SDX Energy. Foundation of value in production, with upside. Meseda and NW Gemsa provide value upside. Exploration is a catalyst

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1 SDX Energy Foundation of value in production, with upside Initiation of coverage Oil & gas SDX Energy (SDX) is a London/Toronto-listed company with interests in two producing onshore fields in Egypt. Crucially for a small E&P, it will be cash flow positive in 217 and is unlikely to return to the market for more equity to develop assets. The current work programme (of new wells, workovers and water flood) could see a more than doubling of recoverable volumes and is both cheap and relatively low risk. Once this work starts to bear fruit (later in 216/17), the low-cost production will put SDX in the enviable position of being able to largely fund development of exploration prospects, while giving it resources and operational credibility to add further assets in Egypt. Our analysis indicates that the share price is more than supported by current operations, giving upside potential for the nearterm production increases we see as likely and free exposure to exploration upside. 26 July 216 Price 2.5p Market cap 16m.75/US$; C$1.29/US$ Net cash (US$m) post May 216 raise 14 Shares in issue 8m Free float 82% Code SDX Primary exchange AIM Secondary exchange TSX Venture Share price performance Year end Revenue (US$m) PBT (US$m) Operating cash flow (US$m) Net (debt)/ cash (US$m) Capex (US$m) 12/ (12.5) 12/ (5.2) 8.2 (.3) 12/16e 14.7 (.1) (16.7) 12/17e (1.6) Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Assumes no revenues/cogs from S Disouq until successful. Meseda and NW Gemsa provide value upside SDX s plan to change pumps and institute a water flood at Meseda (5% WI) should take production to over 8mboe/d (gross), while US$8m gross investment at NW Gemsa (1% WI) could see it maintain production for a year or more. After this, the fields should produce free cash flow, even down around US$3/bbl in 217. Exploration is a catalyst This cash flow generation and operational expertise gives the management options. Material, near-term (carried) exploration drilling at South Disouq is targeting 65mmboe of gas/condensate, which would lead to a re-rating for investors if successful. SDX holds a high working interest (55%) and development would likely be low cost and quick (the asset lies close to existing infrastructure). Valuation: Existing portfolio more than supports price Our analysis indicates the shares are supported by existing production. Successful re-invigoration at Meseda/NW Gemsa should lead to unlocking further (low-risk) value. Our core NAV of 41p/share includes risked value for the reinvigoration programme but could see further upside (to 56p/share) if the water flood programme is effective (not including risked exploration value at South Disouq). Value from any acquisition(s) will hinge on the size/price and possible upside of the targets, but SDX should be well placed to take part in consolidation within Egypt given the large number of opportunities in-country. Its policy of accepting payments in Egyptian pounds reduces payment risk and funds internal growth in the mid-term, but could limit potential for dividends/other corporate activity in the longer term. % 1m 3m 12m Abs.) N/A N/A Rel (local) (7.8) N/A N/A 52-week high/low 24.5p 18p Business description SDX Energy is an Egyptian onshore player listed in Toronto and London. It has plans to notably increase production in two fields, while a third should see a carried exploration well by year-end 216. Next events Workovers and water flood at Meseda Gemsa drilling Analysts H216 H216 Will Forbes +44 () Elaine Reynolds +44 () oilandgas@edisongroup.com Edison profile page SDX Energy is a research client of Edison Investment Research Limited

2 Investment summary Company description: Egyptian producer A combination of new wells, workovers and water flood has the potential to increase net production from SDX s two producing assets (Meseda and NW Gemsa) materially by the end of 216. At Meseda, production may double to 8mboe/d while work at NW Gemsa aims to maintain production levels. These measures should increase free cash flow for reinvestment in exploration and development South Disouq, targeting 65mmboe (best estimate), is likely to be drilled around the turn of the year and puts the company in a strong position to add inorganically in North Africa. Valuation: Upside in core value We value the company on a DCF-basis, using our long-term Brent assumption of US$7/bbl (after a recovery from current levels) and a discount rate of 12.5%. We risk the results of the development programme (workovers and water flood) at Meseda and Gemsa to arrive at a core value of 41p/share (C$.71/share). This provides a solid foundation for investors well above the current share price of 2.5p/share, which should increase as the results of the workovers and water flood are confirmed with higher production, to 56p/share (C$.96/share). Additional value at South Disouq could be material (given a high working interest and cheap/fast development concept) should exploration be successful. Financials: Cash flow positive in 217 SDX Energy is a rare beast among London-listed E&Ps in being cash-flow positive after 216. The combination of the current cash position (US$14m post AIM fund-raising) and cash flow from its producing fields means that SDX should be in a sound financial position after the US$17m of capital investment in 216. Assuming the company proves its technical capability by executing successfully on its plans to boost production at Meseda and Gemsa, cash flow should be enough to largely fund any development at South Disouq (assuming exploration success). Some external capital may be sourced to plug the shortfall if required, though the company has a number of options. The management has a clear ambition to use the current portfolio as a springboard to grow the company into a much larger player. Its advantaged position (solid relationships with the government, the large number of smaller players in Egypt and the support of shareholders) means it can be a credible acquirer. Sensitivities: Watch for work programme results The value of the company is heavily dependent on the results of the 216 work programme, the oil price and the investor s chosen discount rate. There is value in the shares without the production uplift from the 216 work programme, though this would increase markedly if we assume a fully successful increase in production. Until the programme is complete, we will risk the results of the capital programme, but note that it is neither expensive nor complicated technically. Our core NAV would move 12% for every US$1/bbl move from our US$7/bbl long-term oil price, while a 2.5% move in discount rate would result in an 8% increase (decrease) in value. SDX Energy 26 July 216 2

