Cash is key for the ambitious growth company looking to deliver on its potential and in doing so make the leap up the food chain.
For onshore Italy-focused Sound Oil (LON:SOU), July’s institutional fundraising, which brought in US$23mln (£14mln), was a watershed.
It meant the group no longer had to live a hand-to-mouth existence and, more importantly, the injection of funds puts it on the road to significant value creation.
The plan is to create a mid-cap Mediterranean oil company (a Med-cap, if you will), starting with a five-well drilling programme over the next two years.
The proposition works on two levels: success at Badile, a large, higher risk gas exploration target in the Po Valley, has the potential all on its own to transform Sound’s valuation.
However, as we will see, the far less risky development assets, Nervesa, Laura and Santa Maria Goretti (SMG), also have the potential to lift Sound up to that next level even if Badile fails.
It is worth mentioning the group already has gas production in Italy in the form of the Rapagnano and Casa Tiberi wells, which currently generate enough cash flow to cover the company’s costs in Italy.
It successfully drilled the Nervesa well, in the north of the country, which will come on stream when permitted in the middle of 2015.
Click link for today's news on Nervesa funding deal.
The plan is to drill at least two and possibly three wells on the licence that would take cash flow to an annual US$13mln (€10mln) a year.
Work on Nervesa should get underway January, while early in the New Year the drill rig should also start turning on Badile.
While Nervesa, Laura and SMG are all lower risk development wells on proven discoveries, Badile is at the other end of the scale.
It is a high risk (with a 22% chance of success), but has the potential to be a game changer with a net present value of US$629mln (€486mln).
It is targeting a potential resource of 178bn standard cubic feet of gas. However, optimistically there could be as much as 673bn cubic feet, with a net present value of US$2.3bn (€1.75bn).
But with a dry hole cost of US$29.3mln (€22.6mln), this is not something that Sound is financially or technically equipped to take all the way itself.
It is therefore looking for a partner to farm into the asset.
With this in mind Parsons brought on board Macquarie to help with the process.
“They have dug up interest we didn't expect to find and rekindled interest that we had previously,” the Sound CEO said.
“Given there is a certain amount of competitive tension I'm glad we did it.
“Where we find ourselves at the moment is we have quite a lot of interest.
“I am pleased with the progress and our target here is we are farmed out on the asset on competitive terms before the end of year.”
Although he is keeping his cards close to his chest, Parsons is happy to farm out more than 50% of Badile to the right partner and for the right deal.
“We are looking much more broadly than the carry arrangement,” he explained.
“It is getting the right partner and economics that don't expose you, while keeping enough equity.”
Parsons described himself as “satisfied” with the progress made to date, and with the internationally recognised quality of the potential farminees, and said he is confident of tying up an agreement by the year-end.
“It does take some time to get these things done, particularly when you deal with large companies,” Parsons explained.
“The name of the game here is not speed; it is getting the right deal. And for that we have to be patient.”
There is another of these high impact wells in this drill programme, though Zibido, with a net present value of US$291mln (€225mln), won’t be spudded until 2016.
Before that, Sound’s work is about adding incremental value developing SMG, which will be drilled in the third quarter of next year, and the Laura gas discovery, where work is expected to begin late 2015, early 2016.
Together their net present value (NPV) is around US$142mln (€110mln), and have the potential to boost annual cash flow to around 40mln euros a year.
Using the NPVs ascribed to the assets, Sound’s low risk discoveries are worth around 30p a share, which is a significant advance on the current 12p stock price.
Meanwhile, the high-impact Badile and Zibido could be worth a further 54p even after farm-out deals are struck.
City research firm Edison, meanwhile, reckons Balide is worth an ‘unrisked’ 41p to the current share price and Zibido 24p.
“Whichever way you roll the dice we have substantial upside from where we are today,” says Parsons.