REG - Southern Energy Corp - Q3 Results, H1 Budget, Spud of Gwinville Padsite

Southern EnergyAnnouncement

22/11/2022 07:00

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RNS Number : 1360H  Southern Energy Corp.  22 November 2022

SOUTHERN ENERGY CORP. ANNOUNCES THIRD QUARTER 2022 FINANCIAL AND OPERATING
RESULTS, FIRST HALF 2023 CAPITAL BUDGET AND SPUD OF THE FIRST PADSITE IN THE
MULTI-WELL DEVELOPMENT PROGRAM AT GWINVILLE

 

Calgary, Alberta - November 22, 2022 - Southern Energy Corp. ("Southern" or
the "Company") (TSXV:SOU) (AIM:SOUC)(OTCQX:SOUTF), an established producer
with natural gas and light oil assets in Mississippi, today announces the
release of its third quarter financial and operating results for the three and
nine months ended September 30, 2022. Selected financial and operational
information is outlined below and should be read in conjunction with the
Company's unaudited consolidated financial statements (the "Financial
Statements") and related management's discussion and analysis (the "MD&A")
for the three and nine months ended September 30, 2022, which are available on
the Company's website at www.southernenergycorp.com and have been filed on
SEDAR.

All figures referred to in this news release are denominated in U.S. dollars,
unless otherwise noted.

THIRD QUARTER 2022 HIGHLIGHTS

·    $8.3 million of adjusted funds flow from operations 1  (#_ftn1) in Q3
2022 ($0.06 per share basic and diluted) compared to a loss of $0.2 million in
Q3 2021 ($0.00 per share basic and diluted) and $14.1 million for the nine
months ended September 30, 2022 ($0.14 per share basic and $0.13 per share
diluted), an increase of 907% from the same period in 2021

·    Net earnings of $6.6 million ($0.05 per share basic and $0.04 per
share diluted) and $7.6 million ($0.08 per share basic and $0.07 per share
diluted) for the three and nine months respectively ended September 30, 2022
as compared to net earnings of $4.3 million ($0.10 per share basic and $0.07
per share diluted) and $6.8 million ($0.18 per share basic and $0.15 per share
diluted) in the same period of 2021, an increase of 53% and 12% as compared to
the prior periods, respectively

·    Petroleum and natural gas sales of $19.2 million in Q3 2022, an
increase of 268% from the same period in 2021

·    Q3 2022 average production of 20,449 Mcfe/d 2  (#_ftn2) (3,408 boe/d)
(96% natural gas), an increase of 67% from the same period in 2021

·    Average realized natural gas and oil prices for Q3 2022 of $10.00/Mcf
and $91.93/bbl, respectively, reflecting the benefit of strategic access to
premium-priced US sales hubs in a geographic region with strong industrial and
power generation natural gas demand

·    On July 7, 2022, successfully closed a $17.5 million bought deal
prospectus offering in Canada and a $13.5 million placing in the UK, raising
aggregate gross proceeds of $31.0 million

·    Exited Q3 2022 with a Net Debt Surplus(1) of $20.4 million

·    Successfully renegotiated an increase of $25.0 million borrowing
capacity (currently undrawn) with its current lender in respect of its senior
secured term loan (the "Credit Facility") to increase the total Credit
Facility to $35.0 million (details of which are provided within the MD&A
and Financial Statements)

Ian Atkinson, President and CEO of Southern, commented:

"Our Q3 results have displayed that with a strong underlying production base
and exposure to high prevailing commodity prices, and in particular the
$10.00/Mcf our gas production has achieved, our business can provide
significant cash flows and valuable capital to further our ambitious growth
plans.   Our recent equity financing and credit facility expansion will
allow us to accelerate the organic growth strategy portion of our goal to
reach 25,000 boe/d. The success of the first three wells at Gwinville has
already increased our corporate production by over 100% and we remain truly
excited at the future potential of this asset.  We now look forward to
beginning a long-term development drilling program, starting in Q4 2022, to
unlock shareholder value due to the significant reserves, production and
cashflow growth in Gwinville. This upcoming program will utilize the learnings
from the three well program in Q2 as well as drill horizontal lateral lengths
of up to 6,500 ft in length.  The vast company owned infrastructure at
Gwinville allows for quick conversion from capex to cashflow in this next
phase of development which will support our fundamental strategy of both
organic and inorganic growth of natural gas weighted assets in the Gulf Coast
area of the United States in a timely fashion. We look forward to updating the
market once we have results from the initial phase of our development plan
which we expect will act as a significant catalyst to unlock the value in the
current share price."

