SDX Energy Inc. (TSXV, AIM: SDX), the North Africa focused oil and gas company, is pleased to announce its financial and operating results for the three and six months ended June 30, 2018. All dollar values are expressed in United States dollars net to the Company unless otherwise stated.
Highlights – three and six months ended June 30, 2018 Corporate and Financial
Three months ended June 30
Six months ended June 30
US$ millions except per unit amounts
Net realized average oil/service fees - US$/barrel
Net realized average Morocco gas price - US$/mcf
Netback – US$/boe
Exploration & eval'n expense
Depletion, depreciation and amortization
(Loss)/gain on acquisition
Total comprehensive income/(loss)
Net cash generated from operating activities
Cash and cash equivalents
Note: (1) (2)
Refer to “Non-IFRS Measures” section of this release below for details of Netback and EBITDAX.
EBITDAX for Q2 2018 and 2017 and H2 2018 and 2017 includes US$1.2 million and US$0.9 million and US$2.2 million and US$1.6 million respectively of non-cash revenue relating to the grossing up of Egyptian Corporate Tax on the North West Gemsa PSC which is paid by the Egyptian State on behalf of the Company.
The above financial metrics for the three and six months ended June 30, 2018 and 2017 reflect the impact of the acquisition of the Egyptian and Moroccan businesses of Circle Oil plc (the “Circle Acquisition”) fromJanuary 27, 2017 for consideration of US$28.1 million.
The main components of SDX's comprehensive income of US$1.0 million for the six months ended June 30, 2018 are:
o US$19.3 million netback/gross profit for the period;
o US$5.3 million of E&E write down predominantly relating to two sub-commercial exploration
wells in Morocco and one sub-commercial exploration well in Egypt;o US$6.2 million of DD&A;
o US$2.8 million of G&A; and
o US$3.1 million of Corporate Income Tax expense.
o The Circle Acquisition completing on January 27, 2017, therefore H1 2017 results only included five months of ‘Circle' activity whereas the H2 2018 results included six months; and
o H1 2018 also benefited from improved oil prices impacting SDX's Egyptian producing assets andhigher realised gas pricing in Morocco due to a contract price increase and favourable currency movement.
Cash position of US$25.2 million as at June 30, 2018 was US$0.6 million lower than the US$25.8 million at December 31, 2017 and US$2.4 million lower than the US$27.6 million reported at June 30, 2017. However the Company's strong Netback, improving Receivables position and US$10 million equity placing in September 2017 have enabled it to invest approximately US$45 million of capital expenditure in the 12 months to June 30, 2018. This expenditure included 14 wells in Egypt and 9 wells in Morocco, which did not materially reduce SDX's cash balance over this period.
The Company further improved its available liquidity when it announced on July 18, 2018 that it had secured a three year, US$10 million Credit Facility (the “Facility”) with the European Bank for Reconstruction and Development. This Facility, which also has an additional US$10 million accordion feature, will be used for drilling costs and customer connections in Morocco. Interest on drawings from the Facility will be charged at US$ Libor plus 4.0% for drawings up to US$5 million and US$ Libor plus 4.5% on all drawings if drawings are greater than US$5 million.
US$24.7 million of capital expenditure has been invested into the business during the six months ended June 30, 2018. The main elements of this were;
o US$11.2 million in Morocco, US$10.4 million of which relates to the now completed nine well drilling programme and customer connection projects and US$0.8 million of which relates to the mobilisation cost for the upcoming 240km2 3D seismic programme in Gharb Centre;
o US$5.7 million on the South Disouq drilling programme, which includes the costs for the Ibn Yunus- 1X and SD-4X discovery wells, the costs of the sub-commercial Kelvin-1X well and the site preparation cost for the SD-3X discovery well which reached total depth (“TD”) in July;
o US$6.3 million in North West Gemsa for the costs of the AASE-25, AASE-27 infill wells and the commencement of the Al-Ola 4 well, all of which were discoveries;
o US$0.8 million in Meseda for the costs of the Rabul-4 and MSD-16 discovery wells and the ongoing electric submersible pump (“ESP”) replacement programme;
o US$0.3 million in South Ramadan relating to pre-spud costs of the SRM-3 well; and
o US$0.4 million relating to new office equipment in Cairo and additional technical software.
