Southern Energy Corp. (SOU:TSX; SOUTF:OTCQX; SOUC:AIM) launched an equity raise to generate gross proceeds of about US$6 million (US$6M)/CA$8.5M/£4.8M to get "back to growth," reported Auctus Advisors Analyst Stephane Foucaud in a March 17 research note. Auctus lowered its target price on the oil and gas firm to reflect the equity transaction and a new capital program.
"The additional capital will enable Southern to capitalize on the rising U.S. gas price and boost production and reserves," wrote Foucaud. "Higher gas prices or additional capital would enable Southern to accelerate production growth."
775% Potential Upside
Auctus reduced its target price on Southern Energy to £0.35 from £0.60 per share, noted the analyst. Because Southern Energy is trading now at about £0.04 per share, the target implies a potential 775% return.
The Fundraising Specifics
The fundraising has three components: a placement for existing institutional investors on AIM at 4.3 pence (4.3p) per share (the placement), a concurrent public offering in Canada at CA$0.08 per share (the offering) and included in the latter, an intended subscription by certain company directors and members of senior management.
Each unit will consist of one common share and one-half of one common share purchase warrant. With a single warrant, the holder may purchase one common share at an exercise price of 5.3p in the placement or CA$0.10 in the offering, for a period of 36 months after the raise closes.
Also, if approved, concurrent to completion of the equity raise, Southern Energy intends to convert 102.5% of the outstanding principal amount of the ~US$3.2M convertible debenture, plus all accrued and unpaid interest as of the close, into units at CA$0.08 apiece.
Further, the company's credit facility was amended. Monthly principal amortization payments were lowered to about 15% per year, and certain covenant calculations were revised.
Capital Spend in 2025
This year Southern Energy plans to complete the three wells already drilled (in Q1/23) and uncompleted (DUC) at Gwinville and drill two vertical wells at Mechanicsburg Cotton Valley, both in the Mississippi Interior Salt Basin. This and other work will require about US$10M in capex, reported Foucaud.
Each drilled and uncompleted well is expected to have an initial production rate over the first 30 days of production (IP30) of about 5.5 million cubic feet per day (5.5 MMcf/d) with an expected ultimate recovery of about 3.5 billion cubic feet (3.5 bcf).
The Mechanicsburg wells will increase the liquid weighting of the company's production, with an IP30 of about 4.2 MMcf/d plus 75 barrels per day and an estimated ultimate recovery of 3.7 billions of cubic feet equivalent.
Next year, the company is projected to produce about 4,000 barrels of oil equivalent per day (4 Mboe/d), up from about 2.2 Mboe/d.
"We assume that new wells will be drilled according to available cash flow to reach greater than 7 Mboe/d by year-end 2028, with debt levels remaining stable," wrote Foucaud.
Southern Energy is selling its gas at about a 15% premium (adding about US$0.60−0.70 per thousand cubic feet).
Impressive Reserves Upside
Foucaud highlighted the potential for Southern Energy to at least double its Proven and Probable reserves (about 30 MMboe at year-end 2023). This estimate was based on numerous drill locations, 20 in Gwinville Lower Selma Chalk, eight in Gwinville Upper Selma Chalk and six in Mechanicsburg Cotton Valley.
The analyst indicated where these additional reserves would come from. Bringing drilled and uncompleted well GH13-13#3 in Gwinville City Bank into production could derisk 30-plus new locations, he noted. Plus Gwinville Lower Selma Chalk has 45 unbooked locations, and the new wells at Mechanicsburg Cotton Valley could derisk another six drill locations.
"Assuming 3.5 bcf per well at Gwinville Lower Selma Chalk and 3 bcf per well at Gwinville City Bank and Mechanicsburg Cotton Valley, the potential reserves upside in these two areas alone is about 40 MMboe," wrote Foucaud. "The Williamsburg oil offers further potential upside."
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