SDX making an acquisition
It is now 3 years since SDX acquired Circle Oil. With the benefit of hindsight it was a shrewd move and the acquisition has proved to be accretive to the business.
In 2018 SDX appeared to be acquiring assets from BP but eventually the acquisition fell through.
Given the positive effect of the Circle Oil acquisition and the failed BP deal, it is fair to assume they are constantly looking for any potential targets.
With guaranteed free cash flow of $30 to $32m a year for the next few years, are SDX going to spend that all on drilling and opex? I don’t think so. With market sentiment being so low and some company’s market cap at ridiculously low valuations, there will definitely be targets out there.
I have made my thoughts clear, that I don’t want to see an acquisition with such a low SDX share price. I would fully expect SDX to raise cash through an equity placing as they did with Circle Oil and I believe that would allow the core institutional shareholders to take a bigger slice of the company at these low levels.
Although I don’t want to see it, after 3 years of sitting and watching I think it would be naive to think SDX aren’t overdue in making an acquisition.
SDX as a takeover target
With a market cap that equates to only 2 years free cash flow, I believe it is fair to say SDX is currently cheap, especially with no debt and generating substantial revenue.
The current drilling campaign has already been successful and given their historic success with the drill bit, I think it is fair to assume that the remaining high impact drilling will add to SDX reserves.
Success with the drill bit increases reserves and the paper valuation of SDX. If the intrinsic value of SDX isn’t reflected in a higher share price then an already low valuation gets even more ridiculous. If SDX is already being eyed as a potential takeover target then with increased reserves the argument for attempting a takeover becomes even more compelling. For any company wanting to enter the Moroccan market, there can’t be a better company to acquire, given the SDX reserves, pipeline and established profitable customers.
Some may think that our current shareholders, both institutional and retail would not sell, I would say at the moment cash is king and we don’t know if any shareholder would accept it until an offer comes in.
If SDX are concerned about becoming a takeover target, then attempting to make an acquisition themselves could be seen as defensive measure as it would probably deter a potential buyer from making an offer.
I would expect one or the other to happen this year, it is probably more likely that SDX will attempt to make an acquisition themselves but time will tell.