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Sea Dragon set for re-rating as Egypt returns to an even keel

As the political backdrop in Egypt improves and stabilises so savvy investors are already looking at potential investments that will benefit as the country is rehabilitated in the eyes of the wider world. 
Sea Dragon set for re-rating as Egypt returns to an even keel
On the map: Pictured are the company's main assets.

Egypt has been through an unprecedented period of change since the 2011 ousting of Hosni Mubarak.

Elected government has given way to military rule. 

But with the recent presidential vote elevating former army chief Abdul Fattah al-Sisi to head of state, the international markets are betting on a return to normality for one of the Middle East’s most influential nations. 

Its credit rating has been upgraded, the value of the Cairo Stock Exchange is back up to pre-Arab Spring levels and the country has returned to the radar screen of the international business community.

Against this backdrop, Egypt-focused Sea Dragon Energy (CVE:SDX) is heading into a pivotal period of growth – although you wouldn’t know this from the company’s valuation.

Capitalised at US$30mln (or just two-times forecast annual cash flow), the stock market’s assessment of this exploration and production firm’s worth singularly fails to reflect the normalisation of the country, which should in turn lead to a revaluation of its assets.

Neither does it give any credit for the upturn in Sea Dragon’s cash generating potential that got underway with the de-mobilisation of the drill rig on the North-West Gemsa field.

If this is a problem for current investors, it presents an opportunity to those who believe Egypt’s oil and gas industry is on its way back.

Chief executive Paul Welch describes 2013 as a year of consolidation – one in which much of its capital was tied up, contributing towards the development of Gemsa.

This year the group is able to enjoy the fruits of its labour as its field flows at a steady state 12,500 barrels a day, or 1,250 net to Sea Dragon.

This will take daily output to around 2,000 barrels a day (including production from Shukheir Marine), which analysts reckon will generate US$15mln of cash a year.

Shukheir offers further potential to boost production if, as expected, it secures a 10 year extension to the block. 

The plan initially is to work over and stimulate of a number of wells. Then in the next 12-18 months, it hopes to drill new wells targeting the untapped Kareem and Nubia horizons.

“One good Nubia well and we have the capacity to double production overnight,” observes Welch.

In January the group acquired a 12.75% stake in the South Ramadan Concession in the shallow waters in the Gulf of Suez.

With around 100mln barrels in place (and a likely recovery factor of 25-40%), there is a lot to go for, which explains why the partners are ready to commit US$23mln to developing a well “up-dip” from a previously producing location. 

Drilling work is currently slated to begin in the first quarter of next year, Welch confirms.

At the same time Sea Dragon is looking to farm down its 100% ownership of the South Disouq gas concession, before starting a 3D seismic programme on the Nile Delta acreage.

“Whether we shoot our first 3D in 2014 or early ’15 remains to be seen,” says the Sea Dragon CEO.

“We have secured the concession and started to do the technical work. So we can start to talk about the prospectivity with a little more certainty than we have today.”

Early indications suggest its potential could be significant. Prospects range in size from “half a trillion cubic feet to two-point-three trillion”, says Welch.

“What we are going to do is narrow them down, rate them and rank them and find some partners to help us drill.”

Acquisitions are also on the agenda. And the Sea Dragon chief makes no secret of his desire to increase the company’s footprint in a country that is slowly pulling back from the abyss.

“There’s been a continuous stabilisation of the political environment in Egypt,” he maintains. 

“We have never suffered; we are still 30 days out on our payables. So we are in good financial shape.

“As the political situation improves, asset prices will increase. 

“That is not good for us if we are acquiring, but as a shareholder it is great because you should start to see the market remove Sea Dragon from the penalty box.”

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