Financial Highlights

                                                      Three months ended                  September 30,                                         Nine months ended           September 30,
 (000s, except $ per share)                           2022                     2021                                    2022                                                 2021
 Petroleum and natural gas sales                      $       19,151           $         5,198                         $      35,387                                        $       12,791
 Net earnings                                         6,567                    4,314                                   7,550                                                6,782
 Net earnings per share
     Basic                                            0.05                     0.10                                    0.08                                                 0.18
     Fully diluted                                    0.04                     0.07                                    0.07                                                 0.15
 Adjusted funds flow from operations ((1))            8,273                                     (185)                  14,097                                               1,434
 Adjusted funds flow from operations per share ((1))
     Basic                                            0.06                     0.00                                    0.14                                                 0.04
     Fully diluted                                    0.06                     0.00                                    0.13                                                 0.03
 Capital expenditures                                 3,240                    714                                     20,216                                               807
 Weighted average shares outstanding
     Basic                                            132,822                  45,088                                  98,293                                               37,307
     Fully diluted                                    148,641                  64,694                                  108,671                                              49,896
 As at period end
 Basic common shares outstanding                      135,909                  45,162                                  135,909                                              45,162
 Total assets                                         90,200                   36,969                                  90,200                                               36,969
 Non-current liabilities                              9,613                    13,481                                  9,613                                                13,481
 Net surplus (debt) ((1))                             $      20,435            $    (15,106)                           $      20,435                                             $     (15,106)

Notes:

((1)         ) See "Reader Advisories - Specified Financial
Measures".

Capital Budget

Based on the success of the initial three well appraisal program at Gwinville,
Southern's Board of Directors has approved a capital budget of $78.1 million
for the first half of 2023.  Due to a delay in receiving the drilling rig
from the previous operator, resulting in a later start to the Q4 drilling
program, $11.4 million of the previously approved $34.4 million second half
2022 capital budget has been deferred into 2023 and is included in the $78.1
million first half 2023 program.  The current Gwinville development program
will consist of the drilling, completion and equipping of up to 13 horizontal
wells, as well as the necessary compression additions, pad construction,
in-field pipelines and water disposal well conversions that will service the
next few years of Gwinville development.  Major services and equipment have
been secured for the development program to optimize capital and operational
efficiencies. The approved drilling program will target multi-zone horizontal
potential in the Upper Selma, Lower Selma and City Bank formations.

Operations Update

Q3 2022 represented the first three months of full production addition from
the three well appraisal program in the Gwinville field. The three well pad
site contributed approximately 1,546 boe/d (9.3 MMcfe/d) - an increase of more
than 80% to Southern's base production in the quarter.  All three horizontal
wellbores targeted the Upper Selma Chalk formation, highlighted by the 19-3 #2
well achieving an average initial production rate over the first 30 days
("IP30") of 6.5 MMcf/d.  After the first 120 days of production ("IP120"),
the wells have averaged 533 boe/d (3.2 MMcfe/d).  When these appraisal rates
are normalized for a horizontal lateral length of 5,500' - i.e. the length of
the average lateral planned in the upcoming program - the IP120 rate per well
is approximately 900 boe/d (5.4 MMcfe/d).  The wells are continuing to
perform as expected based on preliminary estimates, and Southern will likely
be installing tubing strings into each of the laterals in the next few months
to optimize flow efficiency.

