Southern Energy Corp. (SOUC LN/SOU CN): Raising equity to grow production
• Southern has raised ~US$5 mm of new equity at a price of 15.5p per share to boost the balance sheet to fund the completion of four drilled and uncompleted (DUC) wells at Gwinville and grow production to 4.7 mboe/d in 2Q24 from 2.8 mboe/d in 3Q23.• We had previously assumed that the completion of these DUCs would have been funded with the credit facility. The credit facility would have been fully drawn under these conditions. The proceeds of the equity raise allow the company to keep a liquidity buffer.
• In the context of higher gas prices, the increased cashflow from higher production should provide funding for further drilling that will in turn boost production further.
• Southern is rebidding completion services for its DUCs and preliminary indications suggest prices lower than recent tenders. This could have important implications for the overall cost of the completion programme that is now estimated at ~US$12 mm (we previously estimated US$15 mm) and for the subsequent drilling programme.
• As we incorporate the impact of the financing, we have changed our target price to £1.20. Southern continues to be a play on the recovery of US gas prices.
More details on the DUCs
The four wells that are awaiting completion include the first two Lower Selma Chalk laterals, along with the second City Bank lateral and one of the Upper Selma Chalk laterals. These four wells are some of Southern’s longest laterals to-date. They were drilled with an average lateral length of ~5,400 ft and were steered within the high-graded intervals for an average of 95% of the wellbore length. The wells can be brought on production within a matter of weeks once completion operations are resumed.
Forecast and Valuation
We have revisited our production growth profile so that the capex for a given year is fully funded by operating cashflow from that same year. Overall, we forecast production to reach ~8,900 boe/d in 4Q27 with Henry Hub of US$4.4/mcf in 2024 increasingly to US$5.5/mcf in 2027. Our new Core NAV and ReNAV, that incorporate the dilution associated with the US$5 mm equity raise, stand respectively at £0.62 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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