o North West Gemsa 1,941 BOE/Do Meseda 633 BBL/D
o Morocco 660 BOE/D
o North West Gemsa 2,777 BOE/D (Gross - 5,553 BOE/D)o Meseda 917 BBL/D (Gross – 4,704 BOE/D)
o Morocco 750 BOE/D (Gross – 1,000 BOE/D)
In Meseda (SDX 50% working interest and non-operator), an ESP replacement programme is underway and three wells have been successfully completed; Rabul-5, Rabul-4 during the period, and MSD-16 post period end. Rabul-5 encountered 151 feet of net heavy crude oil pay, with an average porosity of 18% across the Yusr and Bakr formations. Rabul-4 encountered 43 feet of net heavy crude oil pay also across the Yusr and Bakr, with an average porosity of 16%. Both wells were completed as producers and placed on production. MSD-16 was drilled as a crestal infill producer in a newly available area of the field 100 meters from the concession boundary after an agreement was reached with the offset operator to reduce the boundary stand-off limits. The well encountered 176 feet of net heavy crude oil pay in the ASL reservoir section with an average porosity of 22%. The well was completed as a producer in the ASL using an ESP pump to provide artificial lift and is currently producing approximately 1,200 BBL/D of heavy crude oil. Post-period end, a second lease line development well, MSD-15, was spud, and subsequently reached TD. The MSD-15 well encountered 226 feet of net of heavy crude oil pay in the ASL section and is currently being completed as a producer in this section. Upon production start-up, it is expected to flow at similar rates to the MSD-16, again using an ESP to provide artificial lift. Production at MSD-15 is anticipated to start up between late August and early September 2018. The results of these wells and the ongoing workover programme are expected to allow the field production rate for the year to average approximately 3,800 BBL/D of heavy crude oil (SDX net: 732 BBL/D) which means that the gross field 2018 production rate guidance provided by the Company in January is unchanged.
In South Disouq (SDX 55% working interest and operator), the Company announced on April 12, 2018 that a gas discovery had been made at its Ibn Yunus-1X exploration well. The well was drilled to a TD of 9,068 feet and encountered 101 feet of net conventional natural gas pay in the Abu Madi horizon, with average porosity in the pay section of 28.5%. The well came in on prognosis but with a reservoir section that was of better quality and thicker than pre-drill expectations. On May 18, 2018 the well successfully flow tested conventional natural gas at a stabilised rate of 39.3 MMSCF/D on a 32/64” choke. This flow rate exceeded initial expectations and was limited by the surface facilities in place. The well was subsequently completed in the Kafr El Sheik section and then suspended until it can be connected to the surface facilities that are being developed at the SD-1X location.
The Kelvin-1X exploration well was spud on May 8, 2018 and drilled to a total depth of 8,075 feet, encountering 606 net feet of high quality reservoir interval in the Abu‐Madi formation with an averageporosity of 21%. However, the sands had low gas saturation and were not deemed to be commercial. The well was subsequently plugged and abandoned.
The SD-4X appraisal well was spud on June 4, 2018 and drilled to a total depth of 7,806 feet and encountered 89 feet of net conventional natural gas pay in the Abu Madi horizon, with an average porosity in the pay section of 24%. The well came in on prognosis with a reservoir section of similar quality but thicker than the original SD-1X discovery well. The well was completed in the Abu Madi section and tested at a maximum rate of 30.4 MMSCF/D during an eight hour clean up period. The well was then shut in for eight hours, during which time no pressure decline was observed. Following this the well was flowed at varying choke sizes for two successive 12-hour periods at average rates of 5.4 MMSCF/D, 8.6 MMSCF/D respectively and then one extended flow period of 24-hours at an average rate of 10.5 MMSCF/D. The well was then suspended until it can be connected to the surface facilities that are being developed at the SD-1X location.
The Company's Moroccan acreage consists of three concessions; Sebou, Lalla Mimouna and Gharb Centre,all of which are located in the Gharb Basin in northern Morocco (SDX 75% working interest and operator). Sebou and Lalla Mimouna were obtained as part of the Circle Acquisition and Gharb Centre was acquired directly from the Moroccan State on June 1, 2017.