3 Asset summary SDX is an AIM and TSX Venture Exchange listed company focused on E&P activities in Egypt, and holds interests in two producing assets (Meseda and NW Gemsa), which produce close to 4mb/d and 8mboe/d respectively (gross). The company has already started a low-cost, high-return programme at each field to increase production materially (at Meseda) and maintain production (at NW Gemsa). It was formed from the merger of Sea Dragon Energy and Madison Petrogas (a private company) in October 215 and listed on AIM in May 216. The tables below indicate the net reserves for SDX, though we expect the work programme and production in 216 to have a material impact on these numbers. Exhibit 1: Reserves estimates Gross Net 1P 2P 3P 1P 2P 3P Oil, mbbl NW Gemsa 5,774 7,934 1, ,5 Meseda 5,921 12,795 16,84 2,961 6,398 8,42 Gas, mmscf NW Gemsa 6,315 8,655 11, ,1 Meseda Total, mboe 12,783 22,222 28,782 3,647 7,34 9,614 Source: SDX Energy. Note: This is the position as published on 31 December 215. Exhibit 2: Prospective resource estimates Gross Net Low Best High Low Best High Oil, mbbl South Disouq 2,15 1,459 46,834 1,158 5,752 25,759 Gas, mmscf South Disouq 97, ,773 1,21,48 53, , ,774 Total, mboe 18,942 64, ,939 1,419 35,57 122,617 Source: SDX Energy. Note: This is the position as published on 31 December 215 and does not include other exploration prospects: Nubia, Yusr and Rabul. Meseda Meseda is located in the West Gharib area, around 25km south of Cairo and 1km from the Gulf of Suez. SDX holds 5% WI in the field, which came onstream in November 211.The field contains gross 2P reserves of 12.8mmboe and is currently producing around 4mb/d. The reservoir at Meseda is the Miocene Asl sands, which produce heavy 17-2 API oil from 13 wells and with watercuts approaching 5%. Exhibit 3: Meseda location Exhibit 4: Meseda production profile Gross production (boe/d) 1, 8, 6, 4, 2, Meseda 3P Meseda 2P Meseda 1P Meseda Base case - Edison Meseda Base + Workovers - Edison Meseda Base + Workovers + Waterflood - Edison Source: SDX Energy Source: SDX Energy, Edison Investment Research SDX Energy 26 July 216 3

4 Fluid production is tied into a central production facility capable of handling 2mb/d. These fluids are then trucked to a Government Petroleum Company (GPC) processing centre 18km away. Produced water is re-injected into the field. With high watercuts that will only increase, a key consideration is enlarging liquids processing capability. The company carried out a number of studies including geological modelling, a well performance review and sub-surface modelling and identified the potential to improve field development through workovers and water flooding. The wells require artificial lift to produce to surface and SDX believes that most of the electrical submersible pumps (ESPs) used for this purpose are incorrectly sized and/or have mechanical issues. This was due to a one-size-fits-all approach by the previous operator, which resulted in poor performance of the pumps (causing emulsification of the liquids). The company has shown with a test pump in a well that bespoke design can have a marked effect on production. An 11-well workover programme has been planned for 216 to remedy this, with the first four-well programme recently initiated. In conjunction with the workovers, the company also plans to drill four infill wells and two water injection wells in order to be able to commence water flooding the reservoir. This leads to a number of possible production scenarios for Meseda that we can value: Base case the current production declines over time with minimal investment, leading to a recovery of 13% and 1P volumes. Base case and workovers The results of the upgraded pumps should become evident over the coming months as more are installed, and the recovery we assume from this (guided by the company presentation) is around the 2P estimate. Under this scenario, the recovery increases to 19%. We have a high degree of confidence that this recovery can be achieved. Base case and workovers and water floods The management believes eventual recovery could increase to 35% with water flood, and increase field production to an initial peak of 9,bopd. An expansion and upgrade to surface water handling and water injection facilities is planned in 216 to handle these new water injection requirements. This is a massive increase to reserve recovery and while the techniques used are well known, we believe it is prudent to risk the expectation of this increase until the results are in, which will be in 217. Exhibit 5: Crude discount for Meseda vs Brent (with Arabian heavy for comparison) Exhibit 6: Meseda well locations Discount 1% % (1%) (2%) (3%) (4%) Brent price, $/bbl (5%) Discount of Arabian Heavy vs Brent Discount of Arabian Heavy vs Brent - Trend Discount of Meseda crude vs Brent Source: Edison Investment Research, Bloomberg Source: SDX Energy Further potential The company points to a number of other prospects that could add to production. The Yusr and Rabul prospects have been mapped to the north of the concession and have a combined mmboe OIP (p1-p9). The company classifies the potential to be moderate with recoverable volumes of c 2.5mmboe. SDX Energy 26 July 216 4

