MOROCCO/ EGYPT: SDX ENERGY Announces H1 Operating Results

H1 2020 Operations Highlights 

·    H1 2020 average entitlement production of 6,980 boe/d, an increase of 97% from H1 2019 and 72% higher than average production during FY 2019 (4,062 boe/d) due to strong production levels mainly from South Disouq, which continued to perform ahead of expectations at gross production of 49.7 MMscf/d of dry gas and 486 bbl/d of condensate (52.6 MMscfe/d) equating to 4,825 boe/d net to SDX. 

·     The South Disouq two-well drilling campaign was completed during the period, with the second well, SD-12X (100% working interest to SDX), being a commercial discovery in the Kafr el Sheikh formation, and management estimating 24 bcf of recoverable resources. Plans are underway to connect SD-12X to the Company’s gas processing plant via a 5.8km flow line to the Ibn Yunus-1X well location with production expected in Q1 2021. Based upon well-test data, it is anticipated that when connected, the well will produce at a stabilised rate of 10-12 MMscf/d. 

·     Following the success of SD-12X, management is looking to high grade a number of additional, adjacent and now de-risked, material prospects for drilling in the next two to three years. 

·     Moroccan drilling campaign has resulted in seven discoveries from nine wells drilled to date, with the tenth well, LMS-2, completed and awaiting crew mobilisation for testing. Discoveries at OYF-2 and BMK-1 confirm the prospectivity in SDX’s existing core production and development area extends to the north, and have de-risked c.20 bcf of P50 prospective resources. All objectives of the drilling campaign were achieved with 10 wells with the final two wells deferred in order to preserve capital. 

·     Following the drilling campaigns at South Disouq and Morocco, SDX has incurred the majority of its planned capex for 2020. 

·     Post-period end it was announced that the Company has sold its 50% working interest in the non-core North West Gemsa (NW Gemsa) licence, situated in the Eastern Desert of Egypt for US$3.0 million, of which US$1.4 million was used to discharge the Company’s remaining liabilities on the licence. The net US$1.6 million proceeds exceeded management’s expectations.

COVID-19 update 

·   During the second half of March 2020 and into April 2020, COVID-19 containment restrictions in Morocco temporarily impacted our operations, with three customers being required to close their operations. However, in early May these same customers re-started production and as at 30 June 2020 had returned to approximately 60% of their pre-closure consumption rates. Whilst some restrictions have been eased, there remains uncertainty as to when production will return to pre-COVID-19 levels and accordingly the Company is revising its full year production guidance for the Moroccan business to 5.3 – 6.0 MMscf/d (gross), from 6.7 – 6.9 MMscf/d (gross). Previously the Company had highlighted that should the three customers remain closed down for three months, then FY 2020 guidance would be revised to 5.7 – 6.2 MMscf/d (gross) and if the close down extends to six months, then the guidance would be revised to 5.0 – 5.5 MMscf/d (gross). Gross consumption for H1 2020 was 5.7 MMscf/d and the bottom end of the updated guidance of 5.3 – 6.0 MMscf/d (gross) reflects the potential risk of further shutdowns in H2 2020 if a second spike of COVID-19 infections occur. Egyptian production remains unaffected by COVID-19 at present. The Company continues to follow applicable government guidance in each of its territories. 

2020 Guidance

·     2020 production guidance has been revised to take account of the disposal of NW Gemsa and the impact of COVID-19 on production in Morocco. As such, the Company’s revised 2020 full year guidance is set at 6,000 – 6,250 boe/d (original guidance of 6,750 – 7,000 boe/d). The revised 2020 production guidance is 48-54% higher than 2019 actual production. 

·     2020 capex guidance has been revised down to US$26.2 million from US$28.2 million as per the Company’s Q1 2020 operating and financial results provided on 20 May 2020. The revision reflects the removal of US$2.0 million of budgeted NW Gemsa workover costs that will not be incurred by the Company following the sale of the asset.