In September 2017, the Company commenced a nine well drilling programme covering six appraisal/development wells in Sebou, one appraisal/development well in Gharb Centre and two exploration wells in Lalla Mimouna.
The results of the well programme to date are as follows with the Company achieving seven successful wells from the nine that have been drilled, a 78% success rate;
Conventional Natural Gas Discovery
Primary target of 300m of gas bearing section encountered. Secondary target encountered net pay of 2.6m
Not Yet Tested
Conventional Natural Gas Discovery
Not Yet Tested
Well results announced *April 20, 2018, **May 7, 2018
o The primary target of the LNB-1 well was in the Lafkerena sequence, where 300 meters of gas bearing horizons were encountered in a significantly over-pressured section. This section could not be logged using conventional methods due to hole conditions, however, the gas shows in this section contained heavier hydrocarbon components throughout, which is indicative of a thermogenic hydrocarbon source rock and indicates that a new petroleum system has been encountered in this area. Based on the mud log shows, reservoir quality information from the formation cuttings, analogue fields (outside the Gharb basin), and the size of the feature as currently mapped, a preliminary un-risked mid-case recoverable gas volume of 10.2 BCF of conventional natural gas and 55 thousand barrels of condensate has been estimated by management. This is significantly larger than the traps typically encountered in Sebou and would exceed the size required to justify development and connection to the existing infrastructure in the Sebou area. Additionally in the secondary target, the Upper Dlalha, 2.6 meters of net conventional natural gas pay sands were encountered with average porosity in the pay section of 33%. This pay section is similar to the Guebbas targets, from which SDX successfully produces on the Sebou permit. The LNB-1 well has been completed as a conventional gas producer in the Upper Dlalha with the deeper Lafkerena section being suspended until the appropriate equipment can be mobilized, to test and produce from this over-pressured section. The timetable to test this section has not been finalized and will be the subject of a future update.
o The primary target of the LMS-1 well was in the H-9 sequence, which is a Miocene aged shallow marine deposit that had not been previously tested in the area. The well encountered 16.4 meters of net conventional gas pay sands which had an average porosity of 32% in an over-pressured section. Similar to the LNB-1 well, heavier gas shows were encountered indicating the presence of a deeper thermogenic source rock charging the structure. In addition, the cuttings showed evidence of fluorescence indicating the potential presence of liquid hydrocarbons within the section encountered. The well was completed as a conventional natural gas producer in the H-9 interval. Upon test the well flowed at sub-commercial rates which the Company believes are temporary and due to damage created by the fluids used to control the elevated pressures encountered in the well whilst drilling. The damage is thought to result from the formation clays reacting to certain components used to increase the mud weight in the drilling fluid. The reservoir section, beyond this zone of damage, is thought to be of excellent quality based upon the well log response and is not expected to have been damaged by the drilling fluids. Once the fluid interaction study is complete, a stimulation programme will be designed and implemented and the well test will be repeated.
As a result of the success seen in the LNB-1 and LMS-1 wells, a two year extension to the LM Nord permit was submitted and granted post-period end. This extends the permit validity from July 2018 to July 2020.
The Company continued its land permitting and other associated activities necessary to conduct its 240 km2 3D seismic acquisition in the Gharb Centre permit. The acquisition started up post-period end during the first week of August and is anticipated to be completed early in Q3 2018.
Gross production in H1 2018 of approximately 5.3 MMSCF/D of conventional natural gas (660 BOE/D net to SDX) is expected to increase in H2 2018 when gas sales to the recently contracted customers, Peugeot, Setexam and Extralait, will commence. These contracts are expected to add incremental production of approximately 1.33 MMSCF/D of conventional natural gas during H2 2018.
