SDX Energy Announces Full Year 2020 Financial & Operating Results

Source: www.oilegypt.com 3/19/2021, Location: Africa

SDX Energy Plc (SDX), the MENA-focused oil and gas company, is pleased to announce its audited financial and operating results for the twelve months ended 31 December 2020. All monetary values are expressed in United States dollars net to the Company unless otherwise stated.

SDX management will be hosting a conference call for analysts today at 3:00pm UK time, details of which can be found in the release below. As previously announced, management is also hosting a conference call for retail investors on Monday 22nd March. For details of this call, please contact Camarco at sdx@camarco.co.uk

Mark Reid, CEO of SDX, commented:
"After what has been a very disruptive period for both businesses and people, I am extremely pleased to announce a set of results featuring record production, a strong balance sheet and successful drilling results.

Operationally, 2020 was a strong year for the Group and although the COVID-19 pandemic contributed to a low oil price environment, SDX's high fixed-price gas assets in both Egypt and Morocco demonstrated the cash-generative resilience that exists within our portfolio. While Morocco production saw demand fluctuations early in the period, we are now back to pre-lockdown levels of production with 2021 production expected to be 8-12% higher than in 2020.

Our exploration efforts in the period were also positive in both Egypt and Morocco, with our largest discovery, the SD-12X well in South Disouq, having been brought on stream before the end of the year. As well as adding reserves through the drill bit, the Group also continued to manage its portfolio with the sale of non-core assets in North West Gemsa and South Ramadan, adding further to the Group's cash and reducing its associated capex.

With a 39% increase in EBITDAX from continuing operations to US$32.9 million, our strong focus on capital discipline and our balance sheet stewardship, we have ended the year with a healthy cash balance and clarity over our work programme for the next two years, funded from our cash position. This work programme includes a transformational prospect with the Hanut well having the potential to significantly increase Company reserves. Furthermore, the recently approved ten-year extension of our West Gharib oil concession increases our share of reserves in the asset by 60% year on year and 119% taking account of 2020 production. With a breakeven Brent price of approximately US$20/bbl this is an extremely positive development given current oil prices. We have also made excellent progress with various ESG initiatives and I am particularly proud to announce that our carbon intensity in 2020 was only 1.8kgCO2e/boe for our operated assets, one of the best performances in the industry.

Finally, I would like to thank all of our team for their tireless work rate and commitment in what was tough period for all as we tackled challenges seldom seen before. The outlook for SDX is extremely bright and we look forward to delivering on our goals for the coming period and enhancing value for all stakeholders in the Company."

Year to 31 December 2020 Operations Highlights

- Average entitlement production of 6,397 boe/d, an increase of 57% year on year due to strong production levels mainly from South Disouq, at 49.5 MMscfe/d equating to 4,532 boe/d net to SDX.

- 2020 production from core assets either exceeded or was at the top end of market guidance, despite COVID-19 interruptions in Morocco. Capex was below guidance, primarily due to drilling at West Gharib being deferred due to the lower oil price environment in 2020.

- 2021 guidance for production is 5,620 - 5,920 boe/d and for capex is US$25.0-US$26.5 million.

- The Company's operated assets recorded a carbon intensity of 1.8kg CO2e/boe in 2020 which is one of the lowest rates in the industry.

- The South Disouq two-well drilling campaign finished with a discovery at, SD-12X (100% working interest to SDX). First gas was achieved in December 2020, 5-6 weeks ahead of schedule.

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

- Subject to receipt of final Ministerial and Parliamentary approval for a two-year exploration concession extension, the Company plans to drill the Hanut prospect targeting 139bcf in Q3 2021.

- Hanut will be part of a two-well campaign with IY-2X well, a development well in the eastern part of the Ibn Yunus field, seeking to bring forward production and cash flow. The Company's partner has confirmed that it will participate in both wells.

