Analysts at WH Ireland have initiated coverage on Southern Energy Corp (TSX-V:SOU, AIM:SOUC, OTC:MAXMD) with a $2.08 per share price target and described the company as a ‘high-growth’ US natural gas pure-play with plenty of "running room."
In a note to clients, analysts at WH Ireland said the entirety of the company’s near-term growth is expected to come from drilling up the Gwinville gas field in Mississippi. Historically, the US-based Gwinville gas field has produced prolifically and Southern intends to produce from the field’s undeveloped formations by drilling modern horizontal wells and completing them with multi-stage fracks.
“In 2023, we estimate that Southern Energy’s production will grow to an average of 42.3 one million cubic feet of natural gas equivalent per day (mmcfe/d) or 7,051 boe/d; 98% natural gas, an increase of 146% year-over-year, and that its cash flow will grow to $67.3 million, an increase of 227% year-over-year (based on a $6.50/mmbtu US gas price assumption),” said the analysts at WH Ireland.
READ: Southern Energy says its shares are now trading on the OTCQX Best Market
“We initiate with a fair value estimate of 181p/sh ($2.08/sh), which is premised on a 5x EV/CF 2023e multiple – a conservative multiple.”
Southern shares currently trade around $0.85 on the Toronto Stock Exchange and $0.60 on the OTCQX Best Market.
WH Ireland believes that Southern represents a compelling investment opportunity as it has running room with an extensive inventory of undrilled wells.
“We assume the company drills 15 wells on average per year and that almost all capital will be allocated to the Gwinville field for the foreseeable future,” said the analysts.
“We expect the company to drill its first higher-risk, higher-impact well at the Williamsburg field, targeting the Cotton Valley formation – success would be transformational.”
Strong leadership noted
The analysts also touted the firm’s “strong leadership” based on the track records of the management team consisting of CEO Ian Atkinson, CFO Calvin Yau and Gary McMurren who is the chief operating officer. Southern’s leadership team has a successful history of forging accretive acquisitions and deploying advanced technology.
WH Ireland also noted that the surge in US natural gas prices will be further supported by long-term global demand for US natural gas, particularly from Europe.
“US natural gas is the only practical means, in our opinion, of alleviating the acute and rapidly accelerating global energy crisis – Southern Energy has it,” added the analysts. “With a “buy low, drill high” strategy, the company has been active in the Southern US since 2013; with surging natural gas prices, now is the time to drill.”
Southern 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.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
Follow her on Twitter: @UttaraProactive