SDX Energy (SDX) – Q3 results not what I was expecting!
SDX Energy released its Q3 results yesterday morning (see ) which were the complete opposite of what I hoped for: a weakening balance sheet due to high CAPEX, a drop in production from 4,444 BOEPD (August 23rd) to 4,156 BOEPD and a delay to the expected 2018 production exit rate. The market wasn’t impressed (latest share price 43p, market cap £88m).
Balance Sheet – I was wrong!
Given that SDX didn’t have lots of wells to drill in Q3, I incorrectly assumed that CAPEX would reduce. I couldn’t have been more wrong! Rather than a healthy $30 million on SDX’s balance sheet, it weakened to $18.7 million from $25.2 million at the end of Q2.
South Disouq – 2019 production reduced
SDX had anticipated a 2018 exit rate of 8,000 BOEPD. This is now impossible as the Egyptian authorities have not provided final regulatory approvals to develop the processing facility at South Disouq. SDX now has an H1 target for this production.
High CAPEX going forward
In today’s announcement the company stated the following Q4 CAPEX:
$0.6 million + $0.7 million + $2.3 million + $2 million + $1.8 million = $7.4 million total
The company has stated that a further $15 million will be required in H1 for its Egyptian processing facility. This doesn’t include other development activities the company has planned. Paul Welch has stated in his Proactive interview (at 7 minutes 54 seconds) that they will wait until H2 to drill additional wells, to ensure they do not need to come back to the market or use debt funding.
Given the above, I do not believe that there will be significant cash build at SDX for some time. Therefore, the value disconnect I envisaged does not exist. The delay to the production at South Disouq is unfortunate and outside of SDX’s control. As a result of today’s announcement I believe the shares look expensive compared to RockRose Energy (RRE) and JKX Oil & Gas (JKX) and so I took the decision to cut the shares from my portfolio.