SDX Energy is a company story Share Talk intends to follow over the next 12/18 months. The Company successfully raised approximately £7.6 million (approximately US$11 million) through a placing and subscription (the “Placement”) of 42,201,835 common shares in the capital of the Company (the “Placement Shares”) at 18 pence (C$0.33) per Placing Share May 20, 2016.
With the oil price rising, a few investors may be looking for new opportunities to take advantage off in this turn of events. Enter SDX Energy (SDX), a newly listed company on AIM formed by a merger of Sea Dragon Energy and Madison PetroGas which came to the market on the 20th of May 2016. Whilst most cocktails are drunk by the pool in holiday resorts in Egypt, this looks to a perfect mixture of an exploration company with assets already in production.
A familiar theme of recent ventures on AIM involve raising cash then acquiring assets. This new combination is already ahead of the game, bringing with it already two producing assets
The CEO, Paul Welch, has brought some enthusiasm to the AIM market. The recent placing raised of $11 million was oversubscribed and given the company the opportunity to double its existing production and triple its reserves. Not just content with seeking investor funding, the directors also got involved.
Obviously this story unfolding caught our attention so we took the time to pose some questions to the company which they kindly answered.
Q SDX Energy Inc. Admission to AIM London and First Day of Dealings was 20 May 2016, why the dual (TSX-V / AIM: SDX) listing?
Principal rationale for seeking a dual listing on AIM was that we wanted to diversify our shareholder register by bringing on supportive shareholders who understand our business, sector and long term growth strategy. London has a large pool of investor money that can be tapped if the story presents a particularly compelling investment proposition. The other reasons we listed on AIM are that the management team is based in London and the London market understands Egyptian focused E&P operations which provides us with good comparative peer group.
Q Are you happy with the institutional investors that helped you successfully raise approximately £7.6 million (approximately US$11 million)
We are very happy with the institutional investors that participated in the Placing to raise $11m. We had some impressive names participating such as JP Morgan and City Financial, which we view as a serious endorsement of our story – especially for a small-cap company in a low oil price environment.
Q $11m raised on AIM listing, is this on top of the $8m free cash?
Our balance sheet post placing contains US$15.4m and we have no debt so we are in a very stable financial position relative to many of our industry peers. These newly raised funds will enable us to carry out an aggressive work programme on our Meseda asset that will look to double production and increase reserves by 3X from this asset. Also at current prices it will allow us to generate an additional $10MM in cash flow per annum.
Q Presentation slides from May 16 say “Significant production growth upside recently identified in Meseda. Potential to 2X existing production rates and to 3X reserves “. For clarity what are the production rates?
Current production rates from Meseda are 4,169bopd and a recent study by the independent consultant Gaffney Cline & Associates concludes that our work over programme on the asset, which will include replacing most of the pumps on the producing wells and implementation of water flooding, will increase production to a minimum of 8,550bopd gross.
Q Meseda is a high margin asset with a netback of $15.95/bbl in the current price environment, with this in mind, will this be your flagship for 2016?
We are fortunate to have 2 producing assets, both of which are low-cost and provide good resilience in a low oil price environment. If the workover programme on Meseda yields the production ramp-up results anticipated by GCA’s independent study and increases the netback further then it will certainly be regarded as our flagship.
Q The cash to hand, is this earmarked for the work program only over the next 12 months or can we look forward to acquisitions or increasing our economic interest / ownership of some of the assets?
The funds raised through Placing will primarily be used for the Meseda programme and completion of our 3D seismic programme at our exploration asset South Disouq. We do however have good positive free cash flow to strengthen the balance sheet further. We are actively screening new opportunities that are in line with our geographical and strategic focus and would hope to move quickly on something if we found the right match that was particularly compelling.
Q Are Circle Oil partners in the AASE-24 well in Egypt? They essentially announced a fire sale of assets with Circle Oil is looking to sell its 40% stake in North West Gemsa field. Are SDX in the frame for acquiring all/part of this?
Circle are indeed undertaking a well-documented strategic review and we have spoken to them and their advisors as part of that process. We like the North West Gemsa asset and would be keen to increase our interest in the field if that was an option.
Q There is a 9 well workover program scheduled to end Q2 2016. Exactly what is the target outcome for this?
The target outcome will be to maintain plateau production at 8,000boepd
Q Core NAV: C$1.13/share, RENAV: C$1.88/share in comparison to today’s price, how are SDX going to try and close this gap?
We believe that the AIM Listing will help us close this valuation gap as investors begin to understand our story and watch us deliver on our operational and corporate milestones. We are confident that we have all the elements in place to educate existing and new shareholders on how compelling our investment proposition is.
Q RNS (20 May2016) says “The AASE24 well is expected to be another strong producer from the Shagar and is the second of two successful development wells to be drilled in the field this year. The results of these two development wells combined with a 9 well work-over program, which his currently underway, will allow you to maintain production at a plateau rate of 8,000 Boepd for the remainder of 2016” Is this net to SDX?
No, we have 10% equity interest in NW Gemsa meaning we currently have production of about 800boepd from NWG and 700boepd from Meseda which makes up our c.1,500 boepd reported last year.
Q You have no debt but your current running costs in your presentation look high? How are you going to reduce these costs?
Our running costs are actually quite low however we have costs associated with the merger with Madison Petrogas in October 2015, our AIM Listing, and the highly active work programme we have carried out which has included an exploration well in Cameroon, technical work on South Disouq and operations at NWG and Meseda. We maintain a strict financial discipline and are constantly reviewing how we can reduce overheads.
Q SDX reported net production of 1,519 boepd in 2015, what changes do you see short term in 2016 and how can you add more shareholder value for holders this year?
We would be looking to incrementally increase production at Meseda whilst simultaneously maintaining production at NWG at current levels. We also have a material catalyst on the horizon in the form of our high-impact onshore exploration well at South Disouq, which our costs will be fully carried on later this year. This block lies within the prolific Abu Madi-Baltim Trend where multiple large gas discoveries have been made in recent years and in the success case this could be transformational for SDX Energy. Finally, we will be looking to use our stable financial position, supportive institutional shareholder register, and our proven track-record for value accretive M&A activity to capitalize on the multiple opportunities that we see in the industry, especially in Egypt where we are particularly well placed given our existing reputation and network in country.
Paul has already expressed his aim to increase the company oil production to 20,000 bopd. No easy feat but we’d anticipate news of another acquisition in the not too distant future. Following the $5.5 million spent on increasing the production on Meseda (After well reworking and a water flood programme takes place) this will increase their war chest to take advantage of other opportunities that come to the surface.
Money in the bank and the South Dasouq exploration well planned should make for good reading in future updates.
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