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Today's Oil & Gas Update - SDX Energy and more...

Published: 10:56 19 Mar 2021 GMT

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Non-Independent Research; Marketing & Sales Commentary - MiFID II exempt information – see disclaimer below

 

Market Update: Friday 19 March 2021

SDX Energy (AIM:SDX): FY20 results ahead of expectations

 

Energy Prices         

Brent Oil US$63.0/bbl vs US$67.2/bbl yesterday

WTI Oil US$59.8/bbl vs US$63.8/bbl yesterday

Natural Gas US$2.51/mmbtu vs US$2.52/mmbtu yesterday

 

Oil Price News 

  • Oil prices saw a significant pull back yesterday afternoon with WTI sliding 8.68% to US$58.99/bbl whilst Brent fell below US$63/bbl
  • It is the biggest drop in absolute terms since April 2020, when US oil prices slipped into negative territory
  • The market has been broadly conflicted in its predictions during the recent price rally, with bulls signalling there is more room to run, making proclamations of a coming super cycle
  • Others, more cautious in their outlook, have warned for a couple of weeks that the optimism present in the oil markets were unjustified
  • The recent rally was largely on the back of OPEC+ production cuts instead of ramping up production as the market had anticipated
  • The passing of the third round of stimulus in the US had also bolstered oil market sentiment
  • But a rising dollar, increased crude inventories in the US, growing fears of a resurgence in coronavirus cases and vaccine safety concerns in Europe have proven to weigh on any gains
  • Those concerns are linked directly to oil demand resurgence and markets are viewing this demand picture as less favourable today, as shown by crude futures which show the market backwardation is waning
  • WTI’s front-month contract is once again trading at a discount to the following month
  • Crude oil WTI April contract is now trading at US$59.46/bbl while the May contract is trading at US$59.57/bbl

Gas Price News 

  • Natural gas prices moved lower on Thursday following a smaller than expected draw in natural gas stockpiles according to a report from the US Department of Energy
  • Natural gas in storage was 1,782Bcf as of Friday 12 March 2021, according to the EIA
  • This represents a net decrease of 11Bcf from the previous week
  • Expectations were for a 31Bcf draw in stockpiles according to survey provider Estimize
  • Stocks were 253Bcf less than last year at this time and 93Bcf below the five-year average of 1,875Bcf
  • At 1,782Bcf, total working gas is within the five-year historical range
  • The weather is expected to remain warmer than normal for most of the US East coast for the next 6-10 day as well as during the next 8-14 days