Outlook

·    The Company is well-placed to weather the current macroeconomic uncertainties and continues to screen a number of business development opportunities.

·   Cash generation is expected to continue strongly in the second half of 2020 as approximately 90% of the Company’s cash flows are expected to be generated from fixed-price gas businesses.

·      2020 and 2021 work programmes are fully funded.

·     The Company continues to assess the optimum use of its capital, whether that be investment into new projects or returning cash to shareholders. At present it is felt that continued investment into new projects is the optimum use of the Company’s capital, however this will be assessed on an ongoing basis.

Operations Update 

H1 2020 Production and Full Year Guidance 

·    H1 2020 actual entitlement production of 6,980 boe/d, an increase of 97% from H1 2019, with South Disouq and West Gharib exceeding guidance. Full year guidance has been revised to approximately 6,000 – 6,250 boe/d from 6,750 – 7,000 boe/d to reflect the disposal of the non-core NW Gemsa concession and lower consumption expectations in Morocco which has been impacted by COVID-19 shutdowns.  Given this, our revised full year guidance for Morocco is 5.3 – 6.0 MMscf/d which is representative of actual production achieved in H1 2020 (original guidance of 6.7 – 6.9 MMscf/d). An analysis of production by asset is as follows: 

Gross production

SDX entitlement production

Asset

Actual  6 months ended 30 June 2020

Guidance  12 months ended 31 December 2020

Guidance  12 months ended 31 December 2020

Actual 6 months ended 30 June 2020

Actual 6 months ended 30 June 2019

Core assets

South Disouq – WI 55%

52.6 MMscfe/d

47  49 MMscfe/d

4,300  4,460

4,825

West Gharib – WI 50%

3,395 bbl/d

3,200  3,300 bbl/d

610  630

647

822

Morocco – WI 75%

5.7 MMscf/d

5.3  6.0 MMscf/d

663  750

707

745

Non-core assets

NW Gemsa – WI 50%

N/A  now disposed

N/A – now disposed

385

769

1,972

South Ramadan – WI 12.75 %

251 boe/d

42

32

Total

6,000 – 6,267

6,980

3,539

 

o  South Disouq (W.I. 55%): The South Disouq asset has performed above expectations during H1 2020, with all four wells flowing ahead of expected rates and the CPF achieving higher than planned levels of uptime. During Q2 2020, a well testing program was carried out as part of scheduled reservoir management activities. Scheduled CPF maintenance is planned for Q3 2020 and one of the four wells, SD-4X, will be produced at lower rates during H2 2020 until a planned workover to reduce water production, as a result of poor cement job when the well was originally completed, is carried out in Q1 2021 after SD-12X (SDX W.I. 100%) has been brought on stream.  Notwithstanding the above, the Company re-iterates its full year guidance of gross production of 47 – 49 MMscfe/d.

o  West Gharib (W.I. 50%): A new production well, Rabul-3, was successfully drilled, completed and tied into the field production system during H1 2020. Although the existing well stock experienced increasing water cut during the half year, production in the period was higher than guidance albeit lower than the same period in 2019.  Given the above, the Company re-iterates its full year guidance of gross production of 3,200 – 3,300 bbl/d for 2020.

o  Morocco (W.I. 75%): As previously reported, following a period of strong demand in January and February, three customers accounting for 50% of normal daily consumption were required to close between mid-March and early May due to COVID-19 restrictions imposed by the Government of Morocco. Since the recommencement of production, these customers have gradually increased their consumption to c.60% of pre-closure levels, which is constrained by ongoing virus containment measures. The situation in-country remains uncertain and as a result, guidance for this business for FY 2020 has been revised from 6.7 – 6.9 MMscf/d to 5.3 – 6.0 MMscf/d.