- During the year, the Group sold its two non-core assets, North West Gemsa and South Ramadan in Egypt for US$2.1 million, a sum which exceeded management's expectation.

- Post-period end, SDX obtained approval for a ten-year extension to the West Gharib Production Services Agreement increasing audited(1) 2P reserves in this core oil asset as at 31 December 2020, by 60% year on year, or 119% taking account of 2020 production, to 3.52 million barrels.

- The Moroccan drilling campaign in 2019/20 resulted in seven discoveries from nine wells, with the tenth well, LMS-2, completed and now expected to be tested as part of the 2021 drilling campaign.

- Further analysis of the LMS-2 well results has revealed that Top Nappe structures, similar to LMS-2, are present throughout the Company's acreage. Subject to a successful flow test of LMS-2, the intention is to target the Top Nappe as part of the planned 2021 Moroccan drilling campaign, to commence in H1 2021.

- Gas consumption in Morocco has returned to March 2020 pre-COVID-19 levels. In December 2020 an existing customer's second factory started up, contributing to higher guidance for FY2021.

- As at 31 December 2020, the Company's working interest share of audited(1) 2P reserves was 11.1 mmboe and audited 2C contingent resources was 0.9 mmboe. The 0.9 mmboe of 2C resources relates to the Meseda and Rabul producing assets in its West Gharib concession in Egypt and will be converted to 2P reserves upon approval of a development plan.

(1) The Company's 2P reserves and 2C resources estimates have been audited in accordance with the COGE Handbook & PRMS by Gaffney, Cline & Associates, an independent qualified reserves evaluator and auditor.

Twelve months to 31 December 2020 Financial Highlights

The North West Gemsa and South Ramadan concessions, which were sold in Q3 and Q4 2020 respectively, are classified as discontinued operations (as required by IFRS). All revenues, costs and taxation from these assets have been consolidated into a single line item "profit/(loss) from discontinued operations" in both periods reported. Per unit metrics do not include North West Gemsa or South Ramadan.

- Netback of US$36.5 million, 29% higher than the same period in 2019, was driven by a full year of production from South Disouq. Morocco Netback was higher reflecting a strong recovery from COVID-19 shutdowns, however West Gharib experienced lower production due to increased water cut and lower oil service fee realisations due to lower oil prices in 2020. Operating expenses were US$2.9 million higher predominantly due to a full year of South Disouq operations, partly offset by cost savings and lower workover activity at West Gharib. The lower per unit Netback of US$16.73/boe in 2020 (2019: US$34.75/boe) results from the increased contribution of South Disouq in 2020 which has high volume, lower Netback production, versus 2019 which only included South Disouq from the start of production in November and therefore reflected a higher proportion of volumes from Morocco, which achieves high Netbacks.

- EBITDAX of US$32.9 million was 39% higher than the same period in 2019 of US$23.6 million due to higher Netback, lower recurring G&A expenses and lower transaction costs in 2020, partly offset by lower profitability from the Company's investment in the joint venture that operates the West Gharib asset due to the lower oil price environment.

- Depletion, depreciation and amortisation ("DD&A") charge of US$25.2 million was higher than the US$18.7 million for the same period in 2019 due to a full year of South Disouq DD&A charge, partly offset by a reduced charge in Morocco following 2P reserves additions from the drilling campaign in Q4 2019/Q1 2020.

- 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. In 2019 the US$5.1 million South Ramadan E&E asset was written off, as was the 2018/19 South Disouq 3D seismic survey (US$3.7 million) and the CGD-15 dry hole in Morocco (US$1.5 million).

- Operating cash flow (before capex, excluding discontinued operations) of US$21.3 million, was higher than the same period in 2019, US$12.1 million, primarily due to the EBITDAX drivers discussed above, offset by an increase in accounts receivable from continuing operations mainly due to increased revenues from South Disouq and Morocco during the period, and higher inventory spend.

