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SDX – Will they make an acquisition in 2020 or become an acquisition target?

lse:sdx

#1

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.


#2

Indeed. Time will tell. A potential positive scenario for SDX acquiring something is that they could potentially do it with debt or at worst a combination of debt and equity thus limiting dilution. They should be able to get decent terms as they will have strong free cashflows going forward. They could even use the EBRD facility for Morocco CAPEX to free up even more free cash for an acquisition.

SDX’s backers (Waha and Ingalls) basically are SDX. I believe SDX management is beholden to them and SDX has been managed extremely well from a financial and operating perspective. Whatever happens I expect that it will be very beneficial to these two main shareholders. The question is, will it benefit all shareholders?


#3

There really could be blood in the streets in the oil patch this year if this corona virus really does take hold. There will be bargains aplenty and SDX are extremely well positioned to take full advantage. Fixed-price gas contracts contributing the lions share of cash-flow and zero debt. They could do very well indeed out of what may come.


#4

Yes very depressing time to hold shares. The financial effect of the Coronavirus is already being felt and the situation will get a lot worse if this is a prolonged epidemic.
The companies at the most risk are the ones still in the pre production phase were they have no revenue and they still require additional funds to get them through to production.

It has been a difficult year for companies trying to raise funds in this market and that situation is going to get tougher. I own several AIM shares and it is the ones that are not yet generating income that give me the greatest concern.

SDX on the other hand is not a worry. They are in the very fortunate position that they could down tools tomorrow and just rake in the profits for the next five years or so, till their reserves run out. With fairly low opex they could build a large cash pile. With no debt and no real need to raise cash, they are self sufficient with a fixed income.

As s/t points out there will be companies who are struggling to raise cash and are very vulnerable to takeover. A prolonged slowdown in China and the rest of the world will just increase the pressure on these companies and no doubt opportunities will appear to take advantage of that situation.

Although the SDX share price has fallen a little this week it was on low volumes and I suspect it is just nervous retail investors selling.
I don’t expect the share price to fall a lot further especially as we are in a period of high impact drilling news. Long term investors are rightly frustrated by the low share price but a lot of what is happening currently is across the board and nothing to do with the company or how it is being run.
SDX is a solid company in great financial shape and certainly causes me less concern than other areas of my portfolio.


#5

Thanks to Doubler on LSE board

https://www.linkedin.com/company/zenith-energy/


#6

We may get an update on the BMK-1 well this week, the update on the 28th January said “The rig has now moved to the BMK-1 location”.
Given the above information about the speed of drilling, is it too much to hope for that we get a result by the weekend?


#7

On the subject of SDX looking at acquisitions, Malcy’s comments on SDX today

"SDX Energy

The company has announced that the SD-6X (Salah) well in South Disouq (55%) has spudded targeting P50 unrisked prospective resources of c. 71 bcfe. After that the rig moves 6km west to drill the SD-12X (Sobhi) well targeting c.33 bcfe.

Upon success both would only require easy and inexpensive tie-ins to the South Disouq Central Processing Facility and whilst significantly increase SD reserves would probably add marginally to earnings. With exciting wells in Morocco things are looking better for SDX but there are still few signs of the appetite for inorganic growth which would add substantially to the party."

Although he says that there are few signs of the appetite for inorganic growth, SDX have been talking about consolidation in the market for a very long time. I don’t believe that they aren’t looking for acquisitions, I think it will be a constant process and they are just biding their time until the right target appears.

Having an ex CFO as our CEO should have its advantages, by the very nature of the job of CFO he will be cautious and want to see good accretive value.
I still think we will see an acquisition this year, hopefully before any deal is proposed we will have seen a very successful drilling campaign and a more realistic share price.

The current market cap of circa £46m is just too cheap for SDX, given the fundamentals and the near term positive prospects.


#8

Interesting that Sound Energy have failed to sell their Moroccan assets by the 14th February deadline.
They are now considering a micro LNG scheme, the gas would then be trucked to industrial customers in Morocco.

In the shares magazine presentation Mark Reid said in the Q&A section that, assuming the wells in Lalla Mimouna North were successful, depending on the size of any find SDX would either extend the pipeline or put compression in at the well head and truck LNG to customers.


#9

“In particular, Sound said the potential purchaser had not demonstrated it had the cash required to move the deal forwards. Talks are continuing, but are no longer exclusive.”

I wonder if SDX was the potential acquirer? Might have made sense for them to try to take control of the Moroccan natural gas industry. With the current market cap of Sound, maybe in the future they’ll go for it.