Sound Energy

Sound Energy

Sound has updated the market on the ongoing marketing process in respect of its Eastern Morocco portfolio. The plan has been to explore the monetisation options for the company’s interests in the area with a view to selling all or part of this portfolio prior to FID.

It seems that the company has seen a great deal of interest from potential buyers with 23 companies in non-disclosure agreements followed by the board hosting 15 management presentations which resulted in them receiving a number of non-binding offers. The number of companies showing interest is testimony to the acreage offer available and included I would imagine a range of majors and and independent companies both private and quoted, accordingly the company received a range of valuations and risk/reward profiles. With the need, according to the company, for further exploration to unlock fully the basin potential the choice of partner has been key in unlocking enhanced value to shareholders.

So, the heads of terms agreement has been signed with a ‘privately-owned, UK registered company specialising in energy asset development and investment’, as yet unnamed…This company will buy a substantial proportion of Sound’s interest in their Eastern Morocco portfolio whilst Sound shareholders will continue to benefit from significant potential upside in those assets.

The nuts and bolts of the deal are interesting, subject to completion Sound will sell 51% of its share ie 24.2% of its 47.5% stake for a total consideration of $112.8m of which cash is $54.3m (payable in tranches) and a carry worth $58.5m for Sound’s future capital expenditure requirements to first gas. This will leave Sound with a 23.3% interest in the Eastern Morocco portfolio held synthetically through this new JV, in addition Sound has provided the buyer with an option to buy a further 9% of the asset on the same terms which would take them down to 14.3%.

Looking at the transaction metrics this is a read across 19p deal on an enterprise value basis…  split roughly 4p upfront cash, 4p of carry with the P50 value of the remaining 23.3%, according to the brokers, valued at circa NPV 10 of 11.3p which gives a total read through of around 19.3p from which you would have to deduct the around 2p of debt to get to a read through equity price of above 17p.   Furthermore this figure is before any exploration upside which is substantial given the huge basin potential and the near term drill ready prospects, which presumably are one of the main upside attractions for the prospective buyers. This looks like an interesting result for Sound shareholders, who whilst disappointed with some of the recent drilling results now get early monetisation of the Eastern Morocco portfolio, a line to funded first gas as well as possible substantial exploration upside. This is validated by the substantial interest in the assets for sale and the huge size and range of those expressing an interest.

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4 comments on “Sound Energy
  1. Peter Burn says:

    Malcy
    Thank you for the Sound Energy update on today’s RNS
    But
    What about PANR’s updates. An interesting update a week or two back, plus lots in today’s RNS from Pantheon Resources.

    • Malcy says:

      Hi Peter
      I didn’t cover that days a announcement as it said nothing except the process was going very well. After Texas which has recently been forgotten I’m afraid that I need proof before going again.
      Kind regards
      Malcy

  2. NDP says:

    Malcolm,
    I cannot help thinking you have been remarkably generous in your analysis of this company. Yes, you may be quite correct with the maths and theory regarding a “read through equity price of above 17p”, however, I feel it is somewhat of a glossed over view of the company and its current standing within the market. Let’s consider some undeniable facts:
    1). This company’s share price has fallen from a high of 97 pence in September 2016 to a current price of 4.5 pence.
    2). The cash position dropped from 46 million to 20 million between December 2016 and December 2018.
    3). The company hasn’t managed to produce a profit, ever.
    4). As quoted in the financial statements 2018 the company had a total of 32 employees (All levels and skills), with employee costs (non-capitalised) of £10,145,000. Which gives a crude average of £317,031 per employee. Nice work if you can get it.
    5). It is doubtful that the company will see any meaningful production output for at least another three years, although I am willing to be persuaded otherwise if anyone knows why this period should be considerably shorter?
    Other more subjective issues could also be commented on:
    1). The market has totally lost faith in the current Board of Directors.
    2). The Board have continually “bigged up” the potential of this company, way beyond the levels that were realistically feasible.
    3). The Board have never considered not taking or delaying their remuneration due to failure (like the Board at BPC).
    4). Huge amounts of shareholders bought into this company at levels way above 20p per share and probably have no chance of ever regaining their money. Although, again I could be persuaded that this may be possible if anyone knows better?
    So in the interests of a more balance view of the company and so that potential investors do not get drawn in unwittingly, would you be prepared to publish this comment?
    It would also be interesting to know whether you will continue to keep Sound in your bucket list or just quietly drop it in February without much comment?
    Just to show that I am not just a “Malcy basher”, I hold positions in several companies you have listed in your bucket list, notably SAVP and Amerisur. I welcome your research and view on most companies in what is a hard sector to be successful in, but please, when a Board is messing up please call it for what it is, after all they take huge amounts of shareholder’s money and need to be accountable.

    • Malcy says:

      They are fair comments but what most people forget is that Sound was always a high risk, potentially high reward exploration play with appropriate pay back should the wells come in. As it happened the early ones did, providing this asset that they are selling and the others didnt which ended the play without spending more money. It will come out of the bucket list as it wont be a conventional equity, it will be a non-operated vehicle with cash payments like a royalty and shareholders should get rewarded as such.
      Kind regards
      Malcy

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