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SDX Energy Announces 9 Months Financial & Operating Results

Source: www.oilegypt.com 11/19/2020, Location: Africa

SDX Energy Plc (SDX) is pleased to announce its unaudited financial and operating results for the nine months ended 30 September 2020. All monetary values are expressed in United States dollars net to the Company unless otherwise stated.

SDX management will be hosting a Capital Markets Day today at 3:00pm UK time, details of which can be found in the release below. A copy of all presentations will be available on the Company's corporate website shortly after the event has begun at approximately 3:00pm. The webcast recording of the event will be made available on the Company website shortly thereafter.

Mark Reid, CEO of SDX, commented:

"I am pleased to report another strong period of production and cash generation from our portfolio in what remains a challenging period for businesses globally. Despite this, we reiterate our production guidance for 2020 and feel that we are in a very strong position to continue our excellent cash generation with approximately 90% of revenues being derived from our fixed price gas contracts. Our discovery at the SD-12X well in Egypt towards the beginning of the year is quickly being developed with initial production expected in Q1 2021.

Growth remains a key focus for the Management team at SDX and we were pleased to announce the identification of c.233bcf of close to infrastructure resource in drill-ready prospects at our South Disouq concession. In Q2/Q3 2021, the Company will drill the Ibn Yunus-2 development well to accelerate production from our existing discovered reserve base. Immediately following this, the Hanut prospect will target 139bcf of the 233bcf of newly identified resource and in 2022, two further wells will target another 40 bcf. In line with our ongoing focus on shareholder value creation, we continue to assess the optimum allocation of capital, whether that be investment into organic or inorganic growth projects, or returning capital to shareholders. Our final decision on this will always be taken with the best interests of shareholders in mind.

We remain confident in the Group's outlook and its potential to grow significantly in the months ahead."

Nine months to 30 September 2020 Operations Highlights

- Average entitlement production of 6,646 boe/d, an increase of 90% from the nine months to 30 September 2019 (3,501 boe/d) and 64% higher than average production during FY 2019 (4,062 boe/d) due to strong production levels mainly from South Disouq, which delivered gross production of 48.6 MMscf/d of dry gas and 467 bbl/d of condensate (51.4 MMscfe/d) equating to 4,710 boe/d net to SDX.

- Existing full year production guidance is maintained across all assets at 6,000 - 6,250 boe/d, which is 48-54% higher than 2019 actual production and existing full year capex guidance is also maintained at US$26.2 million, the majority of which has already been incurred.

- The South Disouq two-well drilling campaign was completed during the period, with the second well, SD-12X (100% working interest to SDX), being a commercial discovery in the Kafr el Sheikh formation, and management estimating 24 bcf of recoverable resources. Construction is underway to connect SD-12X to the Company's gas processing plant via a 5.8km flow line to the Ibn Yunus-1X well location with production expected in Q1 2021. Based upon well-test data, it is anticipated that when connected, the well will produce at a stabilised rate of 10-12 MMscf/d.

- Following further review of the 3D seismic at SD-12X, c.233bcf of close to infrastructure, mean unrisked recoverable volumes, located in productive horizons have been high-graded to ready-to-drill prospects.

- Subject to receipt of final Ministerial and Parliamentary approval, the Company plans to accelerate its drilling campaign to Q2/Q3 2021 from H1 2022 with the drilling of the Hanut prospect targeting 139bcf. The Company's partner has still to advise whether it will participate in the well. The campaign will commence with the Company and its partner drilling the IY-2X well, a development well accessing reserves in the eastern portion of the Ibn Yunus field, to bring forward production and cash flow from this asset. The Company expects to drill the Mohsen and Warda prospects, targeting 26bcf and 14bcf respectively, in 2022.

- The period saw the sale of the Group's non-core North West Gemsa asset in Egypt with the net US$1.6 million proceeds exceeding management's expectations as well as showing the ongoing focus and commitment to capital discipline and careful management of the Group's portfolio whilst also providing additional cash to further strengthen its balance sheet.

