Monday, 30 January 2017

SDX Energy's acquisition of Circle's Moroccan assets - summary

By Will Forbes

SDX Energy’s accretive $30m acquisition of the Egyptian and Moroccan assets from Circle Oil is a major step to increase the company’s footprint and is in line with its stated ambition to grow (in)organically. The Moroccan gas production in particular is a step-out from its existing base, but provides strong cash flow generation, quick effective payback and the possibility of future high-value development and exploration. The increased working interest in NW Gemsa should boost SDX’s share in FCF in Egypt, and further contribute to costs for the upcoming waterflood programme. We increase our core NAV from 39p/share to 42p/share (RENAV moves from 68p/share to 57p/share) even after some (unrelated) modelling adjustments. Despite a recent increase in the shares, this suggests further upside for investors in a larger company with greater ability to invest in high-value projects in North Africa.

Accretive acquisition

The acquisition should be accretive to shareholder value, despite the share dilution connected with the announced $40m capital raising. The associated working capital connected to the acquisition (as well as not taking on any of Circle’s debt) reduces the effective (core) metrics to $3.5/boe (compared to SDX’s pre-deal metric of $4.6/boe pre-acquisition at 30p/share). We value the acquired assets at $70m (on a core basis), implying that SDX obtained them at a c.60% discount.

Acquisition increases SDX footprint

SDX has always been actively looking to grow inorganically and the US$30m purchase of a 40% stake in NW Gemsa (Egypt) and 75% in Sebou (Morocco) production (including approximately US$18m in working capital) is a strong first move. The new assets are strongly cash generative and could add around $20m of cash flow in 2017 and 2018 (each year, including working capital movements) and with an effective IRR of over 50% and a 1.5 year payback on the acquisition price.

Valuation: Accretive deal increases core NAV to 42p

We have folded the new assets into the existing portfolio, which increases our indicative core NAV to 42p/share (from 39p), while our indicative full NAV (including a risked 7p valuation for the South Disouq exploration well and possible upside from Meseda waterflood) is now 57p/share. SDX is now a larger company with strongly positive cash flows in the near term, and can use these to further explore in Morocco, develop a discovery at South Disouq or to grow further inorganically. It retains the ambition to grow in North Africa towards a production rate of 25-30mboed.

The full note is available here

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