SEA 0.00% 16.5¢ sundance energy australia limited

Production Guidance - Ambition vs Ability

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    Be prepared ... a lengthy post and a simple graph to summarise it.

    This post is going to review SEA 2019 production ambition and their ability to deliver it.

    Nothing in the post considers any “Trumpian actions or conspiracies”, OPEC cuts or whatnots, Sanctions, War, Currency, Brexit, GDP, Recession, etc. etc.

    The only consideration is SEA’s current production and their statements as to exit rate, production averages and guidance. . I had earlier done this for SEA back in 2015 and in 2016 (and if you really want to, you could go back & review the commentary regarding production, capital efficiency (of production), and the need for more capital to “survive’ back then … ).

    The key boepd numbers are as follows"
    Q4’18 average = 14,500 (guidance)
    2018 annual average production = 12,802 (inferred, using YTD production and Q4 avg)
    2019 annual average production = 21,500 (guidance)
    2019 wells D&C = 36 (guidance, but no schedule provided)
    2019 CapEx = $210M (guidance and assumes all associated with increasing production)

    The first thing that needs to happen is to model the legacy production. What I’m talking about is the present decline curve. I see SEA in 2 chunks – current generation and prior generation. What I’ve based my estimate upon is that at end of Q4’18 legacy production prior generation wells is 7,000 boped and current generation wells is 7,500 boepd (14,500 boepd in total). This is important as the “current generation” will have the highest rate of decline. I constructed a Qtrly decline model for legacy production.

    Then I take the new wells et al (what SEA is spending $210M on). For the sake of modelling, I’ve taken a smoothing approach. The 36 wells are spread out as 9 wells per Qtr. Each well is then considered to have the same “productivity” per 1,000 feet of lateral length with an avg lateral of 5,000 feet. From a model’s perspective those 9 wells in their first Qtr of production all produce for 60 days (to average out when the are TIL’ed across the Qtr). Subsequent Qtrs are all 91 days of production using a typical EFS decline model.

    Graphically it looks like this.

    SEA-Production-decline.jpg



    There are 2 ways then to look at production Capital Efficiency (CE)

    (1) Look at annualized rates which is $210M / (21,500-14,500)boped or $30,000/boepd

    OR

    (2) Look at Qtrly rates which is  Capex 2019 / (Q4’19 avg – Q4’18 avg) boepd. This is my favoured view (and coincidentally paints the more bullish picture).

    = $210M / (23,438 – 14,500)boepd = $23,494/boepd (pretty good number)

    The lower the number the better
    – all things being equal (and Boe’s are not equal). In other words know what you are comparing yourself to. Companies with high gas production will have a higher Boe of production and consequently “appear” more CE. So be careful using this to seek the most efficient driller.

    You can also use the metric to compare your company to itself. In other words, are you getting more Production “bang” for your Capex$. Again, the warning on BOE. Is SEA 2019 Oil% rising or falling.

    Anyway, pressing on. Hope you’re all still reading.

    A, B, C, D on the graph are important points.

    A = Q4’18 avg production exit … the baseline for 2019 performance
    B = Q4’19 avg Production if NO CAPEX spent during 2019
    C = Q4’19 avg Production if CAPEX LIMITED to only replenishing production decline
    D = Q4’19 avg Production spending CAPEX Guidance (36 wells)

    The model suggests 16 wells (4 wells per Qtr, using exactly the same parameters for decline and production) will be necessary to maintain a flat production level. Q4’19 avg modeled at 14,511 boepd (close enough to 14,500).

    Which infers the remaining 20 wells (of a 36 well drilling program) are growth wells.

    What we can now do is a little bit of planning should oil prices become lower for longer (again). The improvements in expense reduction (on a BoE basis) wont be quite as good in a no growth world. Nonetheless the model spits out adjusted EBITDAX of $172.5M (assuming we’ve hedged to the expected production as claimed and it does roughly fit in the models assumptions) and now subtract Interest Payments (~$30M) and the Capex ($93.333M) leaves ~$50M surplus cash.

    That’s unexpected surprise and shows some financial resilience … which was the objective of the exercise. Reasonably comfortable that SEA has the optionality to reduce the pace of drilling should another lower for longer oil price scenario make that necessary.

    Caveats apply ... all care taken but there is the chance I've made poor choices in my modelling.
 
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