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Sound Energy is now unrecognisable as its ‘simple’ plan continues to pay-off

At Tendrara site preparations underway ahead of well drilling in March
Sound Energy as it stands today is almost unrecognisable from Orbell’s Sound Oil.

“Bottom line: we need to promise to do something then do it.”

The words are from Sound Energy PLC's (LON:SOU) chief executive James Parsons and date back to an interview in 2012.

They will resonate strongly today with investors as Sound continues to deliver; as the share price has bucked the trend and grown 30% in the last year.

At the time Proactive quoted Parsons he was finance director and was part of the team that took the reins from Gerry Orbell, former chairman and chief executive who brought the company to AIM in summer of 2005.

Sound Energy as it stands today is almost unrecognisable from Orbell’s Sound Oil as it was then.

Parson’s plan then was (and still is) to put gas projects into production, in order to progressively build the business.

Sounds simple, yes? But just look at how many companies have failed to deliver. Look how many AIM juniors have fallen by the wayside in the last four years and in era when the market couldn’t have been any easier.

For Parsons, step one was to exit the group’s Asia-focussed exploration ventures and to instead prioritise on development stage assets onshore Italy.

Sound announced the end to its Citarum production sharing contract, in Indonesia, just three days after the 2012 Proactive interview.

That deal - which immediately saved the group $2.4mln, and was followed shortly after by a $7mln asset sale - was perhaps a sign of things to come.

In relatively short order the company hunkered down to concentrate on its assets in Italy.

The modest but cash-generative Rapagnano gas field was brought online within about six months and Sound’s production profile was lifted modestly again with Casa Tiberi start-up in the summer of 2014.

Today the company’s Nervesa field is beginning to move the needle - even if it is not quite the slam-dunk asset many had hoped for.

The Nervesa start-up marked an important milestone, both for the group and Sound boss specifically.

The company’s revenue stream is growing to the point that is now almost able to sustain the Italian business.

Self-sufficiency is a Parsons promise that is now being delivered.

That focus on bringing cash generative production online was born of necessity.

Throwing money purely at costly exploration programmes was untenable. Sound by luck or good judgement realised this well before the rest of the pack.

Having a realistic business plan that balanced production with some exploration blue-sky in Italy was the key to gaining the funds needed to get Sound to where it is today.

Valued at £86mln and with about £20mln in the bank, Sound is in a better place than the majority of its rivals that are living a hand to mouth existence.

Financial strength has its benefits as witnessed in Morocco.

A series of deals there have refilled the development portfolio, and could deliver a step-up in scale.

Drilling will get underway soon at Tendrara, where a well will appraise and de-risk an existing discovery.

Ideally, it will prove-up sufficient viable gas resources that can warrant further development and the installation of infrastructure.

Such a result could open up a number of resources within the newly acquired project.

Sound currently has 37.5% of Tendrara - though its interest can rise to 55% - and the company believes the 14,500 square kilometre area, in north-east Morocco, could deliver resources in the ‘trillion cubic feet’ bracket.

Then there’s Sidi Moktar, Sound’s second Morocco asset.

A quick inspection of Thursday’s (March 10 ,2016) deal-making shows Sound again appears to have played its hand well.

It began with 25% of the asset, and agreed a deal with PetroMaroc to acquire a further 50% to take its ownership to 75%.

In a separate deal a company called Culebra Petroleum is buying 66% of the Sound Energy Morocco South subsidiary in return for $6mln of cash and the promise of an $18mln investment into the Sidi Moktar project.

So once both transactions square off, the group’s exposure to the Sidi Moktar remains effectively as it was (at 25%), but, Sound will be $6mln the richer and it won’t have the burden of funding the next leg of work at the project.

As highlighted in a note by Sam Wahab, analyst at house broker Cantor Fitzgerald, the cash windfall has already been earmarked for Sound’s ‘aggressive counter-cyclical growth strategy’.

“Following a highly successful 2015, Sound’s management team are forming an enviable track record of building a compelling multi-geographical acreage position, investing counter-cyclically, at a significant economic discount to asset NPV’s, as today’s farm-out illustrates,” Wahab said.

Prior to today’s deals, Wahab valued Sound at 30.9p per share (versus a market price of 17p).

That comprised 16.7p of ‘core value’, of which 1.5p accounted for the group’s Italian gas production, including Nervesa’s initial rates. Wahab has now put his valuation under review.

Plainly, there is much left for Sound to do. But the simple strategy of delivering gas production (as promised) seems to be working.


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