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, announces its first quarter financial and operating results for the three months ended March 31, 2023. 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 months ended March 31, 2023, which are available on the Company's website at www.southernenergycorp.com and have been filed on SEDAR.
FIRST QUARTER 2023 HIGHLIGHTS
- Generated $1.7 million of adjusted funds flow from operations1 in Q1 2023 ($0.01 per share basic and diluted)
- Net loss of $1.1 million in Q1 2023 ($0.01 loss per share basic and diluted), compared to a net loss of $1.9 million in Q1 2022
- Petroleum and natural gas sales were $5.2 million in Q1 2023
- Maintained balance sheet strength with net debt1 to adjusted funds flow from operationsratio of 1.2x on a trailing twelve month basis down from 2.6x in the first quarter of 2022
- Average production of 15,643 Mcfe/d2 (2,607 boe/d) (95% natural gas) during Q1 2023, an increase of 36% from the same period in 2022
- Average realized natural gas and oil prices for Q1 2023 of $3.25/Mcf and $75.73/bbl, respectively, reflecting the benefit of strategic access to premium-priced U.S. sales hubs in a geographic region with strong industrial and power generation natural gas demand
- Drilled six net wells at Gwinville in Q1 2023 from three padsites, with each subsequent pad drilling operation resulting in fewer drilling days per well depth adjusted
- 2022 Year End Reserves Upgrade:
- Highlights of the Company's year end independent oil and gas reserves evaluation as at December 31, 2022 (the "NSAI Report") prepared by independent qualified reserves evaluator Netherland, Sewell & Associates, Inc. ("NSAI") include:
- an increase in proved developed producing ("PDP") reserves of 25% to 6.2 MMboe
- an increase in total proved ("1P") reserves of 44% to 14.1 MMboe
- an increase in total proved plus probable ("2P") reserves by 31% to 25.5 MMboe in 2022
- before-tax net present value ("NPV") of 2P reserves, discounted at 10% ("NPV10"), of $142.5 million (an increase of 61% on year end 2021)
- Top performing energy stock in the 2023 TSX Venture 50™ based on equal weighting of performance during 2022 across three key indictors: market capitalization growth, share price appreciation, and trading volume
SUBSEQUENT EVENTS
As announced on May 23, 2023, Southern entered into a strategic and highly synergistic purchase and sale agreement to acquire ~400 boe/d (99% natural gas) for cash consideration of $3.2 million in Gwinville with an expected close date of June 1, 2023 (the "Acquisition")
Ian Atkinson, President and CEO of Southern, commented:
"Q1 2023 was a great operational quarter for Southern as we wrapped up our seven horizontal well drilling program at Gwinville, with improved drilling time and cost efficiencies, which will lead to future cost savings when we re-ignite our organic growth at more supportive commodity prices. We are encouraged by the outlook of supply and demand dynamics for U.S. natural gas and are well set to immediately capitalize on gas prices with production behind pipe which can be brought on stream in a very short time scale. Additionally, we are extremely excited to consolidate the Gwinville field with the recently announced asset Acquisition. This Acquisition, which will be seamlessly incorporated with our current operations and staff, provides significant cost synergies, stable, low-decline production and additional high quality drilling locations to compliment our current drilling inventory. These are precisely the type of accretive transactions that we are looking for to expedite reaching our goal to reach 25,000 boe/d. As a low-cost producer attracting premium pricing, we feel that we have the right assets in the right locations that will provide long term value to shareholders and continue to look for further comparable opportunities."
Operational Update
On March 29, 2023, the Company concluded operations on the current drilling campaign which included seven new horizontal wells into three separate productive horizons from three distinct padsites in the Gwinville Field. The program added three Upper Selma Chalk wells, two Lower Selma Chalk wells and two City Bank wells. The drilling campaign was initially planned for 13 horizontal wells, but the Company paused the capital program in response to the weaker natural gas pricing in the first quarter of the year to maintain balance sheet discipline.
