KeyFacts Energy: SDX Energy Egypt country profile    l   SDX Energy Egypt country profile 

SDX Energy today announced its unaudited financial and operating results for the three and six months ended 30 June 2021. All monetary values are expressed in United States dollars net to the Company unless otherwise stated.

Mark Reid, CEO of SDX, commented:
"I am very pleased to report first half 2021 results that show strong growth in revenue, netback, EBITDAX and operating cash flows versus the same period in 2020, as well as ending the period with a strong liquidity position. The producing assets in Egypt and Morocco are performing well and we remain above our mid-point guidance for the year. Our drilling activities have yielded three successful wells in Morocco, all of which are now onstream and contributing to cash flow, and one at South Disouq, which is due to start up shortly. As previously announced, whilst the result of the Hanut-1X well is disappointing, I remain positive about the remaining prospectivity in the area which has not been materially impacted."

Three and six months to 30 June 2021 Operations Highlights

• H1 2021 entitlement production of 5,931 boe/d was 3% higher than 2021 mid point market guidance of 5,770 boe/d and 4% lower than H1 2020 mainly due to natural decline, well workovers and expected sand and water production in two of the five wells at South Disouq.
• Capex guidance for Morocco for the 12 months ended 31 December 2021 has been increased by US$1.5 million as wells planned for the second phase of 2021 drilling are deeper than those included in the original guidance. Capex of US$15.8 million was within guidance for South Disouq and West Gharib. This results in group 2021 capex guidance being revised to US$26.5 - 28.0 million (previous guidance US$25.0 - 26.5 million).
• The Company's operated assets recorded a carbon intensity of 2.7kg CO2e/boe in H1 2021 which is one of the lowest rates in the industry. Scope 1 greenhouse gas emissions at operated assets were 4,405 tons of CO2e. Scope 3 greenhouse gas emissions in Morocco were 75,500 tons of CO2e, which is approximately 38,500 tons of CO2e less than using alternative heavy fuel oil.
• In South Disouq, the IY-2X step-out development well, the first of a two-well campaign, was spud in late June 2021. The well was drilled to a measured depth of 8,025 feet, encountering 40.5 feet net-pay of high-quality gas-bearing sands, with an average porosity of 23.4%, near the base of the Kafr El Sheikh ("KES") formation. The top of the KES sand was encountered at a measured depth of 6,768 feet. Following well testing, the well is expected to be brought on production during the last week in August with a view to maximising recovery from the Ibn Yunus Field and helping to maintain current gross production levels of c.45MMscfe/d at the South Disouq Central Processing Facility (the "CPF"). 
• Post-period end, the second well, the Hanut-1X ("HA-1X") exploration well, spudded on 4 August and reached the target depth of 6,000ft on 17 August.  The primary target for HA-1X was the Basal Kafr El Sheikh sand at approximately 5,200ft. The well however found that the Basal Kafr El Sheikh sand had been eroded at this location.  Whilst drilling to target depth, good quality sands were found at the Qawasim level, however they were not charged with gas. SDX considers the result of the HA-1X well to have limited impact on the remaining c.90-100bcf of prospectivity in the SDX acreage at South Disouq.
• Following the IY-2X and HA-1X well results, during H2 2021 the Company will evaluate the current and future prospectivity of the South Disouq concession to assess whether there is evidence that the carrying value of the asset should be impaired.
• In West Gharib, following the ten-year concession extension granted earlier in 2021, preparations continued for a campaign of three to four development wells, the first of which is expected to spud in early Q4.
• The first phase of the Morocco drilling campaign, which consisted of three appraisal/development wells in SDX's operated Gharb Basin acreage in Morocco (SDX: 75% working interest), was successfully completed in June 2021.
• The OYF-3, KSR-17 and KSR-18 wells were all commercial successes, with OYF-3 and KSR-17 already connected as at 30 June 2021 and producing into the Company's infrastructure. KSR-18 has been tested and was connected at the end of July 2021. Management estimates that 1.5-1.6bcf of gross resources have been added by these wells, which is in line with pre-drill P50 estimates. Preparations are underway for the drilling of up to two additional wells in Morocco later in the year.
• As previously announced, during the first half of the year, the Company received the COVID-19 delayed laboratory analysis of the cuttings and sidewall cores from the LMS-2 well. This information confirmed that LMS-2 had successfully encountered the targeted thermogenic gas source that exists in the Top Nappe horizon but that the reservoir in the Lalla Mimouna Nord concession has low permeability and the well is unlikely to flow conventionally. As such, the Company will not risk US$0.5 million testing this well, nor will it commit to further investment in the Lalla Mimouna Nord concession post the end of the concession date in July 2021 as a result of the limited likelihood of it being commercially developed. Accordingly, the Company has recognised a US$10.3 million non-cash impairment charge in Q2 ahead of relinquishment of the concession, of which US$2.8 million relates to LMS-2.