- Moroccan drilling campaign has resulted in seven discoveries from nine wells drilled to date, with the tenth well, LMS-2, completed and awaiting crew mobilisation for testing, which is now expected in 2021 due to continued COVID-19 restrictions on moving people and equipment in and out of Morocco.

- Further analysis of the LMS-2 well results and a re-interpretation of the 3D seismic across SDX's concessions has revealed that structures similar to LMS-2 are present throughout the Company's acreage. This new prospectivity is located in horizons that are slightly deeper than the Company's core production and development area and the areas previously targeted in Lalla Mimouna. Work is ongoing to further define the scale of this prospectivity and, subject to a successful flow test of LMS-2, the intention is to target it as part of the planned 2021 Moroccan drilling campaign which we will also seek to accelerate into H1 2021.

- Gas consumption levels at SDX's Morocco customers have returned to c.90% of pre-COVID-19 levels.

- Post period end, the Company agreed to the disposal of its non-core 12.75% working interest in the South Ramadan concession, located offshore in the Gulf of Suez, Egypt. The purchaser, International Oil Services, a private Egyptian oil and gas company, has already paid the US$0.5 million consideration for the Company's interest, which is in excess of management's internal valuation of the asset.

Nine months to 30 September 2020 Financial Highlights

- Netback of US$26.6 million, 41% higher than the same period in 2019, was driven by three quarters of production from South Disouq. Morocco Netback was marginally higher despite COVID-19 shutdowns, albeit West Gharib experienced lower production due to increased water cut and lower oil service fee realisations. Operating expenses were US$2.6 million higher predominantly due to South Disouq starting up in November 2019. The lower per unit Netback of US$15.80/boe in 2020 (2019: US$43.74/boe) results from the contribution of South Disouq in 2020 which has high volume, lower Netback production, versus 2019 which did not include South Disouq and therefore reflected a higher proportion of volumes from Morocco, which achieves high Netbacks.

- EBITDAX of US$23.9 million was 58% higher than the same period in 2019 of US$15.1 million due to higher Netback, lower recurring G&A expenses and lower transaction costs in 2020, partly offset by a non-recurring stock-based compensation credit in 2019 following the departure of two senior employees.

- Depletion, depreciation and amortisation ("DD&A") charge of US$17.8 million was higher than the US$12.4 million for the same period in 2019 due to South Disouq start up in Q4 2019, partly offset by a reduced charge in Morocco following 2P reserves additions from the recent drilling campaign in Q4 2019/Q1 2020, and lower production.

- Non-cash E&E write offs totalled US$4.5 million following the drilling of two sub-commercial wells, SD-6X in South Disouq and SAH-5 in Morocco.

- Operating cash flow (before capex, excluding discontinued operations) of US$14.7 million, higher than the same period in 2019 of US$7.7 million primarily due to the EBITDAX drivers discussed above, offset by an increase in accounts receivable during the period, and higher inventory spend.

- Capex of US$21.8 million, reflects:

- US$13.0 million (including US$0.5 million of decommissioning provisions) for the Moroccan drilling campaign and well tie-ins;
- US$6.3 million for the drilling of the SD-6X (SDX: 55% working interest) and SD-12X (SDX: 100% working interest) wells in South Disouq (including US$0.2 million of decommissioning provisions and a US$0.3 million development lease bonus for the SD-12X discovery);
- US$0.9 million for the SD-12X tie in project;
- US$0.8 million for additional work and insurance spares at the South Disouq Central Processing Facility ("CPF");
- US$0.5 million for drilling/workovers in West Gharib;
- US$0.2 million for Morocco facilities and customer connections; and
- US$0.1 million for other assets.

- Liquidity: Closing cash as at 30 September 2020 was US$9.9 million with the US$7.5 million EBRD credit facility remaining undrawn. Following scheduled amortisation, the facility currently has US$2.5 million of availability. In the coming days, the Company is expecting to sign a new facility agreement with EBRD, with a 5-year tenor, which will re-establish US$10.0 million of availability after satisfaction of normal CPs. In the meantime, the existing facility will remain available.