5 The company is also working on possible deeper horizons. The Nubia prospect is in a deeper horizon that produces prolifically in the Gulf of Suez. The company believes it could be the size of Meseda, which would make it around 18mmboe (assuming original Meseda recoverable reserves, rather than reserves remaining as of December 215). NW Gemsa SDX acquired a 1% WI in NW Gemsa in 29. The concession consists of three onshore oil fields, Al Amir SE, Geyad and Al Ola, all located in the Eastern Desert close to the Gulf of Suez and around 3km south of Cairo. Together the fields hold gross 2P reserves of 9.43mmboe and currently produce just under 8,boe/d. Exhibit 7: NW Gemsa location Exhibit 8: NW Gemsa production profile mboed Oil mbd Gas - oil equivalent mboed Condensate mbd Source: SDX Energy Source: SDX Energy, Edison Investment Research Al Amir SE and Geyad produce from two Miocene age reservoirs, the Shagar and Rahmi sandstones. Both reservoirs contain a number of NW/SE trending faults and the sands tend to thin to the east. Al Amir SE has been producing since early 29 and provides the bulk of production from the concession. The field contains 26 wells of which five were still producing from the Rahmi and six from the Shagar at the end of 215. Two further wells were drilled and brought onstream in H116 and together with workovers on nine wells planned in 216 is expected to keep production at a plateau of 8,boe/d. Geyad has also been producing since early 29 and currently produces over 1,boe/d from four wells with a higher watercut than that seen in Al Amir SE. SDX commenced water injection in Al Amir SE and Geyad in 211 and 212, respectively, to maintain reservoir pressure and increase recovery. The central processing facility (CPF) at NW Gemsa is designed to handle up to 15mb/d and 2mmscf/d. This is comprised of three 5, barrel storage tanks; three-phase production separators with a capacity of 15, barrels per day; a three-phase test separator with a capacity of 6, barrels per day; a gas boot for oil stabilisation; a gas compression package; a common flare system; oil shipping pumps; a power generation system; an API water separator and lagoon; and a firefighting system. Gas from the separator is dehydrated, compressed and transferred to the Suco gas facility, while NGLs are separated and added to liquids for sale. Unitisation: The Gemsa field is not totally within the block boundary owned by SDX and as such is subject to unitisation (where an equitable resolution has to be arrived at to share a field s production over multiple owners/blocks). This has not yet been settled, though the company believes it may be complete by year end. The effect on SDX s net reserves is not clear, but we do not believe it would be material given the number of wells inside/outside the block boundary. For the moment, we assume existing reserves assumptions in our modelling. SDX Energy 26 July 216 5

6 Production scenarios Around US$8m (gross) is being invested in the field in 216 and again in 217 to try to keep production at the current levels. After this activity, production may be steady in 217, but will probably start to decline by 218, after which we expect little incremental investment. Instead, the field will produce free cash (of between c US$1.5m and US$3m), which the company will reinvest. Exhibit 9: Comparison of production scenarios 8, 6, Boe/d 4, 2, Gemsa 3P Gemsa 2P Gemsa 1P Gemsa - Maintain Plateau at c.8kboed until H118 Gemsa - Maintain Plateau at c. 8kboed until H117 Source: SDX Energy, Edison Investment Research Exploration South Disouq SDX acquired 1% WI in South Disouq as part of the 213 bid round and subsequently farmedout 45% to its partner IPR (see below). The block sits in the gas prone Central Nile Delta Basin, around 7km north of Cairo. The company has identified the Abu Mahdi prospect on 2D seismic and this was independently assessed by DeGolyer & MacNaughton in December 215 to contain best estimate gross prospective resources of 313.8mmcf. The prospect is a combination structural stratigraphic trap and the company acquired 3km 2 of 3D seismic between March and June 216 to allow further definition of the prospect so that a target location can be drill ready for the end of 216. The cost of drilling the well will be fully carried by SDX s partner IPR, a Dallas-based private company with existing net production in Egypt. The current chance of success (CoS) of 13% is based on the existing 2D data. However, we would expect this to be updated following the interpretation of the 3D seismic where acquisition activities were completed in June. Processing is underway and is anticipated to be completed in September of 216. Exhibit 1: South Disouq Exhibit 11: South Disouq production profile 25 Gross production - per day Gas - oil equivalent mboed Condensate mbd Source: SDX Energy Source: SDX Energy, Edison Investment Research Importantly, in the event of a discovery here, the concession sits in an area of existing gas infrastructure and the company estimates that first production can be achieved around 6 days after reaching TD in the well. As long as the gas does not require too much processing, this should lead to a low capex development that can move into net cash flow generation reasonably quickly. SDX Energy 26 July 216 6