- Capex of US$24.7 million, reflects:

- US$13.3 million (including US$0.5 million of decommissioning provisions) for the Moroccan drilling campaign and well tie-ins;

- US$7.3 million for the drilling, completion, testing and tie-in of the SD-12X well in South Disouq (SDX: 100% working interest), including a US$0.3 million development lease bonus and a US$0.2 million decommissioning provision;

- US$1.2 million for the dry-hole drilling cost of the SD-6X (SDX: 55% working interest) well in South Disouq;

- US$1.5 million for additional work and insurance spares at the South Disouq Central Processing Facility ("CPF");

- US$0.4 million for drilling/workovers in West Gharib;

- US$0.9 million for Morocco facilities and customer connections; and

- US$0.1 million for other assets.

- The key difference between the US$24.7 million spend in 2020 and the US$43.0 million in 2019 is the fact that the South Disouq CPF, the flowlines and main export line were constructed in 2019, at a cost US$19.4 million (including a US$1.0 million decommissioning provision).

- Liquidity: Closing cash as at 31 December 2020 was US$10.1 million with the US$2.5 million EBRD credit facility remaining undrawn. The Company has agreed a new five-year, US$10 million facility with EBRD which will be available for drawing upon satisfaction of standard conditions precedent.

- Together with cash generated from operations, management believes the Company is fully funded for all planned activities in 2021 - 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 31 December 2020 had returned to their pre-closure consumption rates. Egyptian production remained unaffected by COVID-19 throughout the period and at present. The Company continues to follow applicable government guidance in each of its territories.

2021 Guidance

- 2021 production guidance of 5,620 - 5,920 boe/d is 1-6% lower than 2020 production, excluding the assets divested, predominantly due to scheduled maintenance at the Group's CPF at South Disouq. An analysis of 2021 production guidance by asset

- South Disouq: Production guidance for 2021 reflects planned 2-3% Central Processing Facility ("CPF") downtime due to planned maintenance, the installation of an inlet compressor and several well workovers, none of which occurred in 2020. Where possible, these activities are expected to be synchronised to minimise their impact. The Company's share of gross production will increase due to its 100% working interest in the SD-12X well, which started up ahead of schedule in December 2020.

- West Gharib: Production is expected to decline naturally during H1'21 until the planned three to four well campaign commences. Thereafter, the production decline is expected to be arrested, with further development wells planned for 2022 and 2023 with a view to growing production to approximately 3,000 bbl/d.

- Morocco: Production guidance is 8-12% higher than 2020 production and reflects a sustained return to normal levels of consumption across the customer base, following COVID shutdowns which impacted 2020 production, together with a full year's contribution from an existing customer's second factory, which came online in December 2020.

- COVID-19: The 2021 production guidance presented assumes no significant production curtailments due to COVID-19. Should there be COVID-19 related disruptions, then production guidance may be revised.

2021 Capex Guidance

- 2021 capex guidance range of US$25.0 - 26.5 million predominantly relates to one exploration and one development well in South Disouq together with workovers and the installation of an inlet compressor. Up to five new wells and workovers are planned in Morocco and up to four new wells and facilities upgrades at West Gharib.

- South Disouq: One development well, Ibn Yunus-2X, and one exploratio n well, Hanut-1X, will be drilled consecutively, commencing in Q2 2021. The IY-2X well will access the eastern compartment of the Ibn Yunus field and is expected to be completed and tied back rapidly once drilled. The Hanut-1X well is targeting unrisked mean recoverable volumes of 139bcf with a 33% chance of success. The Company's partner has confirmed that it will participate in both wells. An inlet compressor will be installed at the CPF site to maximise recovery from the fields, and several well workovers are also planned. Once the exploration concession extension that includes the Hanut and Mohsen prospects has been ratified by Parliament, the Company will pay its share of signature and training bonuses.

