Southern Energy Corp. (SOUC LN/SOU CN): Better balance sheet than expected. Emerging signs of recovery in gas fundamentals
• 3Q24 production of 2,336 boe/d was in line with our expectations.• Southern has monetized excess inventory for US$2 mm during 3Q24, resulting in net debt being reduced by US$1.4 mm.
• Southern estimates that further excess inventory could be sold for US$1-1.5 mm. The company is also involved in an ongoing dispute around transportation fees, which Southern believes are governed by a regulated rate. In case of success, Southern could recover overpaid historical fees. In addition, future transportation costs could be reduced by ~US$0.1 mm per quarter.
• Southern has obtained a further amendment to its credit facility with an extension to the pause of the monthly repayment of the principal to YE24. A US$1.7 mm repayment of the principal could be due at the end of January. We estimate that Southern has enough cash resources to fund this. The ~US$3.2 mm convertible debentures mature at the end of June 2025 but Southern has been able to extend its maturity in the past.
• We continue to assume that new wells will be drilled according to available cashflow. We have reduced our Henry Hub (HH) assumptions, and we are now forecasting a more muted production profile. We are also assuming lower drilling and service costs (~US$5 mm to drill/complete a well vs US$6 mm previously). Higher gas prices or more capital would allow Southern to grow production faster.
• We have changed our target price to £0.60/sh to reflect lower HH assumptions and our new production profile. Southern continues to be a play on the recovery of US gas prices; however, the company also holds acreage in the Williamsburg and Mechanicsburg that would provide diversification from natural gas.
Reflections on US gas prices
The outlook for HH futures has become more constructive with ~US$3.1/mcf in 1Q24, ~US$2.9/mcf in 2Q24, ~US$3.3/mcf in 3Q24, ~US$3.7/mcf in 4Q24 and >US$4/mcf in 1Q25. The underlying demand for natural gas in the USA is increasing and temperatures in North America are currently below average. In addition, the LNG export facilities in the Gulf are functioning at full export capacity.
Forecast and Valuation
As we incorporate our new production profile, lower HH and lower capex, our new Core NAV is ~£0.33/sh (~5x the current s/p) with a ReNAV of £0.61/sh. The oil rich Williamsburg has an unrisked value of £0.51/sh. We do not yet carry any value for the Mechanicsburg.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
Auctus has been set up at the beginning of a new decade in which we see significant opportunities in the Energy space. Globally, demand for energy is at record levels and continues to grow. Conversely, investment in traditional energy sources has been severely constrained. We believe this imbalance creates opportunities for both companies and investors.
Auctus provides Corporate Broking, Equity Research and Investment Banking services.
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