Southern Energy Corp. (SOUC LN/SOU CN): Improved gas fundamentals expected in 4Q24. Material oil opportunities in the Cotton Valley
• 2Q24 production of 2,578 boe/d was in line with our forecasts (2,680 boe/d). In addition, ~150 boe/d are currently shut-in pending low-cost workovers.• Net debt (based on cash and debt) at the end of June was ~US$18.7 mm. This compares with our forecasts of US$19.1 mm but Southern has sold two compressors for US$1.36 mm.
• While the company will not increase its capex programme until gas prices in the US improve, we note that the 3Q24 and 4Q24 futures for Henry Hub are now standing at ~US$2.3/mcf and ~US$2.8/mcf respectively. The expected 1.6 bcf/d increase in LNG export capacity by YE24 should support much more constructive fundamentals for US gas. AI data centres and new LNG export terminals could each add 10 bcf/d of demand within the next three to five years.
• Southern’s realization basis premium to Henry Hub represented ~20% of Henry Hub in 2Q24 and is expected to remain at this level in 3Q24.
• We assume that new wells will be drilled according to available cashflow. Higher gas prices or more capital would allow Southern to grow production faster.
• With an increasing number of gas companies in the area entering distressed asset sales or Chapter 11 processes, there is a growing number of low-cost opportunities to add production.
• We re-iterate our target price of £0.80 per share. Southern continues to be a play on the recovery of US gas prices.
Oil Play
During 2Q24, Southern acquired a portion of the Cotton Valley rights in Williamsburg it did not own at no cost. The acquisition came with an existing wellbore that can be re-entered (at a cost US$1.5-2.0 mm), so Southern now has two potential re-entry candidates with which to test the oil play. Southern now holds a high WI (> 90%) in both Williamsburg and another asset in Mechanicsburg, both targeting the liquids-rich Cotton Valley formation. No information has been disclosed for Mechanicsburg but >40 mmboe resources were estimated at Williamsburg. Southern is now looking for partners to progress this play. While this is still early stage, this could be very material to the company and diversify its profile.
Forecast and Valuation
Our Core NAV of ~£0.28/sh (~2.8x the current s/p) and our ReNAV of £0.77/sh are broadly unchanged.
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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