SDX Energy (SDX) – Misunderstood and undervalued

SDX Energy (SDX) – Misunderstood and undervalued

SDX Energy is an AIM/TSX listed Moroccan and Egyptian based oil and gas company. The company is unique in that owns a majority stake in the only gas pipeline in Morocco. It has no debt and indeed had $25m of cash and equivalents on the balance sheet at the end of Q2 (latest share price 52p, market cap £106m).

Despite an increasing production profile, multiple discoveries and commodity price increases, the share price is at the same level it was a year ago:

(Source: Google Finance)

Misunderstanding – SDX is not just an oil & gas company – it’s a utility.

SDX own 75% of the only gas pipeline in Morocco. All bar one of its customers have 5 year fixed price contracts. These contracts are lucrative as the alternative is bottled gas. The company produces for $1/MCF and sells for over $10/MCF – not bad margins! The company is currently utilising less than 50% of the pipeline capability and SDX has a project to ramp up towards maximum capacity and connect new customers over the next few years.

Short term catalyst – Q3 results

SDX announced in its half year results that as at August 23rd production was 4444 BOEPD, a circa 33% increase over Q2 production. As oil and gas prices have also risen, Q3 net cash generation should be higher.

H1 capex was high as the company drilled 23 wells. H2 capex is now scheduled to drop, meaning cash flows will be free to head to the balance sheet. CEO Paul Welch discusses H1 success here:

2018 cash generation exit rate

The company should exit 2018 with 8000 BOEPD. In Q2 SDX generated net cash of $9.4m – which was before recent oil and gas price increases and with production at an average 3324 BOEPD. Here are my rough calculations for its net cash generation potential:

Assuming a proportional increase in quarterly net cash generation, scaling up to 8000 BOEPD would increase cash generation to $22m per quarter or $88m (£67m) per year. If net cash generation is anywhere near this level, SDX will be on a price to cash flow multiple of less than two. Of course this does not take the various Morocco/Egypt/gas/oil mix variables into account.

Exploration upside

SDX holds acreage in Morocco and Egypt and has been successful with the drill bit: of the recent 23-well campaign, 20 of the wells drilled were a success. SDX has been using 3D seismic to help it identify its targets and is acquiring new data in both Egypt and Morocco with some results expected this quarter.

I conservatively estimate that SDX should have at least $35m (£26m) of cash on the balance sheet at the end of 2018. Stripping that out from the market cap leaves an enterprise value of £80m. Given that the company could be generating net cash flows in the region of £67m in 2019, I view the company as hilariously cheap. This price doesn’t take into account the high quality management, successful drill record or its gas utility cash flows. Also of note is that unlike my largest holding RockRose Energy (RRE), SDX production is onshore which means there are not the same type of expensive decommissioning costs incurred. I eagerly await Q3 results.


At the time of publication, the author holds a long position in SDX.

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