South Energy Corp. (SOUC LN/SOU CN): Taking advantage of low gas price to make an accretive acquisition

• Southern is acquiring the remaining producing acreage (>8,500 acres) in the Gwinville field it does not own from PetroTx Energy for US$3.2 mm in cash. PetroTX will also be granted a minor overriding royalty over two of the acquired wells that were previously producing 0.4 mmcf/d. These wells are currently not producing and would require remedial work to re-commence production.
• The transaction adds 400 boe/d net production, 1.8 mmboe PDP reserves and 14.5 mmboe 2P reserves (+57% versus the YE22 2P reserves of 25.5 mmboe) in the Selma Chalk to Southern with 20+ new drilling locations. While the City Bank is not expected to be present on the new acreage, the deeper sands (Hosston/Rodessa/Cotton Valley) are likely to be encountered.
• The NPV10 for the PDP reserves is estimated at US$7.7 mm including US$5 mm for synergies with Southern’s existing operation. This represents >2x the price paid by Southern. The operating costs associated with the new acreage could be reduced at the same level as at Southern’s existing operations, representing savings of >30%. The acquisition price implies operating cashflow multiples of 0.9x (relative to 2022 cashflow).
• This acquisition significantly boosts the materiality of the prize as Southern will be able to deploy modern drilling and completion techniques used on the existing acreage (~12,500 acres) to the new acreage (8,500 acres representing an additional 65% of the existing position at Gwinville).
• We increase our target price from £1.50/sh to £1.60/sh.

Timeframe of the transaction and funding
The effective date and proposed closing date of the transaction is 01 June. The transaction will be funded through the current credit facility. Southern expects to have ~US$14.5 mm of capacity remaining on the facility after closing the transaction. This leaves enough funding to complete the four drilled but uncompleted wells from the Gwinville drilling program when natural gas prices are supportive. We currently forecast capex of US$12 mm in 2H23 assuming an environment of higher gas prices.

Valuation
Our Core NAV and ReNAV have increased from £0.74 and £1.49 per share to £0.83 per share and £1.58 per share respectively. 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) versus ~US$2.3/mcf today.