 

Based on these successful production results and supported by the $31.0
million equity financing and $25.0 million increase to the Company's existing
borrowing capacity, Southern began preparations for a multi-well, long-term
re-development program in the Gwinville field. The drilling rig moved to the
Company's 18-10 padsite and on November 20, 2022 spud the first of the three
planned horizontal wells.  The 18-10 padsite will feature two Upper Selma
Chalk horizontal wells, along with Southern's first City Bank horizontal
appraisal well.  The program will also include the first horizontal
evaluation of the Lower Selma Chalk formation.  Southern is in the process of
constructing five separate padsites for multi-well pad drilling to support a
long-term drilling program.

 

Outlook

Southern has recently spud the first well in the next phase of the drilling
program at Gwinville, with all major services and equipment procured for safe
and efficient operations.  Southern intends to strategically and efficiently
deploy cash from the recent equity financing and increased borrowing capacity
from the Credit Facility to capitalize on the strong natural gas pricing in
the Southeastern U.S. and strong economics at the Gwinville field, to
materially grow the Company organically over the coming years. As Southern
refines its drilling techniques on subsequent Gwinville wells and increases
its average horizontal wellbore length, management are confident that the
economics of the wells will be further increased reducing payback time
significantly.

 

Natural gas pricing has remained strong in the Southeastern U.S. spot and
forward basis markets highlighted by the August 2022 settlement price where a
portion of Southern's natural gas sold for approximately $5.00 per MMBtu
premium to NYMEX.  The futures markets continue to indicate premiums to NYMEX
extending out to 2026.  At current pricing the Company's average horizontal
well at Gwinville is expected to payout in less than 12 months.  The Company
continues to monitor these premium prices and is prepared to hedge additional
basis exposure at these elevated basis premiums.

 

 

Calvin Yau, Chief Financial Officer of Southern, commented:

"Q3 was a strong period for Southern with the quarter representing the first
full period of cash flow from our successful Gwinville appraisal programme.
Our strong production along with the continued strength of natural gas spot
and basis pricing premiums to NYMEX in Southeastern U.S. has put the Company
on a strong footing as we embark on further drilling. This long-term drilling
program will add new unhedged production allowing Southern and its
shareholders to realize significant additional value, from sales made at
premiums to NYMEX. From a balance sheet perspective our $31.0 million equity
financing and $25.0 million increase to the Company's existing borrowing
capacity means that we are able to fund a capital programme that allows us a
level of cashflow which we can recycle into further development of our asset
base, increasing cashflows further."

The Company's long-term strategy remains consistent, with an unwavering
commitment to environmental, social and governance ("ESG") principles that
support the continued development and consolidation of prolific reservoirs
that are outside of the more expensive shale basins. Cost savings and
financial discipline will remain a priority through the continued enhancement
of operations and the ongoing evaluation of opportunities to reduce operating
and capital costs.

Southern thanks all of its stakeholders for their ongoing support and looks
forward to providing future updates on operational activities.

 

Short Form Base Shelf Prospectus

On November18, 2022, Southern filed and obtained a final receipt for a final
base shelf prospectus (the "Prospectus") in each of the territories and
provinces of Canada, other than Quebec. The Prospectus enables Southern to
qualify the distribution of up to C$150 million of any combination of ordinary
shares, warrants, subscription receipts, debt securities and units during the
25-month period that the Prospectus remains effective. The specific terms of
any future offerings of securities, including the use of proceeds from an
offering, will be established in a prospectus supplement filed with the
applicable Canadian regulatory authorities. The Prospectus provides the
Company, as a dual listed entity, with future flexibility with respect to the
issuance of various securities. Southern currently has no contemplated plan to
raise capital.

 

Corporate Presentation

 

A new corporate presentation dated November 2022 is now available on the
Company website at www.southernenergycorp.com
(http://www.southernenergycorp.com) .

 

Qualified Person's Statement

 

Gary McMurren, COO, who has over 22 years of relevant experience in the oil
industry and has approved the technical information contained in this
announcement. Mr. McMurren is registered as a Profession Engineer with the
Association of Professional Engineers and Geoscientists of Alberta and
received a Bachelor of Science degree in Chemical Engineering (with
distinction) from the University of Alberta.

 

For further information about Southern, please visit our website at
www.southernenergycorp.com (http://www.southernenergycorp.com) or contact:

 Southern Energy Corp.

