Southern Energy Corp. (SOUC LN/SOU CN): Back to growth
• Southern is expecting to raise US$6 mm in new equity at a price of 4.3p/sh (C$0.08/sh). Investors participating in the transaction will also receive half a warrant for each new share, with an exercise price of 5.3p/sh (C$0.10 /sh).• The existing ~US$3.2 mm convertible debenture will be equitized, at 102.5% of the principal outstanding amount plus accrued interest will be converted into equity at a price of 4.3p/sh (C$0.08/sh). Southern's credit facility has been amended, reducing monthly principal amortization payments to ~15%/y, and revising certain covenant calculations.
• The additional capital will enable Southern to capitalize on the rising US gas price and boost production and reserves. The FY25 ~US$10 mm capex programme will include (1) the completion of the three drilled and uncompleted (DUC) wells, drilled in 1Q23 at Gwinville and (2) the drilling of two vertical Cotton Valley wells at Mechanicsburg.
• Each DUC is expected to have an IP30 rate of ~5.5 mmcf/d with an expected EUR of ~3.5 bcf. The Mechanicsburg wells will increase the liquid weighting of the company's production, with an IP30 rate of ~4.2 mmcf/d plus 75 bbl/d and an EUR of 3.7 bcfe.
• Overall, Southern is forecasted to produce ~4.0 mboe/d in 2026, up from ~2.2 mboe/d. We assume that new wells will be drilled according to available cash flow to reach >7 mboe/d by YE28 with debt levels remaining stable. Southern is selling its gas at a ~ 15% premium (adding ~US$0.6-0.7/mcf). Higher gas prices or additional capital would enable Southern to accelerate production growth.
• We have changed our target price to £0.35/sh to reflect the new capital programme and the equity transaction.
Very significant reserves upside
At YE23, 2P reserves were estimated at ~30 mmboe based on 20 drilling locations in the Gwinville Lower Selma Chalk (G-LSC), 8 locations in the Upper Selma Chalk (G-USC), and 6 locations at Mechanicsburg Cotton Valley (M-CT). Bringing DUC GH13-13#3 in the City Bank at Gwinville (G-CB) into production could derisk 30+ new locations. Additionally, there are 45 unbooked locations at G-LSC. The new wells at M-CT could derisk 6 additional drilling locations. Assuming 3.5 bcf per well at G-LSC and 3 bcf per well at G-CB and M-CT, the potential reserves upside in these two areas alone is ~40 mmboe. The Williamsburg oil offers further potential upside.
Forecast and Valuation
Our new Core NAV is ~£0.23/sh (~6x the current s/p) with a ReNAV of £0.34/sh. Derisking the additional drilling locations at G-LSC and G-CB would add £0.14/sh to our Core NAV. The oil rich Williamsburg has an unrisked value of £0.30/sh. Our CFO forecast for FY26 and FY27 represents respectively >70% and >90% of the current market cap.
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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