Production and Capex: 2019 Year End Update and 2020 Guidance

·      2019 production at 4,020 boe/d was 12% higher than 2018, and by individual asset, has either exceeded or was at the upper end of 2019 guidance.

·      2020 production guidance of 6,750 – 7,000 boe/d is 68-74% higher than 2019 production. Guidance includes 1,000 – 1,050 boe/d for North West Gemsa which the Company may exit during the year if sufficient cost savings cannot be achieved by the operator.

·      2019 capex of approximately US$40.7 million (unaudited), US$4.5 million higher than 2019 guidance primarily due to two extra wells being drilled in Morocco with the campaign starting earlier in Q4’19 and rig move times between wells being shorter than expected.

·      2020 capex guidance of US$25.5 million predominantly relates to the completion of the Morocco 12 well drilling campaign, two exploration wells planned for South Disouq, Egypt, and up to three appraisal/development wells planned for the Meseda and Rabul fields in the West Gharb concession.

Morocco drilling campaign update (SDX 75% Working Interest)

·      Seven ‘close to infrastructure’ appraisal/development wells have been drilled to date in the 12 well campaign resulting in five commercial discoveries.  The Company estimates that this has added 2.0 – 2.5 bcf (gross) to its estimate of existing gross gas reserves of 4.0 – 5.0 bcf in Morocco. Given low connection costs, and assuming continued well deliverability, the Company estimates that these reserves will be sufficient to fulfil existing customer contracts for the next 30 to 36 months.

·      The Company expects to add incremental reserves and contingent resources from the remaining five wells in the campaign and through future development of its acreage. These five wells consist of: two play-opening appraisal wells to determine whether the prospectivity of the Company’s core area extends to the north; two exploration wells in Lalla Mimouna targeting deeper prospectivity in a potential new play fairway; and one ‘close to infrastructure’ appraisal/development well.

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

·      At South Disouq in Egypt, preparations continue for two exploration wells targeting the same horizons encountered in the Company’s four discoveries to date. SDX’s share of these well costs is estimated at US$4.0 million in total and this is fully funded from its existing cash resources.

·      The first well, Salah, which is expected to spud in mid/late February and complete in April 2020, is targeting a gross unrisked P50 prospect of 71 bcfe (Company estimate).  The second well, Sobhi, which is expected to spud in late April/early May and complete in early June, is targeting a gross unrisked P50 prospect of 33 bcfe (Company estimate).

·      If successful, these two wells would require short, 8.0 kilometre and 5.8 kilometre, tie-ins to the South Disouq Central Processing Facility (“CPF”) with SDX’s share of the tie-in cost estimated at US$2.5 million and US$1.9 million respectively.

·      The Company is reviewing a number of development concepts depending on the size of any discovery that is made. To fully produce the gross unrisked P50 prospect of 71 bcfe targeted in the first well, two further development wells are likely to be required.  With the gross unrisked P50 prospect of 33 bcfe targeted in the second well, only one further development well would be required.

·      Depending on partnering discussions, a third South Disouq well targeting deeper prospectivity in a potential new play fairway may be drilled later in 2020.

Cash and liquidity update

·      Closing cash as at 31 December 2019 was approximately US$11 million (unaudited) with the US$10 million European Bank for Reconstruction and Development (“EBRD”) credit facility remaining undrawn.  The facility amortised in November 2019 and it currently has US$7.5 million available for drawdown. Discussions are underway with EBRD to extend the tenor and re-establish the US$10 million availability under the facility. Together with cash generated from operations, the Company is fully funded for all of its planned activities in 2020.

Non-cash impairment of historic balance sheet capex of non-core assets

·      A review of historic capitalised expenditure at the Company’s non-core assets at North West Gemsa, South Ramadan and the southern exploration area of South Disouq, which will likely be relinquished during 2020, and, a comparison against remaining reserves, future capex and opex budgets, remaining time to expiry on concessions and future prospectivity, has resulted in the recognition of non-cash impairments which could amount to approximately US$18 million (unaudited). The final impairment charge will be reflected in the Company’s Consolidated Statement of Comprehensive Income for the year ended 31 December 2019.

·      The above impairments have no impact on the Company’s future cash flows or growth potential.

Mark Reid, CEO of SDX, commented: 

“2019 was a successful year for SDX, with all key metrics being ahead of expectations, success with the drill bit and our key South Disouq development project completing on time and on budget.

We have entered 2020 in a strong position with production at record levels, good monthly cash generation, a strong balance sheet and a busy work programme of drilling ahead of us, which is all fully funded.

With eight wells planned for H1 2020, six of which are exploration/appraisal in nature, we are moving into a very exciting period of activity and I look forward to providing further updates in due course.”

