Southern Energy Corp V.SOU

VIII Capital - drooling over this one still

[Capitulation]

Just a reminder of our technical view
 
It falls into the bucket of Jr’s that we like---ones who can grow production meaningfully.

• The company is drilling wells using Generation 3 technology, which we see providing upside to management guidance/5 year plan. 
• It’s important to note that due to securities laws in London, where the company is dual listed, management isn’t allowed to show guidance based on Gen 3 until they provide actual results.  Therefore, this is a key potential catalyst.
• Our latest note from July (link) demonstrates the upside potential is meaningful in estimated total production through 2026 (see first figure below).
• The company continues to ramp up the first three wells drilled using Gen 3 technology. We expect an update by the time the company reports on 8/23.
• Early results provided by SOU have been on track with Gen 3 expctations.

 
Pure play on U.S. Gulf Coast natural gas pricing.

• The continued LNG export buildout from the U.S. plus the U.S./EU LNG agreement (as way to eliminate consumption of natural gas from Russia) has made U.S. natural gas prices even more globally linked.  Issues in Europe continue to push European natural gas prices higher (see Figure 2).
• SOU provides you with US Gulf Coast pricing exposure, which we see going higher in October once the Freeport LNG facility comes back on line. 
• SOU’s natural gas production has been receiving a premium to NYMEX of late due to strong cooling demand (see third figure).
• As we point out in our aforementioned July note, on 6/27, SOU entered into basis swaps covering just under 40% of its physical price exposure with a basis swap transaction securing an average premium to NYMEX of US$0.39/MMBtu from 7/1/22 to 12/31/22. This compares to the traditional range of between NYMEX plus or minus US$0.05/MMBtu. The company stated that it will continue to look for opportunities to hedge more basis differentials. 

 
Finally, it is cheap trading at only 1.4x EV/2023E DACF at STRIP

• One of the cheapest in our coverage

[nozzpack]

Thank you for that detailed operational update. August 23 report should be quite interesting..