Circle squares the North Africa equation for oil and gas minnow SDX Energy


Even the largest of companies make mistakes with acquisitions, no matter how much due diligence is carried out.

So SDX Energy’s management must have been a little nervous when it acquired Circle Oil two years ago.

Increasingly, though, it is looking like a masterstroke for the AIM-listed oil and gas group.

SDX's acquisition of Circle Oil has been helped by the recovery in the price of Brent price, which has gone back up to $70 a barrel

SDX's acquisition of Circle Oil has been helped by the recovery in the price of Brent price, which has gone back up to $70 a barrel

SDX’s acquisition of Circle Oil has been helped by the recovery in the price of Brent price, which has gone back up to $70 a barrel

The acquisition was at a time when Brent crude oil prices had slumped from $100 a barrel to under $40 and there was little interest in the oil and gas sector generally, let alone in a small operator focused on Egypt and Morocco.

Trepidation was such that SDX picked up the business for $30million, which was 39 per cent of the value of its debt at the time and an amount its lenders were happy to take.

As part of the deal, SDX also acquired $18.3million of working capital – comprising $1.9million of cash, and $16.4million of ‘receivables less payables’.

Circle brought with it production assets and substantial reserves but there were issues of payment in Egypt and uncertainty over the political situation in North Africa.

But SDX was confident and said it would use the Circle assets as the base to build production up to a 25,000 to 30,000 barrels of oil equivalent daily rate of production that would put it comfortably in the middle bracket of oil producers.

Eighteen months on and those terms look especially generous, something borne out by the fact SDX has not looked back since it completed the deal.

Of course, the recovery in the Brent price back up to $70 a barrel has helped and is something the company could not have predicted, but in things it can influence SDX Energy has been energised.

Paul Welch, the firm’s chief executive, has said the first half of 2018 was exceptionally busy for exploration drilling, with the second quarter alone seeing 23 wells drilled.

Of those, 20 wells were successful and the benefits are now starting to show through in hard numbers.

Interim results to June revealed a 35 per cent rise in net revenues as output rose to 3,234 barrels of oil equivalent per day as wells drilled during 2018 started to come onstream.

Revenues were $24.4million, up from $18million in the same period a year ago, while netback or the amount that feeds back to SDX after all costs, taxes, royalties and so on jumped to $32.91 per barrel from $22.51.

As a result, earnings excluding exploration (EBITDAX) more than doubled to $16.2million.

Competition: Egypt has become a more attractive oil destination

Competition: Egypt has become a more attractive oil destination

Competition: Egypt has become a more attractive oil destination

Net cash generated from operations was also impressive. Inflows amounted to $20.3million compared to $11.1million with $25.2million in the bank at the period end.

The drilling pace will ease in the second half, which should further strengthen the balance sheet as cashflow is running currently at $3.5million-£4million per month.

Production since the half-year has risen to 4,400 barrels per day but Welch is forecasting 8,000 barrels per day attributable to SDX by the year-end.

Marketing efforts are also paying off. SDX has picked up French car giant Peugeot as a customer in Morocco on a ten-year gas contract, where prices have followed crude and started to edge higher.

Indeed, the only thing not to have picked up recently is the SDX share price, which has left Welch scratching his head a little.

Trading conditions in Egypt have improved markedly he says, with the issue of receivables easing notably in the first half. Money outstanding to SDX halved and authorities in the country have pencilled in a complete clearance of all money owed.

As a result of the improving conditions there is more competition in assets in Egypt as the country becomes a more attractive oil destination, SDX, though, is now looking from a position of strength.

Research house Edison expects SDX’s year-end cash to be in the order of $28.7million, but it is 2019 when the big numbers start to land.

Edison expects 2019 revenues and profit to climb by 55 per cent and 175 per cent to $86.7million and $51.1million respectively.

Net cash, meanwhile, will have risen to $56.5million even after $37million of additional capital expenditure.

That’s a lot of firepower to do deals with, even in a tightening market and SDX must have plenty of credit in the bank for the way it has developed Circle’s assets.

Edison has a share price target of 92.7p per share compared to the current SDX share price of 59.5p.

At that levels, the group’s market value is £123million or about 2.5 times 2019 cashflow.

Even if oil and gas producers are currently being rated below frontier or wildcat explorers, that looks too much of a discount.

 



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