Southern Energy Corp. (SOUC LN/SOU CN): Positive results at first DUC. Completion costs below expectations
• The recently completed GH 14-06 #3 Upper Selma Chalk well at Gwinville has delivered average natural gas flow rate in excess of 6.5 mmcf/d over the first days of production. The well is still cleaning up with ~33% of load fluid recovered so far.• This is one of the best well results so far by Southern and it is tracking the Gen 2 IP30 type curve. By comparison, the 18-10#2 Upper Selma Chalk well completed in 1Q23 had an IP rate of only 3.3 mmcf/d. During 2022, the GH 19-3 #2, GH 19-3 #3 and the GH 19-3 #4 wells (all Upper Selma Chalk) flowed at IP30 rates of respectively 6.5 mmcf/d, 3.6 mmcf/d and 4.0 mmcf/d. The Upper Selma Chalk well results to-date are directly influenced by the length of effective lateral in high-graded reservoir, and the positive results of this GH 14-06 #3 well highlight the importance of the horizontal steering improvements that Southern achieved in the 1Q23 drilling program.
• The overall completion cost was only US$2.1 mm, significantly below previous indications of US$3 mm per well and ~40% lower than the two previous 18-10 pad Upper Selma Chalk wells that were completed earlier in 2023.
• The timing of the completion of the remaining three drilled and uncompleted wells (DUCS) will be driven by US gas prices. For the time being, we continue to assume this will happen from late 1Q24 (we assume US$3.0/mcf for Henry Hub in 2Q24).
• We re-iterate our target price to £1.20 per share. Southern continues to be a play on the recovery of US gas prices.
Next steps
Southern will monitor the early production performance from the GH 14-06 #3 well over the next couple of months before making a decision on the completion timing of the remaining three DUC wells. The three wells that are awaiting completion include the first two Lower Selma Chalk laterals, along with the second City Bank lateral.
Forecast and Valuation
Our production growth profile is based on capex for a given year being fully funded by operating cashflow from that same year. Overall, we continue to forecast production will reach ~8,900 boe/d in 4Q27 with Henry Hub increasing progressively from ~US$3.0/mcf (current level) to US$5.5/mcf in 2027. Our new Core NAV and ReNAV, stand respectively at £0.59 and £1.23 per share.
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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