- Together with cash generated from operations, the Company is fully funded for all of its planned activities in 2020 - 2022.

COVID-19 update

During the second half of March 2020 and into April 2020, COVID-19 containment restrictions in Morocco temporarily impacted our operations, with three customers being required to close their operations. However, in early May these same customers re-started production and as at 30 September 2020 had returned to approximately 90% of their pre-closure consumption rates. Whilst some restrictions have been eased, there remains uncertainty as to when production will return to pre-COVID-19 levels and accordingly the Company maintains its full year production guidance for the Moroccan business of 5.3 - 6.0 MMscf/d (gross). Gross consumption for the nine months to 30 September 2020 was 5.9 MMscf/d and the bottom end of the updated guidance of 5.3 - 6.0 MMscf/d (gross) reflects the potential risk of further shutdowns in the remainder 2020 if a second lockdown, or similar, is required. Egyptian production remains unaffected by COVID-19 at present. The Company continues to follow applicable government guidance in each of its territories.

2020 Guidance

- The Company's 2020 full year guidance is maintained at 6,000 - 6,250 boe/d, which is 48-54% higher than 2019 actual production.

- 2020 capex guidance is maintained at US$26.2 million (US$21.8 million has been spent to date including the costs of the SD-12X pipeline project which remains on budget).

Outlook

- The Company is well-placed to weather the current macroeconomic uncertainties and continues to screen a number of business development opportunities.

- Cash generation is expected to continue strongly through the rest of 2020 and beyond as approximately 90% of the Company's cash flows are expected to be generated from fixed-price gas businesses.

- 2020, 2021 and 2022 work programmes are fully funded.

- The Company continues to assess the optimum use of capital in the interests of all stakeholders, whether that be investment into new projects or returning cash to shareholders. At present the Company is focussed on continued investment into new projects and considers this the most appropriate use of the Company's capital. This will be assessed on an ongoing basis.

Operations Update

Nine months to 30 September 2020 Production and Full Year Guidance

- Nine months to 30 September 2020 actual entitlement production of 6,646 boe/d, an increase of 90% from the same period in 2019, with South Disouq and West Gharib exceeding guidance.

- South Disouq (W.I. 55%): The South Disouq asset has performed above expectations during the nine months to 30 September 2020, with all four wells flowing ahead of expected rates and the CPF achieving higher than planned levels of uptime. During Q2 2020, a well testing program was carried out as part of scheduled reservoir management activities. Scheduled CPF maintenance is planned for Q4 2020, as are workovers of the SD-4X and SD-1X wells in Q1 2021. These wells are experiencing higher than expected water and sand production respectively and in Q4 2020 they will be produced at lower rates in preparation for the workovers. Notwithstanding this, the Company re-iterates its full year guidance of gross production of 47 - 49 MMscfe/d.

- West Gharib (W.I. 50%): A new production well, Rabul-3, was successfully drilled, completed, and tied into the field production system during H1 2020. Although the existing well stock experienced increasing water cut during the year to date, production was higher than guidance albeit lower than the same period in 2019. Given the above, the Company re-iterates its full year guidance of gross production of 3,200 - 3,300 bbl/d for 2020.

- Morocco (W.I. 75%): As previously reported, following a period of strong demand in January and February, three customers accounting for 50% of normal daily consumption were required to close between mid-March and early May due to COVID-19 restrictions imposed by the Government of Morocco. Since the recommencement of production, these customers have gradually increased their consumption to c.90% of pre-closure levels, which is constrained by ongoing COVID-19 containment measures. The situation in-country remains uncertain and as a result, guidance for this business for FY 2020 is maintained at 5.3 - 6.0 MMscf/d.

- NW Gemsa (W.I. 50%): The Company sold its 50% working interest in this asset in July 2020, with an effective date of 1 April 2020. Gross production to 31 March 2020 was 3,076 boe/d (1,538 boe/d net to SDX), which equates to equivalent actual entitlement production to the Company of 511 boe/d for Q3 2020 and 385 boe/d for the full year. Prior to its sale, the field exceeded expectations, primarily due to a slower rate of pressure depletion and water cut increase.

