South Energy Corp. (SOUC LN/SOU CN): FY22 Financials in line. Operations on track
• There were no surprises in the FY22 financials with production, cashflow and working capital very close to our expectations.• The 18-10 #2 Upper Selma Chalk well that was completed in 1Q23 is performing in line with expectations.
• The 18-10 #3 Upper Selma Chalk will be worked-over in late 2Q23 (as expected).
• The 18-10 #1 City Bank well has now flowed back 9% of the injected fluid (this compares with 5% ~2 weeks ago). Peak gas rates are not expected until the load fluid recovery is closer to 20%, which is expected towards the end of 2Q23. Early gas rates are encouraging and continue to increase. This is a very important well. On success, it would add reserves (none booked so far in the City Bank). Our unrisked NAV for the City Bank is ~£0.50/sh.
• We understand that 1Q23 production has held very well.
• The business continues to be resilient in the current environment of low gas prices. Higher gas prices would unlock material value and allow the company to return to growth.
• We re-iterate target price to £1.50/sh.
Balance sheet and financials
Southern currently has US$23 mm of unused capacity on its credit facility. This could allow the company to take advantage of depressed gas asset value to make bold-on acquisitions and benefit from a likely gas price rally later in 2023. Southern has hedged 2,000 mmbtu/d at a floor price of US$3.50/mmbtu in 1Q23 and 1,000 mmbtu/d at a US$0.32/mbtu premium to NYMEX from April to October.
Valuation
Our Core NAV and ReNAV are unchanged at respectively £0.74 per share and £1.49 per share. This represents respectively 3.5x and 7x the current share price. Higher HH would allow a faster production increase and boost our valuation. The corporate cashflow break even continues to be estimated at ~US$1.8-1.9/mcf (Henry Hub).
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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