Southern Energy Corp (TSX-V:SOU, AIM:SOUC, OTC:MAXMD) has released its second quarter financial and operating results for the three and six months ended June 30, 2022, showing $3.6 million of adjusted funds flow from operations in Q2 2022, an increase of 490% from the same period in 2021.
In the results statement, Ian Atkinson, president and CEO of Southern, commented: "We are pleased with the success of our recent equity financing, which allows us to accelerate the organic growth strategy portion of our goal to reach 25,000 boe/d. The success of these first three wells at Gwinville have already increased our corporate production by over 100%."
He added: "We are truly excited by our ability to begin a long-term development drilling program to unlock shareholder value due to the significant reserves, production and cashflow growth in Gwinville and our other assets. Cashflow generated from this development will support our fundamental strategy of both organic and inorganic growth of natural gas weighted assets in the Gulf Coast area of the United States."
Second quarter 2022 financial highlights:
- Net earnings of $2.8 million in Q2 2022 ($0.03 earnings per share - basic and diluted) compared to net earnings of $3.1 million in the same period of 2021 (which included a one-time gain of $4.5 million on debt retirement)
- Petroleum and natural gas sales of $10.3 million in Q2 2022, an increase of 176% from the same period in 2021
- Q2 2022 average production of 14,169 Mcfe/d (2,362 boe/d) (95% natural gas), which included only a partial month of June from the three new Gwinville wells, an increase of 14% from the same period in 2021
- Completed and successfully brought online all three wells from the initial Gwinville appraisal program
- Exited Q2 2022 with net debt of $12.8 million, and net debt to annualized adjusted funds flow from operations of 0.9 times
- Average realized oil and natural gas prices for Q2 2022 of $109.01/bbl and $7.53/Mcf, respectively, reflecting the benefit of strategic access to premium-priced US sales hubs
On July 7, 2022, the company completed a bought deal prospectus offering and placing raising aggregate gross proceeds of $31.0 million, and leaving Southern with approximately $33.2 million of cash as of July 31, 2022. On August 19, 2022, Southern entered into a non-binding term sheet with its current lender in respect of its senior secured term loan to increase its total credit facility to $35 million.
The company said the combination of the recent equity financing and credit facility expansion, uniquely positions Southern to execute a meaningful growth strategy.
Southern said that based on the success of the initial three well appraisal program at Gwinville, its board of directors has approved an accelerated capital budget of US$34.4 million for the balance of 2022, which will allow the company to commence a long-term drilling program beginning in Q4 2022 in the Gwinville field.
Major services and equipment have been secured for the development program to optimize capital and operational efficiencies, it added. The approved drilling program will target multi-zone horizontal potential in the Upper Selma, Lower Selma and City Bank formations with a further five horizontal wells, as well as pad construction, in-field pipelines and water disposal well conversions that will help service the next few years of Gwinville development.
Southern said its management expects to have the first pad of three horizontal wells on stream prior to year-end but with limited production.
Outlook for 2022
Southern said it has secured the equipment and major services necessary to begin the next phase of drilling at Gwinville in Q4 2022. The company added that it intends to strategically and efficiently deploy cash from the recent equity financing to capitalize on the strong natural gas pricing in the Southeastern US and robust economics at the Gwinville field, to materially grow itself organically over the coming years.
It noted that natural gas pricing has remained strong in the Southeastern US spot and forward basis markets highlighted by the recent August 2022 settlement price where a portion of Southern's natural gas is selling for approximately US$5.00 per MMBtu premium to NYMEX. In recent weeks, this region has had the highest priced natural gas market in the US and futures markets indicate premiums to NYMEX extending out to 2026. At current pricing the company's development drilling at Gwinville is expected to payout in far less than 12 months. The company said it continues to monitor these premium prices and is prepared to hedge additional basis exposure at these elevated basis premiums.
Calvin Yau, chief financial officer of Southern, commented: "The strength of natural gas spot and basis pricing premiums to NYMEX in Southeastern US has continued positively over the past month. Our long-term drilling program will add new unhedged production allowing Southern and its shareholders to realize significant additional value, from sales made at premiums to NYMEX."
Management changes
Southern Energy also announced the promotion of Gary McMurren, VP Engineering, to the role of chief operating officer, the promotion of Jeff Forrester, engineering manager, to the role of VP Engineering and of Ryan Read, controller, to the role of VP Finance.
The comp[any noted that McMurren has over 22 years of engineering, operational and management experience in the oil and gas industry and was a co-founder and VP Engineering of Gulf Pine Energy Partners. He was formerly the director of Light Oil at Athabasca Oil Corp. Prior to that, he held senior engineering positions at Galleon Energy Inc, ARC Resources Ltd, and Talisman Energy Inc. He holds a Bachelor of Science in Chemical Engineering Degree and a Professional Engineer designation.
It pointed out that Forrester has over 15 years of engineering, operations and management experience in the oil and gas industry. He was the engineering manager at Gulf Pine and previously held both engineering and operations roles at Athabasca, and ARC Resources Ltd. He holds a Bachelor of Science in Chemical Engineering with a minor in Petroleum Engineering and is a designated Professional Engineer.
The company said Read has over 17 years of financial, operational and management experience in the oil and gas industry. He was the controller of Gulf Pine and prior to that he was the assistant controller at Long Run Exploration Ltd and has worked both financial and operational roles at Galleon Energy Inc and Devon Canada. He holds a Bachelor of Commerce Degree in Finance and Risk Management, a Chartered Financial Analyst Designation, and is a member of the Chartered Professional Accountants of Alberta.
Southern Energy is a natural gas exploration and production company characterized by a stable, low-decline production base, a significant low-risk drilling inventory and strategic access to premium commodity pricing in North America. The company has a primary focus on acquiring and developing conventional natural gas and light oil resources in the southeast Gulf States of Mississippi, Louisiana, and East Texas.
Its management team has a long and successful history working together and have created significant shareholder value through accretive acquisitions, optimization of existing oil and natural gas fields and the utilization of re-development strategies utilizing horizontal drilling and multi-staged fracture completion techniques.
Contact the author at jon.hopkins@proactiveinvestors.com