 Ian Atkinson (President and CEO)                           +1 587 287 5401

 Calvin Yau (CFO)                                           +1 587 287 5402

 Strand Hanson Limited - Nominated & Financial Adviser      +44 (0) 20 7409 3494

 James Spinney / James Bellman

 Hannam & Partners - Joint Broker                           +44 (0) 20 7907 8500

 Sam Merlin / Ernest Bell

 Canaccord Genuity - Joint Broker                           +44 (0) 20 7523 8000

 Henry Fitzgerald-O'Connor / Gerel Bastin

 Camarco

 Owen Roberts, Hugo Liddy, Billy Clegg                      +44 (0) 20 3757 4980

 

 

 

 

About Southern Energy Corp.

Southern Energy Corp. is a natural gas exploration and production company
characterized by a stable, low-decline production base, a significant low-risk
drilling inventory and strategic access to premium commodity pricing in North
America. Southern has a primary focus on acquiring and developing conventional
natural gas and light oil resources in the southeast Gulf States of
Mississippi, Louisiana, and East Texas. Our management team has a long and
successful history working together and have created significant shareholder
value through accretive acquisitions, optimization of existing oil and natural
gas fields and the utilization of re-development strategies utilizing
horizontal drilling and multi-staged fracture completion techniques.

READER ADVISORY

MCFE Disclosure. Natural gas liquids volumes are recorded in barrels of oil
(bbl) and are converted to a thousand cubic feet equivalent (Mcfe) using a
ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural
gas volumes recorded in thousand cubic feet (Mcf) are converted to barrels of
oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1)
barrel of oil (bbl). Mcfe and boe may be misleading, particularly if used in
isolation. A boe conversion ratio of 6 mcf:1 bbl or a Mcfe conversion ratio of
1 bbl:6 Mcf is based in an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead. In addition, given that the value ratio based on the current price
of oil as compared with natural gas is significantly different from the energy
equivalent of six to one, utilizing a boe conversion ratio of 6 Mcf:1 bbl or a
Mcfe conversion ratio of 1 bbl:6 Mcf may be misleading as an indication of
value.

Throughout this press release, "crude oil" or "oil" refers to light and medium
crude oil product types as defined by National Instrument 51-101 - Standards
of Disclosure for Oil and Gas Activities ("NI 51-101"). References to "NGLs"
throughout this press release comprise pentane, butane, propane, and ethane,
being all NGLs as defined by NI 51-101. References to "natural gas" throughout
this press release refers to conventional natural gas as defined by NI 51-101.

Unit Cost Calculation. For the purpose of calculating unit costs, natural gas
volumes have been converted to a boe using six thousand cubic feet equal to
one barrel unless otherwise stated. A boe conversion ratio of 6:1 is based
upon an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead. This
conversion conforms with National Instrument 51 101 - Standards of Disclosure
for Oil and Gas Activities. Boe may be misleading, particularly if used in
isolation.

Short-Term Results. References in this press release to IP30, production test
rates, initial test production rates, and other short‐term production rates
are useful in confirming the presence of hydrocarbons, however such rates are
not determinative of the rates at which such wells will commence production
and decline thereafter and are not indicative of long term performance or of
ultimate recovery.  While encouraging, readers are cautioned not to place
reliance on such rates in calculating the aggregate production for Southern.
A pressure transient analysis or well test interpretation has not been carried
out in respect of all wells.  Accordingly, the Company cautions that the test
results should be considered to be preliminary.