Capex of US$15.8 million, reflects:

• US$8.9 million (incl. US$0.5 million decommissioning provisions) on three wells in Morocco;
• US$2.0 million for well workovers in Morocco;
• US$3.7 million for the completion of the SD-12X tie in at South Disouq, well drilling preparations for IY-2X and HA-1X, the SD-4X well workover, and other capex projects at South Disouq;
• US$1.2 million for workovers and development drilling preparations in West Gharib

Production

• H1 2021 entitlement production of 5,931 boe/d is 3% higher than midpoint guidance of 5,770 boe/d and 4% lower than H1 2020.

Operational

• South Disouq: During the first half of 2021, the existing wells continued to exhibit natural decline and expected sand and water production from two of the five wells, albeit this was partly offset by contribution from the SD-12X well which was brought online in December 2020. The SD-1X and SD-4X wells were successfully worked over during the period and were put back on production at improved gas production rates and with reduced sand and water production. Production for the six months was above midpoint guidance, with production for the remainder of the year expected to remain close to this as the impact of the planned 2-3% Central Processing Facility ("CPF") downtime in H2 should broadly be offset by contribution from the IY-2X well which is expected to be tied in during the last week in August.
• West Gharib: The existing wellstock at the asset continued to produce steadily, albeit exhibiting natural decline as expected. Preparations are advanced for a development drilling campaign of four wells plus one water injector well which will commence in Q4 and allow the Company to benefit from low-risk production growth into a higher commodity price environment. Production will trend towards midpoint guidance until such time as the new wells are drilled and brought online.
• Morocco: H1 2021 saw stronger demand from all customers and this is the reason that the Company is currently exceeding guidance.  In addition, H1 2021 reflects additional consumption from an existing customer's second factory which came online in December 2020. Production guidance is 8-12% higher than 2020 production and reflects a sustained return to normal levels of consumption across the customer base, following COVID shutdowns which impacted 2020 production. 
• COVID-19: The 2021 production guidance presented assumes no significant production curtailments due to COVID-19. Should there be COVID-19 related disruptions, then production guidance may be revised.

Outlook

• South Disouq: The development well, Ibn Yunus-2X, spud in late June 2021 and reached TD in July 2021 encountering 40.5 ft of net gas sand pay. During the last week in August, the Company expects that the IY-2X well will be tied in via a short flowline to the Ibn Yunus-1X location where an existing flowline connects to the South Disouq CPF. The gross cost of the tie-in was c.US$0.55 million. The Hanut-1X exploration well, which was completed during Q3 2021, did not encounter gas-bearing sands and will be plugged and abandoned. An inlet compressor will be installed at the CPF site to maximise recovery from the fields, and several well workovers are also planned. In H1 2021, US$3.7 million of capex was invested for the compressor project (US$1.5 million), the IY-2X development well (US$0.6 million), the completion of the SD-12X tie in (US$0.4 million), planning for the HA-1X exploration well (US$0.2 million), the workovers of SD-4X and SD-1X (US$0.2 million) and other CPF projects.  
• West Gharib: Four infill development wells and one water injection well will be drilled, and additional facilities to support this project will be installed. In H1 2021, US$1.2 million of capex was spent on a number of well workovers and development drilling preparations.
• Morocco: Capex guidance for Morocco for the 12 months ended 31 December 2021 has been increased by US$1.5 million as the wells planned for the second phase of the 2021 campaign in H2 are deeper than those included in the original guidance. In H1 2021, US$10.9 million of capex was spent on three development wells (US$8.9 million which includes US$0.5 million of decommissioning provisions) and a well workover campaign (US$2.0 million). A further two development wells will be drilled in the next campaign in Q3/Q4 2021.

