A couple of weeks ago I covered Sound Energy (SOU) and its recent disappointing drill results which appeared to cement its fall from grace as a favourite amongst private investors. At the time the share price was around 8.7p and I mentioned that some of the placees from the recent equity fundraising of $2.7 million net at 10p would likely be looking to try and create a spike to sell into. Since then I have seen all sorts of rumours on social media, including one that a single shareholder took £3 million of placing shares – which is more than were actually issued!
I would also have expected that even if the rumour had got confused and people actually meant $3 million worth, that the company would have stated that all of the funding was provided by a single party – especially if it was a new investor. Even more of note, another rumour emerged that an asset sale was on the way and this caused the share price to rise to over 10p and a sudden flood of interest in the company, and as usual there have been all sorts of figures being talked about in terms of what this would be worth to the company. Currently Sound is being valued at just under £100 million by the market, with its only saleable asset looking to be Tendrara, in eastern Morocco, where it has a 47.5% net effective interest, and more specifically the pre-existing TE-5 Horst discovery. This well had already been drilled when Sound acquired its share of Tendrara and it is planned that it will produce 66mcf/d of gas, although a final investment decision is yet to be taken, and net 2C contingent resources stand at 377bcf. I haven’t seen much mention of it recently, but originally it was expected that a pipeline to connect Tendrada to Gazoduc Maghreb would cost around $50 million, and the Oil and Gas Investment Fund, which also has a share of the licence, would fund this, but I would be interested to know if this is still the case and if the cost is the same.
Originally Sound received its share of the licence in return for drilling three wells – I note that the RNS back in June 2015 actually mentions reservoir uncertainties, and it seems like those have now come into play, given the disappointing recent drill results and questions over the reservoir quality across the licence. The TE-5 discovery was actually made back in 2007 by Maghreb Petroleum, but no further exploration was carried out on the block by this company after that. To me this certainly raises questions about the value of TE-5, especially in light of the other drilling results and the current contingent resources that have been booked, given the interest in it that Sound acquired for a relatively small amount of money (the initial well cost around £6 million). Although I do accept the argument that oil and gas prices were low at the time. That still doesn’t suggest to me though that a sale of TE-5 would be worth anywhere close to £100 million, plus the company has over £20 million in debt, so I fail to see how a sale will leave it justifying the current market cap.
People will point to all ‘the multi tcf’ potential of the asset, but thus far drilling by Sound has failed to prove that to be the case, and prospective resources are worth very little, especially where there have been failed drills and questions about the reservoir quality. The fact that part of the licence is also owned by OGIF and the National Office of Hydrocarbons and Mines, which will have to be involved in any development through to production, certainly doesn’t add to the attractiveness of it and could put off potential buyers. I think that people would struggle to find any asset sales in Morocco where a similar amount of 2C gas has sold for anywhere close to the current market cap, let alone the figures that some people are talking about. Some will argue about the value of the gas in terms of profit once it is sold, but given that no final decision has been taken on it being put into production, and given the sort of typical sale values achieved for 2C resources, I can’t see it achieving the equivalent of £2 per barrel of 2C, on an oil equivalent basis (and gas in Morocco isn’t as desirable as oil in other geographical locations). In fact, there are companies in Morocco – although offshore rather than onshore – that have been awarded licences already containing similar amounts of 2C resources, Chariot Oil and Gas (CHAR) recently, for example, with 75% of the 307bcf Lixus licence, which also has ONHYM as a partner.
Currently Sound has remained conveniently silent about the rumours – as far as the placees and anyone else looking to trade a spike is concerned, but were it to really go up on these rumours then I think it would be forced to issue a more specific statement about whether it is in talks and expected value of any sale. Had any actual offer been tabled then it would have had to inform the market anyway. It wouldn’t surprise me that if an offer does come, rather than being cash, it could be a shares deal – if that does happen at an inflated valuation, then I wouldn’t expect any rise off of the back of it to last for long anyway. I expect the share price to remain volatile, but I certainly wouldn’t be buying as I don’t believe an asset sale will achieve an amount that justifies the current market cap, so for me it remains one to avoid.
Filed under: Sound Energy, Yourgene, Sosandar, St James House, Reckitt Benckiser, PetroTal
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