- South Ramadan (W.I. 12.75%): South Ramadan, situated offshore in the Gulf of Suez, commenced production in Q2 2020 at approximately gross 350 bbl/d. Post completion of an acid stimulation operation, production stabilised at gross 500 - 600 bbl/d.

2020 Drilling and Operations

Morocco drilling campaign update (SDX 75% working interest)

- Having fulfilled the objectives for the Morocco campaign, being: (i) to add 2P reserves in and around its existing infrastructure; (ii) to determine if its existing producing area extends to the north; and (iii) to test the prospectivity within the Lalla Mimouna concession, the Company decided not to drill the final two planned wells. As these last two wells would not have been immediately tied into the Company's infrastructure or contributed cash flows in the near term, the Company has chosen to preserve its capital and postpone, at no incremental cost, these last two wells for a future campaign.
- Further analysis of the LMS-2 well results and a re-interpretation of the 3D seismic across SDX's concessions has revealed that structures similar to LMS-2 are present throughout the Company's acreage. This new prospectivity is located in horizons that are slightly deeper than the Company's core production and development area and the areas previously targeted in Lalla Mimouna. Work is ongoing to further define the scale of this prospectivity and, subject to a successful flow test of LMS-2, the intention is to target it as part of the planned 2021 Moroccan drilling campaign which we will also seek to accelerate into H1 2021.
- The above developments will allow the Company to significantly extend reserve life and continue to support lower CO2 emissions at our customers.

South Disouq Egypt exploration drilling campaign update (SDX 55% working interest)

- The Sobhi well is currently being tied in via a 5.8 kilometre connection to the Ibn Yunus-1X location where an existing flow-line connects down to the South Disouq CPF, at an estimated cost of US$3.5 million. The discovery will potentially only require one further development well to be drilled, which will not be necessary for another two to three years. SDX drilled the Sobhi well at a 100% working interest and the total cost of the well, including the cost to complete and test, was US$4.0 million. Management expects the Sobhi well to commence production in Q1 2021.
- The Company's partner has confirmed that, due to the premium that would be payable if it exercised its back-in rights under the Joint Operating Agreement, it will not participate in the development of the Sobhi discovery.
- Following the success of SD-12X and further review of the 3D seismic, management has now identified c.233bcf of mean unrisked recoverable volumes, which are close to our existing infrastructure, located in horizons that are either productive in South Disouq or in adjacent blocks and which have now been high-graded to ready-to-drill prospects. This increase of 137bcf from the Company's previous estimate of c.96bcf is primarily attributable to the identification of the Hanut prospect which the Company estimates has an unrisked mean recoverable volumes of 139bcf.
- Subject to receipt of final Ministerial and Parliamentary approval of the two-year extension to the South Disouq exploration area, which has already been approved by EGAS, the Company plans to accelerate its drilling campaign to Q2/Q3 2021 from H1 2022. The campaign will commence with the drilling of the IY-2X development well in the Ibn Yunus field to accelerate production and cash flows. The Hanut prospect will be drilled immediately afterwards, targeting 139 bcf, with the Mohsen (26 bcf) and Warda (14bcf) wells to be drilled in 2022. The Company's 45% partner will participate in the IY-2X well and has still to confirm whether they will participate in the other proposed wells.

West Gharib Egypt exploration drilling campaign update (SDX 50% working interest)

- During Q1 2020, the Rabul-3 development well in the West Gharib Concession in Egypt was drilled to a total depth of 1,710 metres and encountered approximately 39 metres of net heavy oil pay across the Yusr and Bakr formations. The Yusr and Bakr formations are of excellent reservoir quality with an average porosity of 21%. The well was completed as a producer in mid-April 2020, with both formations being perforated. After connection to the CPF at West Gharib and clean-up, the well has produced at the expected average stabilised rate of approximately 300 bbl/d.



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