2021 Drilling and Operations Update

Morocco drilling campaign update (SDX 75% working interest)

• The first phase of the Morocco drilling campaign consisted of three appraisal/development wells in SDX's operated Gharb Basin acreage in Morocco (SDX: 75% working interest).
• The first well, OYF-3, which spud on 30 April 2021, reached its TD at 1,183 metres MD on 11 May 2021. The main Guebbas reservoir target was thicker than expected and encountered a 5.2 metre net gas sand. The well also encountered a 1.7 metre net gas sand in a secondary zone that OYF-3 will also produce from.
• The second well, KSR-17, was spud on 13 May 2021 and reached its TD at 1,848 metres MD on 27 May 2021. In the main Hoot reservoir, the well encountered a 5.3 metre net gas sand which was slightly thinner than expected, but with very good reservoir properties.
• Both OYF-3 and KSR-17 have been tested, connected, and producing into our infrastructure before the end of the reporting period. Post-drill P50 reserves are estimated at a combined gross 0.81bcf recoverable which is in line with predrill estimates.
• Finally, the third well of the campaign, KSR-18, was spud on 30 May 2021 and reached its TD of 1,905 metres MD on 14 June 2021. Both prognosed targets were successfully encountered, with the shallower Mid Guebbas target comprising a 3.8 metre net gas sand and the main Hoot target encountering a 13.9 metre net gas sand. As expected, the main Hoot had been slightly depleted by production from a nearby well, however the well is still expected to contribute incremental volumes and deliverability from this extensive compartment. Further to these zones, a third 5.5 metre net gas sand was encountered at the Base Guebbas and will contribute to production in the future when the Hoot has been depleted.  Subsequent to the reporting period, KSR-18 has been tested and put on production.
• The second phase of the Moroccan drilling campaign is expected to commence in September/October 2021.
• The above developments will allow the Company to continue to supply gas to our customers in line with our contractual commitments and continue to support lower CO2 emissions at our customers.

South Disouq Egypt exploration drilling campaign update (SDX 55%/100% working interest)

• Following the success of SD-12X and further review of the 3D seismic, management has now identified c.233bcf of mean unrisked recoverable volumes, which are close to our existing infrastructure, located in horizons that are either productive in South Disouq or in adjacent blocks and which have now been high-graded to drill-ready prospects.
• The Company received final Ministerial and Parliamentary approval of the two-year extension to the South Disouq exploration area. The campaign kicked off with the drilling of the IY-2X development well in the Ibn Yunus field to accelerate production and cash flows. The well will be tied in during the last week in August and the Company's expectations are that the IY-2X well can maximise recovery from the Ibn Yunus Field and help maintain current gross production levels of c.45MMscfe/d at the South Disouq Central Processing Facility. The IY-2X well was tied in via a short flowline to the Ibn Yunus-1X location where an existing flowline connects to the South Disouq Central Processing Facility. The gross cost of this tie-in was US$0.55 million. 
• Post-period end, the second well, the HA-1X exploration well, spudded on 4 August and reached the target depth of 6,000ft on 17 August.  The primary target for HA-1X was the Basal Kafr El Sheikh sand at approximately 5,200ft. The well however found that the Basal Kafr El Sheikh sand had been eroded at this location. Whilst drilling to target depth, good quality sands were found at the Qawasim level, however they were not charged with gas. SDX considers the result of the HA-1X well to have limited impact on the remaining c.90-100bcf of prospectivity in the SDX acreage at South Disouq.

Outlook

• Management believes that 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 through 2021 and beyond as approximately 85% of the Company's cash flows are expected to be generated from fixed-price gas businesses.
• Whilst acknowledging the volatility of the commodities market, the current strong oil price and outlook means that the Group also plans to capitalise on its recent production service agreement extension at West Gharib by investing in a 12-well development drilling programme over the next three years, including four wells in 2021.
• Anticipated 2021 and 2022 work programmes are fully funded.
• The Company continues to assess the optimum use of capital in the interests of all stakeholders, whether that be investment into new projects or returning cash to shareholders. At present the Company is focussed on continued investment of its portfolio and considers this the most appropriate use of the Company's capital. This will be assessed on an ongoing basis.