouq and SDX’s other exploration programmes as the year progresses that upside potential looks very likely to be achieved.

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