Where next for Sound Energy following exploration well hit?
Shares in Morocco-focused upstream gas company Sound Energy collapsed by 30.3pc Monday following the news that its first exploration well in the Tendrara area has been plugged and abandoned. With the firm planning two more exploration wells in the area at non-related plays and also working towards the commercialisation of an existing discovery, could this fall be overdone?
In an update yesterday, Sound said the TE-9 exploration well was drilled to a total measured depth of 2925m and penetrated both its TAGI primary target and its Paleozoic secondary target. However, as the interpretation of wireline logs from the well did not establish the presence of producible gas, the well will now be plugged and abandoned without testing.
The well had looked to test the A1 prospect in Sound’s Greater Tendrara permit, located approximately 19km to the northwest of the recently awarded Tendrara production concession. It did encounter 60m of dolomitised silty sandstone and around 630m of a Westphalian aged succession of fine sandstones, siltstones, and mudstones. However, petrophysical analysis of wireline data from both intervals indicated low porosity and therefore poor reservoir quality.
Despite the disappointment, the business added that drill gas readings showed a range of C1 to C5 hydrocarbons, which it sees as further evidence of a working petroleum system. All data from the well is subject to ongoing analysis and is expected to provide ‘further valuable data to de-risk the prospectivity of the wider permit area’.
Sound will now move directly to the drill-ready location of the second well in its current programme – TE-10 – which it describes as ‘non-related’ to TE-9. TE-10 will target a TAGI structural-stratigraphic play with previously advised estimated volumes of 2.6Tcf mid case gross gas initially in place.
Elsewhere in the recent update, Sound said it remains well funded with unaudited cash balances of more than $30m as at 14 November. It also said that it is continuing to prepare a final investment decision for the TE-5 discovery, with front-end engineering design due to complete by the end of the year.
According to the business’s latest presentation, the third well in the programme – TE-11 – could drill in March next year ahead of testing in May. In June, the firm said it could place an exploration well at a ‘potentially significant’ oil play within the Paleozoic rock at its Anoual permit near Tendrara, where it has already identified a gas play.
Having bounced back slightly on Tuesday, Sound Energy still has a valuation of £189.75m, having risen massively back in 2016 on hopes it could prove that large gas resources in Algeria extend into Morocco. In this sense, the fact that the Monday’s was so large may be reflective of the fact that the stock looked quite over-valued in the first place.
After all, it does seem like a hard share price hit given that two more wells on un-related plays remain in the programme and exploration wells have a low success rate in general. With a great deal of cash currently in the bank, funding doesn’t appear to be an immediate concern, either. Moving forward, then, on the exploration side, a lot is likely to depend on what happens at TE-10.
It is perhaps also worth remember that Sound has further prospects in Southern Morocco, and indeed in the Greater Tendrara area itself. In September, it was awarded a production concession relating to its existing Tendrara gas discovery. This is underpinned by a field development plan that includes the drilling – pre-first gas – of up to five new horizontal development wells and the recompletion of the existing TE-6 and TE-7 wells.
The plan also includes the achievement of first gas in approximately two years at an expected mid case production rate of around 60MMscf/pd over a minimum period of 10 years. During this time is currently estimated that an additional 10 to 13 wells will be drilled to maintain this production rate. The gas is due to be monetised through a future 120km pipeline to the Gazoduc Maghreb Europe pipeline.
In September, Sound said it expects to be in a position to take a final investment decision on the Tendrara development once key development milestones have been secured. This includes a gas sales agreement, FEED development capital funding, and local regulatory administrative formalities.
So, with further newsflow on the horizon, do you believe the recent fall signals a buying opportunity at Sound? Or would you instead rather get out while you can?
Sounds seismic summary shows the team diligently working through key data points
JJ Traynor talks investors through the TE-5 TE-9 TE-10 and recent seismic data
Unlocking the Morrocan promise released 2017
The author was remunerated but does not hold shares in the company