o  NW Gemsa (W.I. 50%): The Company sold its 50% working interest in this asset in July 2020, with an effective date of 1 April 2020. Gross production to 31 March 2020 was 3,076 boe/d (1,538 boe/d net to SDX), which equates to equivalent actual entitlement production to the Company of 769 boe/d for H1 2020 and 385 boe/d for the full year. Prior to its sale, the field exceeded expectations, primarily due to a slower rate of pressure depletion and water cut increase.

o  South Ramadan (W.I. 12.75%): South Ramadan, situated offshore in the Gulf of Suez, commenced production in Q2 2020 at approximately gross 350 bbl/d.  Post completion of an acid stimulation operation, production is expected to stabilise during H2 2020 at gross 400 – 500 bbl/d. 

2020 Drilling and Operations 

Morocco drilling campaign update (SDX 75% working interest) 

·   Two close to infrastructure appraisal/development wells were drilled in Q1 2020. The first well, SAH-5, encountered sub-commercial volumes of gas and was plugged and abandoned. The second well, SAH-3, was drilled to a measured depth of 1,129 metres and encountered 5.5 metres of gas sands across two intervals. Management estimates that approximately 0.5 bcf is recoverable from this well, which is expected to be tied into production infrastructure later in 2020 to support customer demand.

·   Two subsequent step-out exploration wells, OYF-2 and BMK-1, have confirmed that the Company’s core productive area extends to the north. The OYF-2 well intersected both pre-drill targets in the Upper and Lower Guebbas horizons, and has been successfully tested. Management estimates that 1.3-1.9 bcf of gas is recoverable from the horizons encountered at OYF-2. The BMK-1 well, further to the north, also encountered gas in both the Upper and Lower Guebbas horizons, albeit due to downhole issues only the former could be logged and completed. Management estimates that 0.9 bcf of gas is recoverable from both of these horizons. The BMK-1 well will be tested in the coming months once COVID-19 restrictions have been lifted.

·     Significantly, the OYF-2 and BMK-1 wells have de-risked up to 20 bcf of adjacent P50 prospective resources for future drilling, of which approximately 10 bcf is located in and around BMK-1.

·     The final well of the campaign, LMS-2 well in the Lalla Mimouna concession, encountered a 10.6 metre net gas reservoir with 30.9% porosity. The LMS-2 gas has a different thermogenic composition from the gas in our core productive area which suggests that it is from a new, and likely deeper, source rock. The well has been cased and completed and it will be perforated and tested to determine its potential when changes to COVID-19 restrictions make it possible to bring a well testing crew into the country.

·      Following the play-opening discoveries made during the campaign, the Company is undertaking an analysis to optimise tie-in costs and future drilling activity in this new area.

·     Having fulfilled the objectives for the Morocco campaign, being: (i) to add 2P reserves in and around its existing infrastructure; (ii) to determine if its existing producing area extends to the north; and (iii) to test the prospectivity within the Lalla Mimouna concession, the Company decided not to drill the final two planned wells. As these last two wells would not have been immediately tied into the Company’s infrastructure or contributed cash flows in the near term, the Company has chosen to preserve its capital and postpone, at no incremental cost, these last two wells for a future campaign.

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

·     Having concluded well planning in late Q4 2019, the SD-6X (Salah) well was drilled in Q1 2020, to a total depth of 3,167 metres. The well encountered 1.7 metres of net gas bearing sand in the Kafr El Sheikh Formation (average porosity 34%), 1.0 metre of net gas bearing sand in the AbuMadi Formation which has 143 metres of high quality net reservoir (average porosity 24%) and 258 metres of high quality net reservoir in the Qawasim Formation (average porosity 20%). The gas sands in both the Kafr El Sheikh and Abu Madi were deemed to be sub-economic and the Qawasim had low gas saturation. The thinner than expected gas columns encountered in SD-6X were attributable to the absence of a sealing mechanism in the stratigraphic traps being targeted by the well.

