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Sound Oil evolves into Sound Energy as it focuses on being a Mediterranean gas business

Published: 17:03 01 Oct 2015 AEST

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Sound is morphing into a Mediterranean gas business.
Sound Oil (LON:SOU) is today changing its name to Sound Energy to better reflect the increasing importance of gas in its portfolio.  
 
The launch event at The Shard, the iconic skyscraper in in the heart of the City of London, is likely to be a high energy event where investors will hear first-hand from the executive their plans for the business.
 
The name change is also meant to underline this ambitious company’s drive to expand into a Mediterranean-wide energy producer, which plans to at least double its current market cap of £71.1mln as soon as possible on its way to becoming a mid-cap group.
 
Chief executive James Parsons said to Proactive Investors: “We feel we have outgrown the name Sound Oil and are happy to respond to institutional feedback that a name change would be helpful at this point in the journey.  
 
“As a current gas producer with a heavy focus on drilling game-changing gas discoveries we are not overly concerned with oil price volatility. 
 
“To attract serious institutional investment we need achieve a market cap of north of £100mln, and this means growing the business.”
 
At today’s gathering Parsons will discuss the recently announced board changes and why he feels they are important in handling the company’s expansion– initially into Morocco.
 
He will also talk about the gas sales deal and forthcoming first gas for the flagship Nervesa gas field onshore Italy.
 
The number of boardroom changes announced by Sound includes the appointments of Richard Liddell and Stephen Whyte as directors.
 
Liddell, formerly Falkland Oil & Gas chairman, and Whyte, an experienced senior executive who was most recently at Galp Energia, have both been hired as non-executive directors.
 
"I am delighted to welcome Richard and Stephen to the board of Sound”, said Simon Davies, Sound’s chairman.
 
“The wealth and breadth of their combined experience and connections will be of great value to the company as it prepares for further growth.”
 
When I started taking Sound seriously at the end of 2012 the share price was a little over 4p. Earlier this year, share price had risen to 24p. It has fallen back to 14.50p in these tough times for small cap companies.
 
Sound was formed in 2005, but the story of its growing success really starts in 2010.
 
At that point Parsons was chief financial officer and the company entered Italy through what now looks a most astute acquisition of Consul Oil & Gas, which gave it around 17 licences.
 
These were both onshore and offshore Italy but mostly onshore and were populated by old discoveries, which had been dormant since the 1980s and 1990s because of the poor price climate that prevailed.
In quick order Sound visited two old producers and managed to bring the fields, Ragpagnano and Casa Tiberi, both onshore, back into life.
 
The pair, both 100% owned by Sound, are now producing and bring 1.2mln euros a year to the kitty. This is not a fortune but it is enough to pay the general and administration costs for the group in Italy.
 
The Nervesa appraisal well is a 24bn cubic feet (bcf) field and thus much larger than either Ragpagnano or Casa Tiberi.
 
It is anticipated that production will start later this year and the well is expected to flow at 1.8mln standard cubic feet a day (mmscfd) and will be a step change for Sound. It is expected to contribute Euros 4mln to the company’s coffers.
 
Parsons said: “This will not only help G&A [general and administrative expenses]. It will also provide material free cash flow.”
 
There could be further wells at Nervesa but they will not be for at least 18 months because Sound has other fish to fry. It is pursuing an ambitious drilling programme elsewhere.
 
The first well will be in Morocco, but more on that in a while. Staying with Italy, the second well will be on the Badile concession, onshore Italy, which Parsons calls the “largest and most strategic asset” in the group’s portfolio with a mid-case estimate of 178bcf of gas in potential resources.
 
Although Sound is well funded, drilling the potentially game-changing Badile well is expected to cost over 20mln euros, so a farm-out looks likely.  However Parsons did note that in the current climate drilling costs are coming down quickly, which is clearly beneficial for the company and is justifying the company’s decision not to accept previous farm out offers.
 
In the success case, Parsons says Badile has a gross best estimate of net present value ten (NPV10) of 486mln euros. NPV10 means the expected gross revenue over ten years minus the costs of preparations and drilling etc. Divide the NPV10 by the number of shares in issue and you get a value of 50p per share.
 
In Morocco Sound is readying to drill its first well on the Tendara licence offshore Morocco. Having earlier this year wisely stepped away from a bid for troubled Antrim Energy, which would have added projects in Ireland and the North Sea, Sound in June farmed in for 55% of the Tendara licence. 
 
The licence covers eight blocks across a total of 14,500 square kilometres. Tendara looks like a significant gas discovery, with potentially significant exploration upside.
Seven wells have been drilled on the licence. Five of the wells discovered hydrocarbons and two of the wells have been tested.
 
The licence was owned 75% by Morocco’s Oil and Gas Investment Fund (OGIF) with the state owned ONHYM organisation holding the remaining 25%. With Sound’s entry OGIF’s stake falls to 20%.
Sound will pay 100% of the cost of three wells thus fully carrying the two partners, but only the first well will be a firm commitment well.
 
It is expected to cost £6.5mln to drill and will be a near term appraisal of the first of the two tested discoveries to address residual reservoir uncertainties.
 
The well relates to deliverability and continuity and to prove up sufficient reserves to, according to Parsons, “justify the cost of building a pipeline to link up with the Gazoduc Maghreb Europe (GME) gas export pipeline to Europe.” 
 
Finally, Maghreb Petroleum has given Sound Oil a two month exclusive period to carry out due diligence work and negotiate a deal to buy its subsidiary that owns a 25% carried working interest in the Sidi Moktar licence. 
Sidi Moktar covers 3,000 square kilometres and lies in the Essaouira basin, which contains multiple Jurassic gas discoveries.
 

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