Company News

SDX Energy (AIM:SDX): FY20 results ahead of expectations

Share price: 17.2p, Market Cap: £35.3m

  • Despite a challenging global and sector backdrop, SDX’s FY20 results underline a year of operational progression.
  • On a financial level, the Company achieved a netback of US$36.5m, 29% higher than the same period in 2019, was driven by a full year of production from South Disouq.
  • Morocco Netback was higher reflecting a strong recovery from COVID-19 shutdowns, however West Gharib experienced lower production due to increased water cut and lower oil service fee realisations due to lower oil prices in 2020.
  • Operating expenses were US$2.9m higher predominantly due to a full year of South Disouq operations, partly offset by cost savings and lower workover activity at West Gharib.
  • The lower per unit Netback of US$16.73/boe in 2020 (2019: US$34.75/boe) results from the increased contribution of South Disouq in 2020 which has high volume, lower netback production, versus 2019 which only included South Disouq from the start of production in November and therefore reflected a higher proportion of volumes from Morocco, which achieves high netbacks. 
  • EBITDAX was 39% higher at US$32.9m due to the higher netback, lower recurring G&A expenses and lower transaction costs in 2020, partly offset by lower profitability from the Company’s investment in the joint venture that operates the West Gharib asset due to the lower oil price environment.
  • Average entitlement production of 6,397boepd, an increase of 57% year on year due to strong production levels mainly from South Disouq, at 49.5MMscfe/d equating to 4,532boepd net to SDX.
  • 2020 production from core assets either exceeded or was at the top end of management guidance, despite COVID-19 interruptions in Morocco.
  • Capex was below guidance, primarily due to drilling at West Gharib being deferred due to the lower oil price environment in 2020.
  • 2021 guidance for production has been set at between 5,620–5,920boepd and for capex between US$25.0-US$26.5m.
  • The Company’s operated assets recorded a carbon intensity of 1.8kg CO2e/boe in 2020 which is one of the lowest rates in the industry.
  • The South Disouq two-well drilling campaign finished with a discovery at, SD-12X (100% working interest to SDX). First gas was achieved in December 2020, 5-6 weeks ahead of schedule.
  • Following further review of the 3D seismic after the SD-12X discovery, c.233Bcf of close to infrastructure, mean unrisked recoverable volumes, located in productive horizons have been high-graded to drill-ready prospects.
  • Subject to receipt of final Ministerial and Parliamentary approval for a two-year exploration concession extension, the Company plans to drill the Hanut prospect targeting 139Bcf in Q3 2021.
  • Hanut will be part of a two-well campaign with IY-2X well, a development well in the eastern part of the Ibn Yunus field, seeking to bring forward production and cash flow. The Company’s partner has confirmed that it will participate in both wells.
  • Post-period end, SDX obtained approval for a ten-year extension to the West Gharib Production Services Agreement increasing audited 2P reserves in this core oil asset as at 31 December 2020, by 60% year on year, or 119% taking account of 2020 production, to 3.52MMbbls.
  • The Moroccan drilling campaign in 2019/20 resulted in seven discoveries from nine wells, with the tenth well, LMS-2, completed and now expected to be tested as part of the 2021 drilling campaign.
  • Further analysis of the LMS-2 well results has revealed that Top Nappe structures, similar to LMS-2, are present throughout the Company's acreage.
  • Subject to a successful flow test of LMS-2, the intention is to target the Top Nappe as part of the planned 2021 Moroccan drilling campaign, to commence in H1 2021.
  • Gas consumption in Morocco has returned to March 2020 pre-COVID-19 levels.
  • In December 2020 an existing customer’s second factory started up, contributing to higher guidance for FY2021.
  • As at 31 December 2020, the Company's working interest share of audited 2P reserves was 11.1MMMboe and audited 2C contingent resources was 0.9MMboe.
  • The 0.9MMboe of 2C resources relates to the Meseda and Rabul producing assets in its West Gharib concession in Egypt and will be converted to 2P reserves upon approval of a development plan.

Our take: A strong set of FY20 financials reported by SDX today. Operationally, FY20 was another year of progression for the Company and although the COVID-19 pandemic contributed to a low oil price environment, SDX’s high fixed-price gas assets in both Egypt and Morocco demonstrated the cash-generative resilience that exists within its portfolio. While Morocco production saw demand fluctuations early in the period, SDX is now back to pre-lockdown levels of production with FY21 production expected to be 8-12% higher than in 2020. Despite a small curtailment to ensure operational efficiencies in Egypt, SDX has entered 2021 with a stable production profile in our view. Operating cashflows, and its existing US$10m cash position provides sufficient headroom to carry out an active drilling campaign of nine to eleven wells targeting exploration and development opportunities in Egypt and Morocco, including the potentially transformational gross 139Bcf Hanut-1X well in South Disouq in Egypt and the testing of the Company’s newly discovered Top Nappe play in Morocco.

 

Research – Oil & Gas

Sam Wahab - 0203 470 0473 / 0784 385 5037

sam.wahab@spangel.co.uk

 

Sales

Richard Parlons – 020 3470 0472

Abigail Wayne – 020 3470 0534

Rob Rees – 020 3470 0535 

Grant Barker – 020 3470 0471  

 

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+SP Angel employees may have previously held, or currently hold, shares in the companies mentioned in this note.

 

Sources of commodity prices

 

Oil Brent, WTI - ICE

Natural Gas -NYMEX

 

 

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Buy - Expected return >15%

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