7 Egyptian gas prices vary hugely depending on field age, status and location as well as gas type. Associated gas is generally priced very poorly, and offshore gas attains higher prices than onshore. The widening gap between supply and demand has led the government to increase prices for younger fields and new discoveries in an effort to spur investment (and reduce reliance on expensive LNG imports). As a result, industrial prices vary between US$ /mcf, while national grid prices are lower. We assume a mix between national grid and industrial pricing, arriving at an assumed price of US$4.5/mcf. Assuming this pricing, and around 16% condensates, 218 average production of 9.3mboe/d would produce around US$17m in gross revenues on our modelling, or US$29m in cash inflows for SDX. This could be attained with relatively little capex (we assume well costs of US$3m), and would easily fund any further capex in the field. Egyptian summary Receivables situation We believe that many investors will be concerned about the receivables situation for SDX, given the heightened perceived risk in Egypt for oil and gas companies. Many companies with material Egyptian production have experienced long-dated receivables balances over recent years (Apache and TransGlobe among them). However, the receivables due to the oil companies in Egypt have shrunk markedly since (eg TransGlobe s receivable was US$15m in 213 but now stands at US$22m). The company is happy to receive payments in Egyptian pounds, rather than US dollars; this is important as we note that Circle Oil s recent announcement stated US dollar payments from EGPC have continued to be unpredictable and to date there has not been a sustained improvement. As a result, we do not see the receivables as a great concern for SDX; normal collection for receivables is 3-6 days, well within normal global standards. SDX had receivables of US$5.7m as at end March 216 composed of US$5m of trade receivables (US$1.m for NW Gemsa oil sales, US$.9m for Meseda service fees and a US$3m receivable linked to Shukheir Marine). This US$3m at Shukheir Marine will be collected once SDX satisfies its work programme obligations at South Disouq; the 3D seismic programme will trigger a full repayment, which is expected to be received before the end of the year. General political situation; currency moves President Abdel Fattah el-sisi took office in June 214 and has overseen a period of relative stability. The country was expected to grow consistently at more than 3% out to 22 (as of April 216) according to the IMF. Exhibit 12: Egyptian index 14, 12, Egypt Index 1, 8, 6, 4, 2, Jan/6 Jan/8 Jan/1 Jan/12 Jan/14 Jan/16 Source: Bloomberg, Edison Investment Research Exhibit 13: US dollar vs Egyptian pound 1 9 USDEGP Curncy Jan/5 Jan/7 Jan/9 Jan/11 Jan/13 Jan/15 Source: Bloomberg, Edison Investment Research SDX Energy 26 July 216 7

8 In March 216, the Egyptian pound was devalued by 14% against the US dollar (to 8.878) to increase competitiveness, which should help the opex costs for SDX and other oil companies (this rate hovered around 6 from 26-12). The full effects of recent terror events on tourism and the wider economy may mean the government is keener to get other areas of the economy contributing more. Exhibit 14: Egypt and selected comparators, GDP growth per capita growth* Egypt MENA UK US Source: IMF WEO April 216. Note: *GDP at constant prices. This still leaves Egypt in the higher-risk category for investment. It is in the lower half of global transparency scores and ease of doing business scores. Exhibit 15: Transparency index score (low=bad, high =good) Exhibit 16: Ease of doing business rankings, World Bank CPI Denmark Egypt Somalia Singapore Egypt Eritrea Source: Transparency International Source: World Bank Acquisition opportunities In Egypt, there are a large number of small players each participating in a limited number of licences. The falling oil price over the last two years has meant many could be feeling financial distress. This means there is strong potential for consolidation in the country. SDX is positioning itself as a potential acquirer, and its positive cash flow (even to low oil prices) and supportive shareholder base means that it has a secure foundation for acquisitions. Exhibit 17: Low number of deals in Egypt Exploration blocks previously awarded Fields under development Average Brent price in year 212 Source: 1Derrick, Edison Investment Research. Note: The two deals in 216 are the Rockhopper/Beach deal (pending) with onward sale of a portion to Dover Petroleum Discoveries (not yet under development) Producing fields SDX Energy 26 July 216 8