- West Gharib: At least three infill development wells will be drilled with a fourth contingent upon field performance and the macroeconomic environment. One water injection well will be drilled, and additional facilities to support this project will be installed. Given the low oil price environment in 2020, only one development well was drilled.

- Morocco: Four or five wells will be drilled in two campaigns in Q2 and Q4 2021. As the drilling rig is stacked in the Company's yard in Morocco, there will be no significant mobilisation cost and in addition splitting the campaign into two allocates the capital investment over approximately eight months which allows the cost of these wells to be comfortably covered by cash generated in that period. Four wells will target shallow biogenic gas that can be tied into the Company's infrastructure quickly and at low cost. In addition, the tenth well from the previous campaign, LMS-2, which penetrated a Top Nappe target will be tested. Should this test be successful, one of the 2021 campaign wells may be deepened to test the Top Nappe prospectivity in the Company's core production area. On the assumption that the rig continues to be available after the drilling of the four firm wells, a fifth contingent well may target additional close to infrastructure reserves. A workover programme of up to seven wells will also be conducted, including re-perforation and sliding sleeve operations to exploit behind-pipe reserves and maximise production and recovery from the existing well stock.

2020 ESG metrics

- During 2020 SDX has developed its systems and processes to enable it to externally report on key ESG metrics at its operated assets.

- The Company's operated assets recorded a carbon intensity of 1.8kg CO2e/boe in 2020, which is one of the lowest rates in the industry

- Scope 1 greenhouse gas emissions at operated assets were 6,699 tons of CO2e. Scope 3 greenhouse gas emissions in Morocco were 113,000 tons of CO2e, which is approximately 57,000 tons of CO2e less than using alternative heavy fuel oil.

- There was one minor Lost Time Injury ("LTI") at South Disouq during 2020 where a contractor was injured but returned to work after three days. SDX immediately conducted an incident report and lessons learned exercise. The safety management system was modified to ensure that similar incidents should not occur in future. This LTI was the first to be recorded by SDX Energy.

- No produced water was discharged into the environment in Morocco (100% contained and evaporated) or at South Disouq (100% recycled).

- There were no hydrocarbon spills at operated assets.

- Whist social projects were severely impacted by COVID-19 restrictions in 2020, the Company is working on a number of initiatives to be launched in 2021 as soon as this can be done safely.

- The Company continues to adopt high standards of Governance through its adherence to the QCA Code on Corporate Governance.

Outlook

- Management believes that 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 2021 and beyond as approximately 90% of the Company's cash flows are expected to be generated from fixed-price gas businesses.

- The current strong oil price and outlook means that the Group also plans to capitalise on its recent production service agreement extension at West Gharib.

- Anticipated 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.

Detailed Operations Update

Twelve months to 31 December 2020 Production

- Twelve months to 31 December 2020 actual entitlement production of 6,397 boe/d, an increase of 57% from the same period in 2019, with South Disouq and Morocco exceeding guidance.

- South Disouq (W.I. 55%): The South Disouq asset exceeded expectations during the twelve months to 31 December 2020, with all four wells flowing ahead of expected rates for the year and the CPF achieving higher than planned levels of uptime. During the second half of the year, the SD-4X and SD-1X wells began to produce increased levels of water and sand, resulting in reduced production. The SD-4X was successfully worked over in Q1 2021 and was put back on production, with SD-1X expected to be worked over later in the quarter.

- 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.

- 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. Upon the recommencement of production, these customers gradually increased their consumption back to pre-closure levels. An existing customer's second factory came online in December 2020.

- NW Gemsa (W.I. 50%): The Company sold its 50% working interest in this non-core asset in July 2020, with an effective date of 1 April 2020. Gross production to 31 March 2020 was 3,056 boe/d (1,528 boe/d net to SDX), which equates to equivalent actual entitlement production to the Company of 382 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. The asset which was non-core was sold with an effective date of 1 November 2020, with the Company's equivalent actual entitlement production of 45 bbl/d for the year.