2019 actual production

o  South Disouq: the field was brought on production as planned in Q4 2019, however the performance of the CPF and wells has exceeded expectations leading to an accelerated ramp up to plateau of gross 50 MMcfe/d in mid-December.

o  Meseda: strong gross production in the first nine months of 2019 from new wells and the well workover programme ensured that, despite increasing water cut in the field in the latter part of the year, annual production was at the upper end of guidance.

o  Morocco: during the second half of 2019 all customers achieved expected consumption rates, with average gross production in Q4’19 of 7.1 MMscf/d, resulting in annual gross production being at the upper end of guidance.

o  NW Gemsa: gross production was c.400 boe/d above guidance due to stronger performance than forecast as a result of slower rate of pressure decline and a slowdown in water cut increases from a number of larger producing wells.

2020 production guidance

o  South Disouq: production guidance reflects a continuation of the 50MMscfe/d current production rate adjusted for CPF expected uptime/availability during the year.

o  Meseda:  although up to three wells are planned for 2020, the lower production guidance reflects the assumption that the two wells targeting meaningful incremental production may not be drilled until Q3 2020 due to the expected time to complete government and offset operator discussions on approvals/permitting.

o  Morocco: production guidance reflects an assumed increase in consumption from existing Morocco gas customers during 2020.

o  NW Gemsa: as the asset is late life, production guidance reflects the impact of increased water cut, falling reservoir pressure and an assumption that no new infill wells will be drilled in 2020. The Company may exit this concession during the year if sufficient cost savings cannot be achieved by the operator.

2019 actual capex

o  South Disouq: capex at US$20.2 million was US$0.7 million above guidance as it was decided to add a second Ibn Yunus flowline for the planned Ibn Yunus-2 development well (scheduled for drilling in 2021) during the laying of the Ibn Yunus-1 line as laying these lines concurrently avoids paying a second tranche of land use rental and farmers’ compensation when Ibn Yunus-2 is brought on stream.

o  Meseda: capex at US$1.5 million was US$1.2 million below guidance as only two of the planned three development wells were drilled in 2019 as a result of delays in obtaining government and offset operator approval for the third well. Furthermore, neither of the planned two water injection wells were drilled and no electrical submersible pump replacements were required as previously anticipated.

o  Morocco: capex at US$16.1 million was US$4.1 million above guidance mainly as a result of six, rather than four, wells being drilled in Q4’19 due to the campaign starting early and rig move times between wells being shorter than expected.  This resulted in capex being US$3.1 million higher than guidance. Additionally, the Company acquired two compressors in Q4’19 to maximise recovery from existing well sites.  The cost of these compressors was c.US$1 million, which has already been paid back from additional gas volumes produced.   

o  NW Gemsa: capex at US$1.3 million was US$0.7 million below guidance as only five workovers were required against 10 planned due to overall field performance being better than anticipated.

2020 capex guidance

·      2020 capex guidance of c.US$25.5 million predominantly relates to the completion of the Morocco 12 well drilling campaign, the drilling of the two exploration wells and well workovers planned for South Disouq, and a deposit on the booster compressor planned for South Disouq in 2021, up to three appraisal/development wells in Meseda and up to 10 workovers in North West Gemsa.

Non-cash impairment of historic balance sheet capex of non-core assets

·      Having conducted a preliminary impairment indicator review, the Company advises that it is likely that up to US$18 million (unaudited) of impairments will be recognised across certain non-core assets in the upcoming financial statements for the year to 31 December 2019.  This impairment, which is analysed below, has no impact on the Company’s future cash flows or growth potential and will be reflected in the Consolidated Statement of Comprehensive for the year ended 31 December 2019:

o  NW Gemsa: lower oil price assumptions, increased water breakthrough reducing oil production in late 2019 and continuing high opex may lead to the concession becoming uncommercial and a subsequent relinquishment may occur. As such an impairment of between US$7-9 million is likely to be recognised.

o  South Ramadan: an updated assessment of discovered volumes and likely future capex/opex requirements indicates that the Company’s historic capitalised expenditure will not be fully recovered. As such an impairment of up to US$5 million is likely to be recognised.

o  South Disouq (southern exploration area of the concession): as there is insufficient time before the concession expires to drill the prospects in the southern exploration area of the concession identified by the 2018/19 3D seismic survey, an impairment of up to US$4 million in relation to this 3D seismic is likely to be recognised. The exploration wells to be drilled in Q1 and Q2 2020 are in the northern part of the concession close to the Company’s core producing area which is held under a 25-year development lease.

(Source: SDX Energy)