Malcy’s Blog: Flash blog: Southern Energy.

A flash blog today, post Thanksgiving and on Black Friday many markets are closed or running on low level trading. As always I will follow up with companies in the next day or two and write more next week after those conversations.

Southern Energy

Southern has announced its third quarter financial and operating results for the three and nine months ended September 30, 2024. Selected financial and operational information is outlined below and should be read in conjunction with the Company’s unaudited consolidated financial statements and related management’s discussion and analysis (the “MD&A”) for the three and nine months ended September 30, 2024, which are available on the Company’s website at www.southernenergycorp.com and have been filed under the Company’s profile on SEDAR+ at www.sedarplus.ca. 

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

THIRD QUARTER 2024 HIGHLIGHTS

·    Petroleum and natural gas sales of $3.5 million in Q3 2024, a decrease of 34% compared to the same period in 2023

·    Average production of 14,018[1] Mcfe/d (2,336 boe/d) (97% natural gas) during Q3 2024, a decrease of 17% from the same period in 2023

·    Generated $0.6 million of adjusted funds flow from operations[2] in Q3 2024 ($0.00 per share – basic and fully diluted)

·    Net loss of $2.1 million in Q3 2024 ($0.01 net loss per share – basic and fully diluted), compared to a net loss of $2.4 million in Q3 2023

·    Average realized natural gas and oil prices for Q3 2024 of $2.40/Mcf and $73.78/bbl compared to $2.83/Mcf and $82.65/bbl in Q3 2023 and a Q3 2024 natural gas benchmark price of $2.16/Mcf

·    Monetized excess inventory equipment in the first nine months of 2024 for net proceeds of $3.4 million

·    Reduced net debt² by $1.4 million from Q2 2024 and $3.9 million from Q4 2023

Ian Atkinson, President and Chief Executive Officer of Southern, commented:

“Southern remains steadfast in preserving its balance sheet amid the challenging natural gas price environment of 2024. With natural gas prices on track to be the second-lowest in 24 years, we have proactively focused on optimizing our value chain. This includes generating $3.4 million in proceeds through the sale of excess equipment inventory in 2024 and reducing our abandonment liabilities by divesting non-core, non-producing wellbores during Q3.

“Despite the market challenges, Southern has leveraged the strategic locations of its assets and sales points, achieving a $0.24/Mcf premium (~11% basis premium) over Henry Hub benchmark pricing in Q3 2024. Additionally, our financial hedge of 5,000 MMBtu/d at $3.40, which was initiated in Q2 2024, has provided stable cash flows, enabling us to navigate ongoing volatility.

“Looking ahead, there are encouraging signs of price improvement as we enter winter and progress into 2025. Increased feed gas demand from Corpus Christi and Plaquemines LNG export facilities, coupled with rising domestic consumption driven by gas-fired power demand for artificial intelligence data centers and vehicle electrification, are expected to tighten the supply-demand balance. The longer-term structural case for natural gas also looks promising, as the lack of new storage capacity built will continue to tighten markets and geo-political events in Europe are expected to make US LNG more attractive.

“We remain committed to leveraging our strategic advantages and maintaining operational efficiencies to drive growth and shareholder value.”

There is no doubt that it has indeed been a challenging gas market in 2024 and the company has ‘proactively focused on optimizing our value chain’. However the company is strategically placed location wise with regard to its assets and sales points which achieved a c. 11% premium to Henry Hub pricing in this quarter. Along with hedging at $3.40, which has provided those stable cash flows which enable the company to ‘navigate ongoing volatility’.

Going forward signs are encouraging, better news as winter markets help as does initial signs for the 2025 strip where increased demand is forecast from a number of emerging markets such as crypto and AI. I consider that gas remains the only reliable and efficient fuel for the transition world for many years to come. Southern is an outstanding company with excellent management who have judiciously controlled the fine portfolio of assets.

These will, in my view provide a pool of highly valuable assets for the future which makes for a great incentive to be a holder of Southern and offers good, long term quality upside.  

Financial Highlights

Note:

⁽¹⁾          See “Reader Advisories – Specified Financial Measures”.

Subsequent Events

On October 30, 2024, Southern entered into the eighth amendment (the “Eighth Amendment“) with the Company’s senior secured term loan (the “Credit Facility“), which includes an extension to the pause of monthly repayment of principal to December 31, 2024 and a condition that Southern shall repay $1.7 million of the outstanding principal at January 31, 2025 in the absence of a use of proceeds acceptable to the lender (see “Liquidity, Capital Resources and Going Concern – Credit Facility” in the September 30, 2024 MD&A for full details of the amendment)

Outlook

In response to continued low natural gas prices, Southern has been actively reducing and optimizing both operating costs and maintenance capital to maximize its field netbacks. In Q3 2024, Southern sold excess equipment inventory for net proceeds of $2.0 million. The Company expects to continue these initiatives for the remainder of 2024 and into 2025, in order to preserve its balance sheet.

Southern has $10.0 million in unused capacity on its Credit Facility, which can be utilized to complete the three remaining Gwinville drilled but uncompleted wells when natural gas prices improve or for counter-cyclical inorganic growth opportunities.

As part of its risk management strategy, Southern continuously monitors NYMEX prices and basis differentials to mitigate some of the volatility of natural gas prices. The Company has taken advantage of the contango in the natural gas future strip by entering into a fixed price swap contract of 5,000 MMBtu/d for the period of May 2024 – December 2026 at a price of $3.40/MMBtu. Southern’s current commodity hedge program includes:

Southern will continue to monitor NYMEX prices and the basis differential prices and is prepared to hedge additional volumes strategically as needed.

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