9 Cameroon The company drilled the Manatee-1 well in its West Bakassi Block in Cameroon. In March 216, it was announced that it encountered 26m of gas bearing pay sands. This gas discovery combined with two others on the block were not deemed sufficiently commercially attractive, and in June the company announced that it was withdrawing from the concession. We expect the company to writeoff the investment in this block at the next opportunity. Management Non-executive chairman: Michael Doyle is a professional geophysicist with more than 35 years industry experience and was a founding director and chairman of Madison PetroGas from its inception in 23. Mr Doyle is a principal of privately held CanPetro International. Mr Doyle was previously a principal and chief executive officer of Petrel Robertson where he was responsible for providing advice and project management to clients throughout the world. Prior to that, he held a variety of exploration positions at Dome Petroleum and Amoco Canada. CEO: Paul Welch has over 25 years industry experience and has held positions at Shell, Hunt Oil, Pioneer Natural Resources and most recently he was CEO of AIM-listed explorer Chariot Oil and Gas. Mr Welch graduated from the Colorado School of Mines with a master s degree in petroleum engineering. He also holds an MBA in finance from the Southern Methodist University in Dallas. CFO: Mark Reid has over 2 years experience in numerous sectors including financial services, investment banking and oil & gas. He has had significant exposure to M&A transactions and the equity and debt capital markets. Most recently, between 29 and 215 he was finance director at AIM-listed Aurelian and Chariot. Prior to this he worked at BNP Paribas Fortis and Ernst & Young Corporate Finance advising on M&A, IPO and other fund-raising transactions. Mr Reid has an MBA and is a member of the Institute of Chartered Accountants of Scotland. Country manager: Ahmed Farid Moaaz has over 3 years experience in the industry. Mr Moaaz has held senior positions with international oil companies with operations in Egypt, including Suez Esso, Trident and El Wastani. Mr Moaaz is a former deputy chairman for production of EGPC where he was responsible for supervising and directing drilling production and petroleum engineering of all joint venture companies operating in Egypt. Valuation We value E&P companies using an asset-by-asset NAV derived from detailed DCF modelling. Core value includes production, development and contingent resources that could be developed, while exploration is valued only if wells are planned and funded in the next 18 months. SDX is a producer, and despite the lower oil prices it generates free cash flow. This puts it in a good position vs peers and should provide investors with a level of comfort and valuation floor. We apply risking that aims to take account of geological, technical and commercial uncertainties. If a company lacks funding or production that could provide cash for development, we assume a dilution of its WI to get through appraisal/development in anticipation of the reduction in value due to financing. This dilution is impossible to accurately estimate, and so we arbitrarily apply a 5% commercial CoS (this is consistent across our coverage universe) for unfunded development this is not the case for SDX given its cash flows. As such, our normal overall CoS applied for unfunded appraisal/development projects would therefore be materially lower than any geological CoS for exploration. SDX Energy 26 July 216 9

10 Exhibit 18: NAV summary We assume real US$7/bbl long-term inflated for Brent (after a recovery from current prices), with country and field specific assumptions to cover quality discount, transport costs and other factors. In particular, we assume a 9.5% discount to Brent for the light oil at NW Gemsa, and a larger discount for the heavier oil at Meseda (decreasing as oil increases). Scenarios: the company is investing NW Gemsa and Meseda with new wells, workovers and water flood. These strategies have the potential to increase production and value markedly, but the outcomes are not certain. As a result, we (incrementally) break down the value of each of these strategies to enable investors to adjust for their own risk estimates. We expect to see substantial signs of success of the work programme in H216, with results more fully visible in 217. Asset Diluted WI CoS Recoverable reserves Net risked value Country Gross Net NPV Absolute Pence per C$/share % % mmboe US$/boe US$m share Net (debt)/ cash post AIM listing estimate 1% 1% SG&A NPV1 of 3 yrs 1% 1% (8) (8) (.14) Net financial income (expenses) NPV 2 yrs 1% 1%. Production Meseda Base case Edison Egypt 5% 1% Meseda Base + Workovers Edison Egypt 5% 9% Gemsa 1P Egypt 1% 1% Gemsa 2P Egypt 1% 1% Core NAV Development upside Meseda Base + workovers + water flood Egypt 5% 4% Edison Gemsa Maintain plateau at c 8mboe/d Egypt 1% 75% until H117 Exploration (known) South Disouq Egypt 55% 13% Exploration NAV RENAV Source: Edison Investment Research. Note: Assumes discount rate of 12.5%. The volumes above may differ slightly from the CPR reserves figures we are using the production volume estimates that the company use, rather than the exact CPR figures. This analysis indicates that the current share price of 2.5p is supported by the current cash position, the base case at Meseda (natural declines from now) and NW Gemsa 1P reserves totals 26p/share (C$.45/share). This leaves substantial upside possible for investors within the core NAV, driven mostly by additional production at Meseda. The exploration well at South Disouq (planned for Q416) could add very materially to the company value, and we expect an update on the prospect (particularly the CoS) once 3D seismic analysis and interpretation is complete. SDX Energy 26 July 216 1