The achievement of the Company's guidance for the year-end 2018 production rate of 8-10 MMSCF/D of conventional natural gas from its Morocco operations is dependent upon the number of new customer connections made and the subsequent commencement/increase of manufacturing activity at these new customers. The Company will provide a further update towards achieving its stated guidance when its Q3 2018 results are issued in November.
o Targeting FY 2018 gross production of approximately 4,400 BOE/D of light crude oil, in line with Company guidance provided at start of year.
o Workover programme to continue in H2 2018, however no further drilling is planned.
o SDX's share of North West Gemsa FY 2018 capex is expected to be US$7.9 million with
approximately US$1.6 million of this to be incurred in H2 2018. Meseda (50% Working Interest and non-operator)
o Targeting FY 2018 gross production of 3,800 BBL/D of heavy crude oil, approximately 700 BBL/D higher than 2017's level, and in line with Company guidance provided at start of year.
o Workover programme to continue in H2 2018 however no further drilling planned.
o SDX's share of Meseda FY 2018 capex is expected to be US$1.4 million with approximately US$0.6
million of this to be incurred in H2 2018. South Disouq (55% Working Interest and operator)
o Complete construction of SD-1X processing facility, well tie-ins and 10 kilometer pipeline connecting the processing facilities to the main export line.
o Given the above, and assuming all necessary approvals are obtained, first gas is targeted before the end of 2018, at an initial gross plateau production rate of approximately 50-60 MMSCF/D of conventional natural gas. The gas price is still under negotiation.
o SDX's share of South Disouq FY 2018 capex is expected to be approximately US$22 million with approximately US$16 million to be incurred in H2 2018 for the SD-3X and SD-4X well completions and testing, the processing facility, well tie-ins and 10 kilometer pipeline to the main export line.
o The SRM-3 well is the last remaining commitment well on the South Ramadan concession and based upon the results of this well the Company will decide how best to optimise its position in the licence.
o Gross South Ramadan capex FY 2018 is expected to be approximately US$23.5 million (SDX net: US$3.0 million). All of this capex is still to be incurred in H2 2018.
Morocco (75% Working Interest and operator)
Given the recent drilling success, 2018 gross production is targeted to increase in line with new customer tie-ins. Depending on the timing of new customer tie-ins and the subsequent commencement/increase of manufacturing activity at these new customers, SDX is still targeting gross production of 8-10 MMSCF/D of conventional natural gas by the end of 2018.
SDX's nine well Moroccan drilling programme completed on May 7, 2018 with the LMS-1 discovery. The Company will now commence planning for the mobilisation of equipment for a further drilling campaign in 2019 during which the LNB-1 and LMS-1 wells in Lalla Mimouna will be re-tested.
The Company will acquire 240km2 of 3D seismic in its Gharb Centre concession at an estimated cost of US$6.5 million.
Continue to minimise costs and crystallise synergies from the Circle Oil Acquisition; and as part of the Company's strategy it continues to review and explore opportunities to expand the asset base in the North Africa region, including through new licencing rounds and acquisitions.
Paul Welch, President & CEO of SDX Energy, commented:
“The first half of 2018 was a busy period for SDX and one which saw the Company significantly increase its net revenue and overall production year on year.
We also made significant operational progress across our portfolio with discoveries from 20 of the 23 wells drilled in the recent Moroccan and Egyptian drilling campaigns, representing a success rate of 87%.
In Egypt, at Meseda, we enjoyed success at our Rabul-5, Rabul-4, MSD-16 and MSD-15 (post-period end) appraisal wells. This was matched in North West Gemsa with successful wells at AASE-25, AASE-27 and Al-Ola-4 (post-period end), and at South Disouq, with discoveries at our Ibn Yunus-1X, SD-4X and SD-3X wells (post-period end). Due to this drilling success, the Company is able to reconfirm its FY 2018 gross production guidance for North West Gemsa and Meseda at 4,400 BOE/D and 3,800 BBL/D respectively. We also remain on target to commence production at South Disouq at gross 50-60 MMSCF/D by the end of the year.
In Morocco, the Company completed its nine well drilling programme with seven gas discoveries, a 78% success rate throughout the campaign. The last two exploration wells appear to be very significant successes and upon completion oftestingitishopedthattheywillhaveopenedupnewproducingareasfortheCompany. TheCompanyhassigned Gas Sales Agreements with three new customers: Peugeot, Setexam and Extralait, and is still targeting gross production of 8-10 MMSCF/D of conventional natural gas by the end of 2018.
Throughout the period, we remained focused on strict capital discipline and continued to monitor opportunities that would enable us to increase our asset base in North Africa. As at June 30, 2018, we are well funded for our remaining work commitments with US$25.2 million of cash and an undrawn Credit Facility of US$10.0 million and we continue to target doubling our production by the end of 2018.”