| | | | | | | | | | Southern Energy Corp. | | | Oil and Gas, Exploration and Production | Raising Target Price | | | Q2 results, but focus on upbeat operations update and forward programme | | | | | | | | SOUC-AIM; SOU-TSXV | Price 61p | Market Cap £47.3M | | SPECULATIVE BUY Unchanged | | PRICE TARGET 140p C$2.25 from 125p | | | | | | | | | Canaccord Genuity view | | | | We focus on Southern's recent three well Gwinville field Selma Chalk reservoir drilling programme and growth outlook rather than the Q2 22 results, which benefited from those wells for only a very short period. These three wells have provided proof of concept for improved Upper Selma productivity through extended laterals and multi-stage stimulation. That is a very encouraging springboard for longer-term Gwinville development and the company remains on track to deliver its goal of c.25 kboed production through organic development.
Unsurprisingly, as an appraisal programme, the three wells have generated plenty of information that will help optimise future well productivity. Combined IP30 rates of 14.1 mmcf/d were solid but a little below pre-drill hopes. However, Southern is confident that consistently higher well productivity can be achieved. In particular, the last two wells laterals only encountered Upper Selma reservoir over 50% of their length compared with 90% in the first and notably best performing well. Southern has revised its structural reservoir modelling (reinterpretation of 3D seismic) and with use of higher precision well technology (rotary steerable directional drilling) it expects to increase future wells Upper Selma lateral contact to >80% and productivity to an average IP30 of 6-8mmcf/d.
The rapidly rising well count, strong US gas prices and largely fixed operating costs point to delivery of step changes in cash flow generation for many years to come. | | | | | | Gwinville Upper Selma wells update | Productivity: Well#1 (GH19-3#2) IP30 6.5 mmcf/d (within anticipated Gen 3 pre-drill guidance of 6-8 mmcf/d), lateral 3,498ft, 90% in target window. Payout <4 months at current gas prices. Well #2 (GH19-3 #3) IP30 3.6 mmcf/d, lateral 4,146ft, 50% in target window. Well #3 (GH19-3#4) IP30 4.0 mmcf/d, lateral 4,623 ft, 50% in target window.
Learnings: Southern expects 1) improved Upper Selma structural mapping, and 2) higher precision drilling, to result in >80% lateral reservoir contact/optimised well performance, plus 3) likely increased lateral length to 'see' more reservoir. | | | | | | Next steps - drilling restarts Q4 22 | Near term: Southern has approved a five well programme for the remainder of 2022 to include three Upper Selma development wells and two Lower Selma and City Bank appraisals. The new Upper Selma wells are all expected onstream by YE22. Additional pads to be constructed ahead of 2023 drilling programme. Total capex $34m.
Reserves: Update at YE22 expected in Q1 23. Southern expects to add material reserves to the Gwinville field, potentially across Upper and Lower Selma and City Bank reservoirs. | | | | | | | | | | Key financials | Southern has $33m cash (end July) and it also has an agreement with its current lender to increase loan capacity by $25m with maturity extended August 2025. We anticipate that the long term field development can be delivered fully-funded through a combination of operating cash flow, cash on balance sheet, the new credit facility and additional loans.
Valuation, target price and rating
We maintain our IP30=6 mmcf/d Selma production assumption, partially de-risk the Gwinville development to 60% CoS from 53%, and so we raise our target price to 140p (from 125p) based on our risked NPV10 valuation at LT Henry Hub assumption of $4.75/mcf (currently >$9/mcf). We maintain our SPECULATIVE BUY rating. | | | | | | | | | | | | | | | | | Charlie Sharp | Analyst | Canaccord Genuity Ltd (UK) | csharp@cgf.com | 44.20.7523.4651 | | | | | | | | | | | | | To request a meeting click here | | | | | Click on title or here for full note | | | | | | | | | For more research and our coverage universe online, visit Canaccord Genuity's Research Portal.
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