11 Exhibit 19: Breakdown of NAV components US$m Net (Debt) Cash minus G&A Meseda Base case - Edison Gemsa 1P Gemsa 2P Meseda Base + Workovers - Edison Meseda Base + Workovers + Waterflood - Edison Gemsa - Maintain Plateau at c. 8kboed until H117 SouthDisouq Source: Edison Investment Research. Note: Dotted line is the current market cap (in US$). Note the bars here are risked as the table above indicates. Valuation and cash flow sensitivities As a producer, the assets are exposed to the current oil prices to a greater extent than long-dated exploration. The oil price has been volatile of late and there is a great level of uncertainty over what the long-term price of oil may be. As a result, we show two types of sensitivity. The first shows the cash flow sensitivity to oil pricing in , with a longer-term NAV impact of oil pricing. NAV sensitivity for long-term prices and discount rates We assume the gas prices in Egypt are on a long-term basis and are not affected by any oil price changes. As a result, the value of South Disouq will be largely un-affected by oil price movements. The WACC employed is key and we would encourage investors to be happy in the rate they choose to employ. We believe the financial position of SDX, with free cash flow from 217, means it should be assessed on a notably lower WACC than other peers engaged in equity-funded exploration. Exhibit 2: Sensitivity (p/share) to oil prices and discount rate Discount rate Oil prices, US$/bbl % % % % Source: Edison Investment Research We made a detailed assessment of E&P costs of capital that implies the equity costs are well above 15% in the E&P space, and so reducing its need to source external capital is a key point in keeping costs of capital down. SDX Energy 26 July

12 Exhibit 21: Cost of equity derived from share performance (CAPM-based) 3 25 WACC cost equity Mar/1 Sep/1 Mar/11 Sep/11 Mar/12 Sep/12 Mar/13 Sep/13 Mar/14 Sep/14 Mar/15 Sep/15 Mar/16 SDX Transglobe Apache ENI Petroceltic Dana Gas Source: Bloomberg Value in 217 It is clear that the work programme in 216 could see a step change in the value and cash flows. It is useful to see this impact, we think. If we assume the Gemsa workovers are successful enough to de-risk this fully, and that the water flood programme could move the CoS from 4% to 8%, and move the discount year to 217, the core NAV could move from to 41p/share (C$.72/share) to over 7p/share. Reinvestment/repatriation risk We would also note that the value of the company in the long term will be built on cash flows denominated in Egyptian pounds, and that investors will eventually need to see this value moved to US dollars to realise any value (through dividends for example). We explicitly assume that there is no further movement in currency rates over this time and that US$/EGP are essentially fungible; that may not be the reality. Financials and funding considerations After the merger with Madison and the AIM listing, the company has 79.4m shares in issue. There are also 611k warrants outstanding, which expired earlier in July 216. In March 216, the company held US$8.7m in cash and had no debt. In May, the company listed on AIM and raised 7.6m (US$11m) at 18p/share, leaving it with US$14m in cash. An additional US$1.4m of working capital adds to the financial position. As can be seen below (using the position at December 215), the vast bulk of these resources are in US dollars, insulating it from the recent UK pound move following the Brexit vote. Indeed, the weaker UK pound reduces the G&A overheads (in US dollars). SDX Energy 26 July