·     The rig then moved to the site of the next drilling location, the SD-12X (Sobhi) exploration well, and was spud on 18 March 2020. The well was drilled to a measured depth of 2,415 metres, encountering 36 metres net of high-quality gas-bearing sands, with an average porosity of 20%, near the base of the Kafr El Sheikh (“KES”) formation. The top of the KES sand was encountered at a measured depth of 2,169 metres. Management’s best estimate is that the well has encountered approximately 24 bcf of recoverable gas resources which is significantly in excess of the minimum commercial volume of approximately 8 bcf.

·     Subsequently, the Company conducted a drill stem test (DST) in April 2020 during which, following clean-up and a shut-in period, a maximum rate of 25 MMscf/d on a 54/64″ choke was recorded during the main flowing period. This initial flow test was followed by a three hour period flowing at a stable rate of 15 MMscf/d on a 28/64″ choke and then a further four hours flowing at a stable rate of 10 MMscf/d on a 16/64″ choke. The well was then shut in for a 12-hour build-up period during which pressure continued to increase back to pre-test levels. After the DST the well was completed with a gravel-pack and an extended well test (“EWT”) conducted. During the EWT the well was flowed at rates of 9, 13 and 15 MMscf/d for 12, 8 and 28 hours at 25/64″, 36/64″ and 44/64″ choke respectively. The well performance and EWT test data suggested that, when completed, the well will produce at an optimum stabilised rate of 10-12 MMscf/d which is in line with the nearby Ibn Yunus-1X producing well. The well is expected to produce mostly dry gas.

·      Management expects that the Sobhi well will be tied in during 2020/21 via a 5.8 kilometre connection to the Ibn Yunus-1X location where an existing flow-line connects down to the South Disouq CPF. On a gross basis, the tie-in cost is estimated at US$3.5 million. The discovery will potentially only require one further development well to be drilled, which will not be necessary for another two to three years. SDX drilled the Sobhi well at a 100% working interest and the total cost of the well, including the cost to complete and test, was US$4.0 million. Management expects the Sobhi well to commence production in Q1 2021 when the SD-4X well is taken offline for a workover.

·     The Company’s partner has confirmed that, due to the premium that would be payable if it exercised its back-in rights under the Joint Operating Agreement, it will not participate in the development of the Sobhi discovery.

·    Post the discovery at SD-12X, SDX has been undertaking a review of remaining prospectivity in the South Disouq acreage identifying material low-risk prospects. The work has focussed on, but has not been restricted to, the now de-risked basal Kafr el Sheikh play, with a number of features having been identified and advanced to prospect status. The basal Kafr el Sheikh play has so far been identified to contain approximately 73bcf recoverable volumes (management estimate) with a number of additional significant features yet to be fully defined. During the review process, leads and prospects have been identified in other plays that have been proven to exist in either the South Disouq concession or in adjacent acreage. Additional features have been identified in the shallow Kafr el Sheikh horizon, leads in the 10 to 20bcf recoverable range have been identified in the Abu Madi play and prospects and leads are being analysed in a “buried hill” play that is analogous to producing fields in adjacent acreage. With the buried hill play, one feature has been worked to prospect status and is estimated to contain approximately 23bcf recoverable volumes (management estimate). Other, similar sized buried hill features have been identified plus one much larger feature and these are currently being worked to prospect status. Negotiations are underway with the Egyptian authorities for an extension of the existing licences to enable SDX to pursue the material opportunities that have been identified. 

West Gharib Egypt exploration drilling campaign update (SDX 50% working interest) 

·     During Q1 2020, the Rabul-3 development well in the West Gharib Concession in Egypt was drilled to a total depth of 1,710 metres and encountered approximately 39 metres of net heavy oil pay across the Yusr and Bakr formations. The Yusr and Bakr formations are of excellent reservoir quality with an average porosity of 21%. The well was completed as a producer in mid-April 2020, with both formations being perforated.  After connection to the CPFs at West Gharib and clean-up, the well has produced at the expected average stabilised rate of approximately 300 bbl/d.