Abbreviations. Please see below for a list of abbreviations used in this press
release.

bbl                          barrels

bbl/d                      barrels per day

boe                         barrels of oil

boe/d                     barrels of oil per day

IP30                       average production for the
first 30 days that a well is onstream

Mcf                         thousand cubic feet

Mcf/d                     thousand cubic feet per day

MMcf                     million cubic feet

MMcf/d                 million cubic feet per day

Mcfe                       thousand cubic feet
equivalent

Mcfe/d                   thousand cubic feet equivalent per
day

MMBtu                  million British thermal units

MMBtu/d              million British thermal units per day

Forward Looking Statements. Certain information included in this press release
constitutes forward-looking information under applicable securities
legislation. Forward-looking information typically contains statements with
words such as "anticipate", "believe", "expect", "plan", "intend", "estimate",
"propose", "project" or similar words suggesting future outcomes or statements
regarding an outlook. Forward-looking information in this press release may
include, but is not limited to, statements concerning the Company's asset base
including the development of the Company's assets, oil and natural gas
production levels, including the objective of achieving production of 25,000
boe/d, the Company's capital budget, expectations regarding material reserves,
anticipated operational results for Q4 2022 including, but not limited to,
capital expenditures and drilling plans, expectations regarding commodity
prices, the performance characteristics of the Company's oil and natural gas
properties, the Company's hedging strategy, the ability of the Company to
achieve drilling success consistent with management's expectations, the
sources of funding for the Company's activities, the effectiveness of a final
base shelf prospectus and potential future offerings of securities of the
Company, the effect of market conditions and the COVID-19 pandemic on the
Company's performance, Southern's planned ESG initiatives, expectations
regarding site preparation and production from the Company's drilling
operations in Gwinville and the timing thereof, including the Company's
drilling plans in the Upper Selma, Lower Selma and City Bank formations,
expectations regarding the use of proceeds from all sources, including the
Company's credit facilities, the availability and renewal of the Credit
Facility and future amendments thereto, future organic and inorganic growth
and acquisition opportunities within the resource market, and costs/debt
reducing activities. Statements relating to "reserves" and "recovery" are also
deemed to be forward- looking statements, as they involve the implied
assessment, based on certain estimates and assumptions, that the reserves
described exist in the quantities predicted or estimated and that the reserves
can be profitably produced in the future.

The forward-looking statements contained in this press release are based on
certain key expectations and assumptions made by Southern, including the
timing of and success of future drilling, development and completion
activities, the performance of existing wells, the performance of new wells,
the availability and performance of drilling rigs, facilities and pipelines,
the geological characteristics of Southern's properties, the characteristics
of the Company's assets, the successful application of drilling, completion
and seismic technology, the benefits of current commodity pricing hedging
arrangements, Southern's ability to enter into future derivative contracts on
acceptable terms,  Southern's ability to secure financing on acceptable
terms, prevailing weather conditions, prevailing legislation, as well as
regulatory and licensing requirements, affecting the oil and gas industry, the
Company's ability to obtain all requisite permits and licences, prevailing
commodity prices, price volatility, price differentials and the actual prices
received for the Company's products, royalty regimes and exchange rates, the
impact of inflation on costs, the application of regulatory and licensing
requirements, the Company's ability to obtain all requisite permits and
licences, the availability of capital, labour and services, the
creditworthiness of industry partners, and the Company's ability to source and
complete asset acquisitions.

Although Southern believes that the expectations and assumptions on which the
forward-looking statements are based are reasonable, undue reliance should not
be placed on the forward-looking statements because Southern can give no
assurance that they will prove to be correct. Since forward-looking statements
address future events and conditions, by their very nature they involve
inherent risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors and risks. These
include, but are not limited to, risks associated with the oil and gas
industry in general (e.g., operational risks in development, exploration and
production; the uncertainty of reserve estimates; the uncertainty of estimates
and projections relating to production, costs and expenses, regulatory risks,
and health, safety and environmental risks), constraint in the availability of
labour, supplies, or services, the impact of COVID-19 and variant strains of
the virus, commodity price and exchange rate fluctuations, geo-political
risks, political and economic instability abroad, wars (including the
Russo-Ukrainian War), hostilities, civil insurrections, inflationary risks
including potential increases to operating and capital costs, changes in
legislation impacting the oil and gas industry, adverse weather or break-up
conditions, and uncertainties resulting from potential delays or changes in
plans with respect to exploration or development projects or capital
expenditures. The Russo-Ukrainian War is particularly noteworthy, as this
conflict has the potential to disrupt the global supply of oil and gas, and
its full impact remains uncertain.