Southern is extremely happy with the field execution performance from this program, highlighted by drilling efficiencies which saw the average time from spud to total depth of the Selma Chalk wells reduced from approximately 20 days in Southern's three well appraisal program in 2022 to below 10 days by the final padsite in Q1 2023. The majority of the wells in the program came in at or below the initial drilling and completion cost estimates, despite more than 80% of the cost structure being fixed due to long term contracts for materials and major services locked in during the highly inflationary second half of 2022. With the learnings and efficiencies achieved in this campaign, Southern is planning for all future horizontal drilling in Gwinville to utilize an optimized wellbore design change that will remove the intermediate casing string and all associated costs which the Company expects will reduce the per-well drilling costs by 20-25%. This will allow the Company to reinitiate its organic growth plans at lower future gas prices than what was previously contemplated.
Comparing key performance indicators from the drilling and completion operations in this program to the appraisal program from 2022, Southern achieved a 6% reduction in drilling costs per lateral foot (down to $644/ft) and a greater than 22% reduction in completion costs per lateral foot (down to $615/ft). Further, compared to the early generation horizontal activity between 2005 and 2009 on the asset by the previous operator, one of the largest independent upstream oil and natural gas companies in the U.S., on an inflation adjusted basis, Southern achieved a greater than 30% reduction in both drilling and completion costs per lateral foot.
The Company continues to flow back its first City Bank Hz well at Gwinville 18-10 #1, with load fluid recovery of approximately 13%. Based on historical vertical and early generation horizontal well completions in the City Bank reservoir in Gwinville, peak gas rates are not expected until the load fluid recovery is closer to 20+%, which is expected to be towards the end of Q2 2023. Gas rates are encouraging and continue to improve and Southern is excited to provide further operational updates in Q2 2023 as the modern generation City Bank type curve results are established.
Remediation plans for the 18-10 #3 Upper Selma Chalk well that experienced a mechanical integrity issue with the production casing during completion operations continue to be finalized, with field execution expected in late Q2 2023. The 18-10 #3 well was drilled to a total lateral length of 5,091 ft, achieved 80% of the lateral placed in the targeted porosity zone and was successfully completed in 44 stages prior to the mechanical issue.
The four wells that are awaiting completion include the first two Lower Selma Chalk laterals, along with the second City Bank lateral and one Upper Selma Chalk lateral. These four wells are some of Southern's longest laterals to-date. They were drilled with an average lateral length of approximately 5,400 ft and were steered within the high-graded intervals for an average of 95% of the wellbore length. The two padsites can be brought on production within a matter of weeks once completion operations are resumed. At current strip pricing, Southern could commence completion operations in Q4 2023.
Outlook
With a moderated capital program due to low commodity prices, Southern has left four drilled, uncompleted wells ("DUCs") that can be quickly completed and brought online through Southern's 100% owned equipment at higher natural gas prices. After closing the above-mentioned Acquisition anticipated on June 1, 2023, Southern expects to have approximately $14.5 million of unused capacity on its senior secured term loan (the "Credit Facility"), which can be utilized to complete the DUCs at supportive natural gas prices.
As part of its risk management and sustainability strategy, Southern has entered into both a fixed basis and a fixed price swap in order to mitigate some of the volatility of the natural gas prices going forward. In Q1 2023, Southern entered into a basis swap transaction to secure a premium to NYMEX of $0.32 per MMBtu on 1,000 MMBtu/d from April 1, 2023 to October 31, 2023. Subsequent to March 31, 2023, Southern entered into a fixed price hedge on 1,000 MMBtu/d of production at a price of $3.88/MMBtu from January 1, 2024 to December 31, 2025. To further protect against the volatility, the Company continues to monitor the basis differential prices and is prepared to hedge additional basis exposure at elevated basis premiums.
Southern thanks all of its stakeholders for their ongoing support and looks forward to providing future updates on operational activities and continuing to create shareholder value.
