Shield’s lead asset Feraccru is a novel and highly...
Sound Energy (SOU.LON) is an AIM-listed upstream gas company with a balanced exploration and appraisal portfolio focussed on three strategic assets in onshore Morocco and Italy. The share price has trebled in the past year, following drilling success in the Tendrara licence of eastern Morocco. The work program of the next 12-18 months has the potential to de-risk additional gas resources in Morocco and Italy, providing short-term catalysts for further upside in the share price. However, any disappointing drilling results might leave the stock rather exposed given recent momentum and lack of certified reserves, although we recognise that the optionality in the portfolio would remain substantial.
Sound Energy (SOU.LON) has operatorship interests in a number of licences in Morocco and Italy and is currently focussed on delivering value from three strategic assets, the Tendrara and Sidi Moktar licences, located respectively in eastern and western onshore Morocco, as well as the Badile licence in onshore northern Italy. Schlumberger is a strategic partner in these assets, providing third-party validation, best practice, technical de-risking as well as funding.
In 2016, Sound Energy (SOU.LON) drilled two successful gas wells in the Tendrara licence, TE6 and TE-7 which achieved flow rates of 17MMscfd and 32MMscfd respectively, largely exceeding market’s expectations and suggesting the potential presence of multi-TCF gas resources in a similar Triassic play as the proven Algerian gas reserves across the border into Morocco (Figure 1).
A strategic partnership with Schlumberger provides technical as well as funding assistance minimizing Sound Energy’s capex outlay by funding 80%/75% of the already-completed Te-6/Te-7 wells and 75% of prospective Te-8 well. The commercial attractiveness and optionality of this project is further enhanced by world-class fiscal terms in Morocco, the presence of gas infrastructure relatively close-by, a domestic market which imports 90% of its gas needs and the opportunity to export gas into southern Europe.
According to management estimates, existing wells indicate the presence of 300-500BCF of gas resources which could be further extended to 1-1.5TCF if a forthcoming step-out well TE-8 confirms pressure data interpretation of the existing TE-1 well drilled in 1966 (Figure 2).
Management expects to be in a position to finalise a development plan and apply for a production licence by the end of 2017 and the company could be in a position to produce first gas in late 2019.
Management believes that, in addition to the Triassic play, the deeper Palaeozoic sands, also a prolific gas play in Algeria which has not been penetrated in previous wells in Tendrara, provides a source of additional upside. Similarly, this licence contains a number of other prospects which could be explored at a later stage, potentially increasing the size of the gas resources base.
Management’s conviction in the upside potential of the Tendrara licence is such that the company recently agreed the purchase of an additional 20% interest in the licence from Oil and Gas Investment Fund (OGIF), the initial licence holder. A consideration of 272 million shares at a price of 72p, representing 28.8% of the enlarged share capital or 24.3% of the Company on a fully diluted basis, was agreed for this purchase which increases the interest of the Company in the licence by 73%. The 20% incremental interest represents a 42% increase in the Company’s interest overall and thus we believe the deal is highly value accretive for the Company.
On 1 Feb 2017, Sound Energy released preliminary volume estimates for Tendrara and Meridja, based on a recently commissioned basin modelling study. Internal estimated volumes for the exploration potential of the entire Tendrara and Meridja permit areas now stand at 17TCF of unrisked original gas in place, within a range of 9-31TCF.
These estimates are supported by the mapped inventory of discoveries, prospects and leads in the Triassic reservoir, the available charge from the Palaeozoic source rocks post deposition of the thick salt sea, as well as a conceptual evaluation of the Palaeozoic resource potential by analogue to neighbouring Algerian basins. The Basin Model indicates that there is sufficient gas available to charge the existing Triassic prospects and leads and the yet to be explored Palaeozoic.
The acquisition of additional 2D and 3D seismic and further drilling will be required to substantiate the estimated exploration potential of the Basin. Management intends to commission a Competent Person’s Report (CPR) following the drilling of TE-8 and before potential Final Investment Decision (FID) on the development later in 2017.
We display below the short-term catalysts that we believe will drive the stock price during the course of this year. We believe the stock provides investors the opportunity to gain exposure to one of the few growth story in the sector, with the potential to benefit from substantial appreciation as assets get de-risked and material resources are added. However, we would caution that any disappointing drilling results might leave the stock rather exposed given recent momentum and the lack of certified reserves, although we recognise that the optionality in the portfolio would remain substantial. (Figure 3).
Sound Energy has two other strategic licences. Sidi Moktar in western Morocco and Badile in the Po Valley of northern Italy. Both Sidi Moktar and Badile are targeting onshore gas resources located in proven plays located close to infrastructure. For both licences the company benefits from a strategic partnership with Schlumberger which minimises Sound Energy’s financial exposure to the remaining appraisal risk inherent in these licences and lowers the risk profile of the company.
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