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 to preserve capital.

- 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 deeper than the Company's core production and development area and the areas previously targeted in Lalla Mimouna. Subject to a successful flow test of LMS-2, the 2021 drilling campaign may target a Top Nappe prospect within the core producing area.

- 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)

- In Q4 2020, the SD-12X well (SDX 100% working interest) was 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, achieving first gas in December, at an estimated tie in cost of US$3.1 million, US$0.4 million below initial estimates. The discovery will potentially only require one further development well to be drilled, which can be undertaken when necessary.

- 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 drill-ready prospects.

- 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 commence drilling in June. The campaign will kick off 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 expected to be drilled in 2022/23. 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.

- Management's estimate of the mean prospective resources and chance of success of the prospects identified in the South Disouq area

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 produced at the expected average stabilised rate of approximately 300 bbl/d.

Twelve months to 31 December 2020 Financial Update

- Netback was US$36.5 million, 29% higher than the Netback of US$28.2 million for the twelve months to 31 December 2019, driven by:

- Net revenue increase of US$11.3 million due to:

- US$17.3 million higher South Disouq revenue, with a full year's production following start up in Q4 2019; and

- US$1.0 million higher revenue in Morocco due to increased production following strong demand rebound following COVID-19 shutdowns (2020: 812 boe/d, 2019: 802 boe/d) and higher prices due to the strengthening of the Moroccan dirham and contract mix; offset by; and

- US$7.1 million lower revenue at West Gharib due to lower realised service fees (2020: US$31.96/bbl, 2019: US$49.61/bbl) and lower production (2020: 626 bbl/d, 2019: 795 bbl/d).

- Operating costs increasing by US$2.9 million from prior period due to the commencement of production at South Disouq, partly offset by lower costs at West Gharib due to cost savings and lower workover activities.

- EBITDAX was US$32.9 million, US$9.3 million (39%) higher than EBITDAX of US$23.6 million for the twelve months to 31 December 2019. This increase is due to higher Netback and lower G&A expenses due to the absence in 2020 of transaction costs associated with the Company's redomicile to the UK in 2019 and redundancy costs for two senior employees who left in Q2 2019, partly offset by lower profitability from the Company's investment in the joint venture that operates the West Gharib asset.

- The main components of SDX's comprehensive loss of US$2.1 million for the twelve months ended 31 December 2020 are:

- US$36.5 million Netback;

- US$5.8 million of E&E expense, of which:

- US$2.3 million represents the write-off of the sub-commercial SD-6X well in South Disouq, including associated 3D seismic costs;

- US$2.2 million is the write off of the sub-commercial SAH-5 well in Morocco, including associated 3D seismic costs; and

- US$1.3 million relates to ongoing new venture activity (predominantly internal management time);

- US$25.2 million of DD&A expense reflects increased charges due to a full year of South Disouq production, partly offsezt by a lower charge in Morocco following 2P reserve additions from Q4 2019/Q1 2020 drilling;

- US$4.0 million of ongoing G&A expense, and US$0.2 million of transaction costs associated with the disposals of NW Gemsa and South Ramadan;

- US$5.3 million of Egyptian corporation tax predominantly for South Disouq; and

- US$1.8 million profit from discontinued operations representing the result from the NW Gemsa field up to 31 March 2020 prior to its sale, a profit after tax of US$1.1 million, and a US$0.8 million gain on sale. The South Ramadan asset contributed a net loss of US$0.1 million.

Operating cash flow (before capex, excluding discontinued operations)

- Operating cash flow (before capex, excluding discontinued operations) of US$21.3 million, higher than the same period in 2019 of US$12.1 million primarily due to the EBITDAX drivers discussed above, offset by an increase in accounts receivable from continuing operations mainly due to increased revenues from South Disouq and Morocco during the period and cash spent on inventory, the majority of which will be consumed in the next Morocco drilling campaign.

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