13 Exhibit 22: Currency exposure to current assets/liabilities (end 215) Exhibit 23: Currency exposure to cash holdings (end 215) 12, 9, Exposure of current assets and liabilities (USD equiv.) 1, 8, 6, 4, 2, Exposure of current assets and liabilities (USD equiv.) 8, 7, 6, 5, 4, 3, 2, 1, USD EGP EUR CAD GBP Total USD EGP EUR CAD GBP Total Source: SDX Energy Source: SDX Energy The question is how this cash will be deployed. We model net capex in 216 to be US$16.7m, with the split as follows: US$1.m at NW Gemsa two development wells and nine workovers. US$5.5m at Meseda for workover programme across 14 wells, with implementation of water flood. US$3.5m at South Disouq this covers only the net capex requirement for 3D seismic as the well cost (US$3m) will be carried by SDX s partner (IPR). If the well is successful, future development costs will be split on the working interest basis (55% for SDX). US$6.7m for the West Bakassi well in Cameroon. We assume no further work is done in Cameroon and the licence is relinquished. 217 capex expectations revolves on South Disouq results The company s cash flow is sensitive to prevailing prices. Given the cash flow requirements to develop any successful exploration it is important that investors are comfortable that the company can fund capital investment at a range of oil prices and scenarios. Capital investment in 217 should be notably lower at the producing fields in 217 as the vast bulk of workovers and water flood work should have been completed. This leads to capex in NW Gemsa and Meseda at under US$2m in 217, and a move to free cash flow generation. In fact, the company will be generating free cash flow in 217 from NW Gemsa and Meseda even at Brent of around US$3/bbl. Importantly, if the South Disouq exploration well is successful and development capital is as we currently model, the company could require capital during 217 (once we consider the timings of cash flows during the year of investing capex before resulting cash flows). In our base case of higher production at Meseda and NW Gemsa, this is not likely to be a large amount, but investors should be aware of this possibility. If successful at South Disouq, we expect the management to look to develop the field as quickly as possible, with gross capex of [US$32m], or a net capex of [US$17m] in 217. This compares to expected cashflow generated from NW Gemsa/Meseda (assuming successful well interventions at both fields) of US$8m (including central company costs). We expect South Disouq production to add a further US$1m in cash flow during the year, but even with this contribution, it is possible that there is a cash flow mismatch in 217, whereby cash flows are not enough to fully fund investment in 217, especially given phasing considerations. SDX Energy 26 July

14 Exhibit 24: CFO and capex at various oil prices 5, 4, 3, 2, 1, $m SouthDisouq Meseda NWGemsa Low case ( $43/bbl, $43/bbl, $43/bbl) Default ( $43/bbl, $52/bbl, $64/bbl) High case ( $43/bbl, $6/bbl, $64/bbl) Source: Edison Investment Research. Note: Bars are capex, lines are CFO. Exhibit 25: Capex and net (debt)/cash at various oil price 4, 3, 2, 1, $m 216 SouthDisouq Meseda NWGemsa Low case ( $43/bbl, $43/bbl, $43/bbl) Default ( $43/bbl, $52/bbl, $64/bbl) High case ( $43/bbl, $6/bbl, $64/bbl) Source: Edison Investment Research. Note: Bars are capex, lines are net (debt)/cash. There are a number of avenues the company can pursue to overcome this: Debt: With NW Gemsa and Meseda throwing off plenty of excess cash, the company may look to raise some debt to cover the development expenditure at South Disouq. As an example of how affordable this may be, if the company raises US$1m of bank debt (which should be enough to cover the shortfall) at an interest rate of 15%, the EBITDA (ex-south Disouq earnings)/interest cover in 217 is 9x. Even if we assume a Brent price of US$43/bbl in 217, this falls to 6x, while in a worse scenario (of US$43/bbl and Meseda and NW Gemsa programmes having little effect on production), this falls to x, but recovers quickly in 218. As long as debt markets are open, we would expect this to be the first option examined. This is complicated by having cash flows from production in Egyptian pounds, which are not as easy to convert to US dollars as other currencies. We would expect any debt to be originated in Egyptian pounds, though the market is likely more difficult and the resulting interest rate could be higher than the company could attain in other markets. However, we believe that 15% is on the conservative side and the company may be able to attain rates below 1%. Delay/prolong development: SDX is the operator of South Disouq and are therefore has veto over the timelines of the development (albeit with agreement of its partner). The company could therefore look to match its cash outflows with cash inflows. This would negate the need for external cash flows, but would reduce the NPV of the project. Farm down of South Disouq: With very low capex intensity and quick development at attractive gas prices, we model that South Disouq has a project IRR of over 7% (and over 35% even if we double both opex and capex). As a result, it should be an attractive project for a partner. Should SDX look to reduce its holding in return for a total net development cost carry (in the first two years of major capex in this instance), it would still retain the vast majority of the value. If the incoming party requires an IRR of 25%, it would sacrifice a 13.5% gross working interest (or a fifth of its current working interest of 55%). Importantly, because of the carry, it would retain over 9% of the value. This option has the potential to lead to delays given the farm-out process is not typically the fastest to complete. Equity: Given the cost of equity is likely to be the highest of all options, we expect this to only occur if the other options were not available or the share price after the discovery had reacted extremely positively. Given the financial position of the company, we do not expect this to be required. SDX Energy 26 July

