Southern Energy Corp. (SOU:TSX.V; SOUTF:OTCQX; SOUC:AIM) captured the attention of Research Capital Corp. Analyst Bill Newman, who initiated coverage on it with a Speculative Buy rating and an CA$0.18 per share target price, he reported in a June 6 research note.
"With a clear path to rapidly increasing production, improving margins and expanding free cash flow, Southern Energy offers investors a unique opportunity to gain leveraged exposure to a strengthening natural gas cycle, backed by a strong operational foundation and a proven management team," Newman wrote.
200% Implied Return
Southern's share price at the time of Newman's report was CA$0.06, the analyst noted. He pointed out the stock is undervalued on both an asset and cash flow basis. From this price, the return to target is 200%.
Also, the Canadian natural gas producer had 336.3 million (336.3M) basic shares outstanding and 516.7M fully diluted shares outstanding. Its market cap was CA$20.18 million (CA$20.18M). Its 52-week range was CA$0.06–0.24 per share.
"With a bullish outlook for natural gas prices—driven by expanding liquefied natural gas exports and rising electricity demand — we believe Southern's shares offer meaningful leverage to a strengthening gas market," wrote Newman.
Conventional, Low-Decline Assets
The analyst described Southern as a "U.S. Gulf Coast natural gas explorer and producer focused on growing production and cash flow through the low-risk development of its high working interest portfolio in Central Mississippi." The company benefits from premium natural gas pricing relative to NYMEX (Henry Hub) and 100%-owned infrastructure, which contribute to its high margins.
"Southern provides investors with a compelling mix of stable base production, premium gas pricing exposure and high-impact, low-risk organic growth potential," wrote Newman, and he presented the company's assets.
Gwinville Field: Southern's flagship natural gas asset in Jefferson Davis County, Gwinville offers development of stacked pays in multiple horizons, including the Upper Selma Chalk, Lower Selma Chalk and City Bank formations. Southern has identified 70 tier 1 horizontal drill locations at Gwinville.
Mechanicsburg Field: In the Interior Salt Basin, Mechanicsburg offers a high-working interest, liquids-rich gas development opportunity and significant upside from low-risk vertical infill drill locations. Along with the six currently booked PUDs, another 12 locations have been identified via three-dimensional seismic surveying.
Williamsburg Field: in Covington County, Williamsburg offers a high-potential, light oil development opportunity within its mostly gas-weighted portfolio. There, Southern holds an operated ~100% working interest over 9,400 acres. The company has identified about 50 vertical drill locations at Williamsburg based on 160-acre spacing, Current production is modest at about 110 barrels of oil equivalent per day (110 boe/d).
"Geologically, Williamsburg is underpinned by stacked pay in the Cotton Valley Formation, which management believes holds substantial untapped upside," wrote Newman.
Executing the Growth Plan
When natural gas prices dropped in early 2023, Southern paused its field operations, explained Newman. Fast forward to this year, when in April, the company raised US$5M of equity to fund near-term growth. Also, it converted US$3.1M of debt into equity units. (Estimated net debt now is CA$23.2M.)
Currently, the analyst highlighted, given improved market conditions and a capital infusion, the company is well positioned and about to kick off its multiyear, self-funded growth strategy.
Starting this month, Southern will complete three high-quality, drilled but uncompleted wells at Gwinville this year, at an estimated cost of US$2.5M apiece. These wells are expected to deliver a combined gross initial 30-day production (IP30) of 15 million cubic feet of gas equivalent per day (15 MMcfe/d). Management estimates the net present value discounted at 10% (NPV10) to be US$2.8M per well, the internal rate of return (IRR) to be 85% and the payout period to be 14 months, using a conservative gas price of US$3.50 per 1 million British thermal units, reported Newman.
In Q4/25, Southern will drill a new vertical infill well at Mechanicsburg, targeting the Lower Cotton Valley interval at a total vertical depth of about 13,000 feet. This well is expected to add about 4.6 MMcfe/d of gross IP30, more than tripling Mechanicsburg's current production of about 1.4 MMcfe/d. Thus, it would increase corporate volumes substantially and boost near-term cash flow. As for economics, the projected NPV10 is US$4.5M, the IRR, 64% and the payout, about 1.5 years.
"The overall 2025 campaign is expected to grow production to more than 4,000 boe/d by year-end from about 2,125 boe/d in Q1/25, thereby establishing a strong base of cash flow," Newman wrote. "We anticipate meaningful near-term share price appreciation if Southern successfully delivers production growth from its current program."
Next year, at Williamsburg, Southern plans to execute two low-cost vertical well re-entries, one in H1/26, the other in H2/26, as well as infill programs. The purpose is to test and confirm the productivity of the Cotton Valley oil zone and derisk the broader drilling inventory.
"If successful, the 2026 program could pave the way for a scalable oil development program at Williamsburg, providing Southern with a valuable liquids growth engine to complement its gas-focused assets at Gwinville and Mechanicsburg," wrote Newman.
Favorable Market Conditions
The outlook for the North American natural gas market is positive, Newman pointed out, which could benefit Southern. The market is undergoing a structural shift to a potential period of supply tightening from a decade-long surplus. Demand for shale gas production is about to surge, fueled by rapid LNG export expansion and rising power needs for artificial intelligence (AI)-powered data centers. These factors could result in a long-term bull market for natural gas and enhanced cash flow and a higher valuation for Southern.
"The company's assets are ideally positioned to benefit from tightening U.S. natural gas fundamentals, where LNG export growth, new AI-driven power demand and a declining rig count are expected to push prices materially higher through 2025 and beyond," wrote Newman.
Well-Qualified Leadership
Newman reported that Southern's senior management team has more than 135 years of technical, operational and financial experience and successes in executing operations and growing companies. For instance, President and Chief Executive Officer Ian Atkinson and Chief Operating Officer Gary McMurren were key participants in the rapid growth of Athabasca Oil Corp. (ATH:TSX; ATI:FSE), to an $8 billion enterprise from a $200M private company. Southern's leadership has operated in the U.S. Gulf Coast since 2013, and thus is technically savvy about its complex geology and infrastructure.
Members of management and the board own 3.8% of the company.
Production, Funds Flow to Rise
Newman reported that Southern shut in about 400 boe/d from the Mechanicsburg and Greens Creek fields in mid-May due to a dispute over transportation fees imposed by a third-party pipeline operator. Resolution could take up to five months, but the natural gas company is optimistic it could happen sooner. The shut-in volumes represent about 20% of corporate production but only 10% of Q1/25 operating income, so the financial impact is minimal, noted the analyst.
Taking this into account, Research Capital estimates that in 2025 Southern will produce an average of 2,555 boe/d and generate funds of US$6.3M (CA$8.7M). It expects a US$10M capital budget for the rest of this year.
For next year, Research Capital forecasts a capital program of US$10M, funded through operating cash flow, average production of 3,700 boe/d and funds flow of US$17.2M (C$23.7M).
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Disclosures for Research Capital Corp. and Southern Energy Corp., June 6, 2025:
Analyst Certification: I, Bill Newman, CFA, certify the views expressed in this report were formed by my review of relevant company data and industry investigation, and accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not related to specific recommendations or views expressed in this report. Each analyst of Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report.
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