Southern Energy Corp. (SOU:TSX; SOUTF:OTCQX; SOUC:AIM) achieved a production rate in Q2/23 was only in line with that of Q1/23 due to the City Bank 18-10 1 well at Gwinville underperforming, reported Auctus Advisors analyst Stephane Foucaud in an Aug. 18 research note.
To reflect a slightly slower production ramp-up there, Auctus lowered its target price on the Canadian oil and gas company to £1.50 per share from £1.60, "which still represents greater than six times the current price," Foucaud noted.
552% possible gain
Despite the reduced target price, Alberta-headquartered Southern Energy still offers investors a remarkable potential return, of 552%, Foucaud wrote. This is implied in the difference between the new £1.50 per share target and the company's current share price, of £0.22.
Production at a glance
Foucaud presented the highlights of Southern Energy's Q2/23 results. Its three main assets are in the Mississippi Interior Salt Basin, in the Gwinville, Mechanicsburg and Mount Olive East fields.
Total production was 2,651 barrels of oil equivalent per day (2,651 boe/d). This was slightly above production in the previous quarter of 2,607 boe/d.
Q2/23 production was hindered by underperformance of 18-10 1, the first City Bank horizontal well at Gwinville, Foucaud reported. After being brought online in February, its natural gas rate increased to 600,000 cubic feet per day (600 Mcf/d) then remained flat. Pressure in the well was unable to build up past 60% of the initial level achieved, the analyst added, "which suggests the well is in communication with a depleted zone."
Management attributes this to "fracture communication with an offset well with poor cementation which had previously been produced from the deeper Tuscaloosa formation," added Foucaud.
Consequently, to prevent this from happening in the future, Southern will create a buffer zone around the historical Tuscaloosa wells by doing away with proximal fracking stages.
Southern's current production, in August 2023, including that from the Gwinville field interest acquired on June 1, 2023, is about 2,900 boe/d.
As for production during the rest of 2023, Auctus now forecasts 3,070 boe/d in Q3 and greater than 4,000 boe/d in Q4, Foucaud wrote.
Cash on hand
At Q2/23's end, Southern Energy had about US$2.2 million (US$2.2M) in cash at the end of June, having paid US$15.4M in capex during the quarter.
As of June 30, 2023, there were still US$11.5M from the credit facility that were unused and available.
On the horizon
Regarding its newly acquired Gwinville assets, Southern Energy is now installing the necessary pipeline infrastructure to consolidate the two existing gathering systems. This will reduce the required compressor stations to one from five. It also will save 250 Mcf/d of fuel gas that the company will add to sales volumes.
During the rest of Q3/23 the company plans to work over some of the acquired Gwinville well bores and start remediation work for the 18-10 3 Upper Selma Chalk well.
When gas prices are such that Southern can materially improve its per-thousand cubic feet equivalent operating expenses, it plans to quickly complete and bring online four of its drilled but uncompleted wells.
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