The forward-looking information contained in this press release is made as of
the date hereof and Southern undertakes no obligation to update publicly or
revise any forward-looking information, whether as a result of new
information, future events or otherwise, unless required by applicable
securities laws. The forward-looking information contained in this press
release is expressly qualified by this cautionary statement.

Future Oriented Financial Information. This press release contains
future-oriented financial information and financial outlook information
(collectively, "FOFI") about Southern's prospective results of operations,
cash flow, increased capacity under the credit facility, capital expenditures
and payout of wells, all of which are subject to the same assumptions, risk
factors, limitations, and qualifications as set forth in the above paragraphs.
FOFI contained in this document was approved by management as of the date of
this document and was provided for the purpose of providing further
information about Southern's future business operations. Southern and its
management believe that FOFI has been prepared on a reasonable basis,
reflecting management's best estimates and judgments, and represent, to the
best of management's knowledge and opinion, the Company's expected course of
action. However, because this information is highly subjective, it should not
be relied on as necessarily indicative of future results. Southern disclaims
any intention or obligation to update or revise any FOFI contained in this
document, whether as a result of new information, future events or otherwise,
unless required pursuant to applicable law. Readers are cautioned that the
FOFI contained in this document should not be used for purposes other than for
which it is disclosed herein. Changes in forecast commodity prices,
differences in the timing of capital expenditures, and variances in average
production estimates can have a significant impact on the key performance
measures included in Southern's guidance. The Company's actual results may
differ materially from these estimates.

Specified Financial Measures. This press release provides various financial
measures that do not have a standardized meaning prescribed by IFRS, including
non-IFRS financial measures, non-IFRS financial ratios and capital management
measures. These specified financial measures may not be comparable to similar
measures presented by other issuers. Southern's method of calculating these
measures may differ from other companies and accordingly, they may not be
comparable to measures used by other companies. Adjusted funds flow from
operations, operating netback, adjusted working capital and net debt are not
recognized measures under IFRS. Readers are cautioned that these specified
financial measures should not be construed as alternatives to other measures
of financial performance calculated in accordance with IFRS. These specified
financial measures provide additional information that management believes is
meaningful in describing the Company's operational performance, liquidity and
capacity to fund capital expenditures and other activities. Please see below
for a brief overview of all specified financial measures used in this release
and refer to the Company's MD&A for additional information relating to
specified financial measures, which is available on the Company's website at
www.southernenergycorp.com and filed on SEDAR.

"Adjusted Funds Flow from Operations" (non-IFRS financial measure) is
calculated based on cash flow from operative activities before changes in
non-cash working capital and cash decommissioning expenditures. Management
uses adjusted funds flow from operations as a key measure to assess the
ability of the Company to finance operating activities, capital expenditures
and debt repayments.

"Adjusted Funds Flow from Operations per Share" (non-IFRS financial measure)
is calculated by dividing Adjusted Funds Flow from Operations by the number of
Southern shares issued and outstanding.

"Operating Netback" (non-IFRS financial measure) equals total oil and natural
gas sales less royalties, production taxes, operating expenses, transportation
costs and realized gain / (loss) on derivatives. Management considers
operating netback an important measure to evaluate its operational
performance, as it demonstrates field level profitability relative to current
commodity prices.

"Net Debt Surplus" (capital management measure) is monitored by Management,
along with adjusted working capital, as part of its capital structure in order
to fund current operations and future growth of the Company. Net debt is
defined as long-term debt plus adjusted working capital surplus or deficit.
Adjusted working capital is calculated as current assets less current
liabilities, removing current derivative assets/liabilities, the current
portion of bank debt, and the current portion of lease liabilities.

 Neither the TSX Venture Exchange nor its Regulation Services Provider (as
that term is defined in the policies of the TSX Venture Exchange) accepts
responsibility for the adequacy or accuracy of this release.

 

 1  (#_ftnref1) See "Specified Financial Measures" under "Reader Advisory"
below

 2  (#_ftnref2) Comprised of 118 bbl/d light and medium crude oil, 16 bbl/d
NGLs and 19,645 Mcf/d conventional natural gas

 

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