Southern Energy Corp. (SOUC LN/SOU CN): Managing the balance sheet in the context of low US gas prices
• 4Q23 production of 2,793 boe/d and YE23 net debt of US$26.7 mm were in line with forecasts.• The GH 14-06 #3 Upper Selma Chalk well delivered an IP30 rate of 5.2 mmcf/d. This is a good rate compared to the other Upper Selma Chalk wells of 2022-2023 which had IP30 rates of 3.3-6.5 mmcf/d. The overall completion cost was only US$2.1 mm, ~40% lower than the two previous 18-10 pad Upper Selma Chalk wells that were completed earlier in 2023.
• With low US gas prices, we are now assuming that the 2nd DUC will not be completed before 4Q24 (2Q24 previously) with further DUCs being completed in 1Q25 and 2Q25. Southern can accelerate the DUC timing if US gas prices recover sooner. We assume that new wells will be drilled according to available cashflow. Overall, in the context of a slower increase in US gas price (US$2.55/mcf in 2024 and US$3.9/mcf in 2025), our production ramp-up is shallower with FY24 production now marginally below 2023 and increasing to 4.7 mboe/d in 2027. Higher gas prices or more capital would allow Southern to grow production faster.
• The YE23 2P reserves at Southern’s legacy assets (excluding the 2Q23 acquisition) have been reduced from 25.5 mmboe to 22.2 mmboe, which reflects FY23 production (-1 mmboe), lower gas prices (-0.3 mmboe) and the expected recovery per well based on recent drilling (-~2 mmboe). Only 10 out of 20-25 well 2P locations have been booked as 2P reserves at the 2Q23 acquisition. This suggests potential upside to the YE23 reserves.
• We have changed our target price to £0.80/sh to reflect the slower production growth profile. Southern continues to be a play on the recovery of US gas prices.
Managing the balance sheet
Southern has monetized its fixed price swap derivative contracts, realizing net proceeds of US$1.1 mm. The company has entered a new contract at a fixed price of US$3.4/mcf for 5 mmcf/d from May 2024 to December 2026. The maturity of the existing credit facility has been extended from 31/08/2025 to 31/12/2026 with no monthly repayment of the principal amount from February to September 2024. The interest on the facility has been increased from 12% per year to 15% per year. With only ~US$3.5 mm capex in 2024 (assuming only one DUC), US$3.1 mm in cash at YE23 and ~US$10 mm undrawn on the facility, we believe that Southern has enough financial resources to weather the storm until US gas prices recover.
Forecast and Valuation
Our new Core NAV is £0.27/sh (~2.7x the current s/p) with a ReNAV of £0.76/sh. The reserves auditor estimated the NPV10 of Southern’s 2P reserves at US$119 mm. Deducting US$27 mm net debt leads to a NAV of US$82 mm or £0.37/sh. This represents >3.5x the current share price.
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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