15 Exhibit 26: Financial summary US$s e 217e 218e 219e Year end 31 December IFRS IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 24,533 11,372 14,694 24,31 26,752 28,935 Cost of Sales (3,639) (4,973) (6,588) (9,92) (7,646) (6,593) Gross Profit 2,894 6,399 8,16 15,218 19,16 22,342 EBITDA 19,126 2,65 4,416 13,173 16,625 19,485 Operating Profit (before amort. and except.) 17, (14) 9,43 13,749 17,538 Intangible Amortisation Exceptionals (2,767) (6,915) (28,5) Share based payments (1,64) (761) (1,) (1,) (1,) (1,) Other Operating Profit 13,693 (7,83) (29,64) 8,43 12,749 16,538 Net Interest (1,9) 18, Profit Before Tax (norm) 16,515 18,786 (124) 9,444 13,78 17,593 Profit Before Tax (FRS 3) 12,684 11,11 (29,624) 8,444 12,78 16,593 Tax (4,328) (1,63) (682) (2,91) (2,944) (3,698) Profit After Tax (norm) 12,187 17,723 (86) 7,353 1,835 13,896 Profit After Tax (FRS 3) 8,356 1,47 (3,36) 6,353 9,835 12,896 Average Number of Shares Outstanding (m) EPS normalised (p) (1.) EPS normalised and fully diluted (p) (1.) EPS (IFRS) (p) (38.) Dividend per share (p) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets 27,851 43,98 27,637 25,513 23,121 21,219 Intangible Assets 16,46 23,473 8,173 8,173 8,173 8,173 Tangible Assets 9,392 18,41 17,358 15,234 12,842 1,94 Investments 1,999 2,16 2,16 2,16 2,16 2,16 Current Assets 21,241 16,36 12,73 22,877 35,695 51,21 Stocks 1,188 1,188 1,639 1,379 1,189 Debtors 3,36 6,678 3,678 6,85 6,696 7,243 Cash 17,935 8,17 7,27 15,153 27,62 42,59 Other Current Liabilities (9,35) (4,484) (4,484) (6,811) (7,42) (7,93) Creditors (6,828) (4,484) (4,484) (6,811) (7,42) (7,93) Short term borrowings (2,27) Long Term Liabilities (68) (286) (286) (286) (286) (286) Long term borrowings Other long term liabilities (68) (286) (286) (286) (286) (286) Net Assets 39,449 55,246 34,94 41,293 51,128 64,24 CASH FLOW Operating Cash Flow 25,531 (5,214) 5,75 9,566 12,951 15,14 Net Interest Tax Capex (12,524) (284) (16,712) (1,62) (484) (45) Acquisitions/disposals Financing (615) (565) 1, Dividends Net Cash Flow 12,392 (6,63) (963) 7,946 12,467 14,969 Opening net debt/(cash) (3,336) (15,728) (8,17) (7,27) (15,153) (27,62) HP finance leases initiated Other (1,495) () Closing net debt/(cash) (15,728) (8,17) (7,27) (15,153) (27,62) (42,59) Source: Edison Investment Research, company accounts. Note: This does not include any revenues, capex or costs for South Disouq from 216 onwards. We assume impairment of the Cameroon intangible assets in 216. We put EPS in p/share throughout the period even though the company only listed to AIM in 216, given this will be the primary exchange going forward. SDX Energy 26 July

16 Contact details 38 Welbeck Street London W1G 8DP United Kingdom Revenue by geography % 1% Egypt Management team CEO: Paul Welch Mr Welch has over 25 years industry experience and has held positons at Shell, Hunt Oil, Pioneer Natural Resources and most recently as CEO of AIM listed explorer Chariot Oil and Gas. Mr Welch graduated from the Colorado School of Mines with both a Bachelor and Master s degrees in Petroleum Engineering. He also holds an MBA in Finance from the Southern Methodist University in Dallas, Texas. Country Manager: Ahmed Farid Moaaz Mr Moaaz has over 3 years experience in industry. Mr Moaaz has held senior positions with international oil companies with operations in Egypt, including Suez Esso, Trident and El Wastani. Mr Moaaz is a former deputy chairman for production of EGPC where he was responsible for supervising and directing drilling production and petroleum engineering of all joint venture companies operating in Egypt. CFO: Mark Reid Mr Reid has over 2 years' experience in numerous sectors including financial services, investment banking and oil & gas. He has had significant exposure to M&A transactions and the equity and debt capital markets. Most recently, between 29 and 215 he was finance director at AIM-listed Aurelian and Chariot. Prior to this he worked at BNP Paribas Fortis and Ernst & Young Corporate Finance advising on M&A, IPO and other fund-raising transactions. Mr Reid has an MBA and is a member of the Institute of Chartered Accountants of Scotland. Principal shareholders (%) Ingalls and Synder 14.5 MEA Energy 14.4 JP Morgan 6.9 City Financial Investment 5.6 Directors and management 1.8 Companies named in this report SDX Energy, IPR, Apache, Transglobe Edison, the investment intelligence firm, is the future of investor interaction with corporates. 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