Where next for Sound Energy as it looks to monetise assets in eastern Morocco?
Shares in Sound Energy have declined considerably over the last 12 months on the back of two disappointing drilling results. In response, the firm has introduced a programme of cost-cutting measures and is now looking to accelerate its route to monetisation by marketing its assets in eastern Morocco. With the company indicating that it plans to return the proceeds of any sale to shareholders in the most effective way possible, could it be worth getting exposure at current levels?
Moroccan gas opportunity
Sound Energy is an exploration business focused on the development of its portfolio of onshore gas opportunities in Morocco, an import-reliant market which it believes to hold plenty of upside potential. The company’s assets are based in both the east and west of the country. In the east, the firm is the 47.5pc owner and operator of two exploration permits called Greater Tendrara and Anoual, as well as a production concession. These are being developed alongside Schlumberger, one of the largest businesses in the oil & gas sector.
Greater Tendrara spans 14,500km2 and covers a proven gas play in Morocco’s Triassic ’tagi’ reservoir. Sound’s basin model has assigned the licence exploration potential of 7Tcf in the low-case, 20Tcf in the mid-case, and 34Tcf in the high case, alongside plenty of upside potential. The field already contains a 0.65Tcf gas discovery called TE-5 Horst over which a concession has been awarded to Sound and Schlumberger. Development planning and a gas supply agreement are nearing completion for the discovery, and a final investment decision is expected before year-end. Anoual, meanwhile, covers c.8,850km2 and has been assigned gross unrisked gas initially in place (GIIP) of 5.5tcf identified in Triassic sandstone leads.
Elsewhere, in western Morocco, Sound owns a 75pc stake in a gas exploration permit called Sidi Mokhtar. This is divided between shallow plays and deep plays, with the former including a discovery called Kechoula and the latter up to 9Tcf of mid-case, gross, unrisked GIIP. Moving forward, Sound plans to complete a 2D seismic programme across the asset to help it better understand its potential.
Much of Sound’s efforts over the past year have centred around a three-well exploration campaign on its eastern Moroccan assets. Unfortunately for investors, the company has enjoyed little success to date. It’s first well, TE-9, completed in November but was unable to establish the presence of producible gas. As such, it was plugged and abandoned, and no testing took place. The news saw Sound’s shares collapse from than 30p each to a low of 11p over a matter of days.
Following a period of modest recovery, the business once again took a battering in May when it revealed that the second well in its programme had not achieved commercial flow rates in a stimulated well test. The disappointment – which came despite Sound announcing that well TE-10 contained a discovery that had flowed hydrocarbon gas to surface – led the firm to crash from c.18p to below 10p in a matter of days. It has struggled to recover since and currently sits at around 9.2p.
Rather than leaving its strategy unchanged in the face of repeated failure, Sound’s board has spent the last couple of months repositioning itself. Alongside news of TE-10’s disappointment, the business announced that it had kicked off a programme aimed at reducing its annual general and administrative expenses by more than 50pc. This has included measures such as reducing staff numbers, staff costs, and executive director salaries.
Several days later, Sound went on to announce that it had decided to explore monetisation options for its eastern Moroccan portfolio. To support these efforts, the company has enlisted Rothschild & Co to market the assets in this area of its portfolio to assess a sale before the final investment decision for the TE-5 Horst discovery. It has also paused the drilling of TE-11, the last drill in its exploration programme for eastern Morocco.
Finally, in its most recent update last month, Sound announced that it had raised $2.7m at 10p a share to strengthen its cash position while it explores the marketing of its assets. This money will supplement the firm’s existing cash balance, which sat at more than $14m as of 14 May 2019.
With several strings left to Sound’s bow, could the firm’s change of tact represent a speculative buying opportunity?
Aside from its healthy cash balance and proactive efforts to cut costs and continue operations, the business continues to boast a strong management team. Indeed, chief executive James Parsons has spent more than two decades in various oil & gas roles across the world including 12 years spent with Royal Dutch Shell. Meanwhile, exploration director Brian Mitchener is a chartered geologist and past president of the Geological Society’s Petroleum Group. He has held senior roles at BG, BP, and Statoil, where he was VP international exploration for Africa.
If anyone can commercialise Tendrara – where Sound recently said it had identified multiple leads and prospects that it hopes will complement TE-5 – then it will be people of this calibre. In doing so, the team will be supported by the assets’ 25-year concession, plans for an Enagas-led consortium to provide FEED and potentially vendor financing, and a gas sales agreement with Morocco’s Ministry of Energy.
It is also worth remembering that the sale of Sound’s eastern Moroccan assets does not represent an end to its efforts in the country. Indeed, the company will continue to hold an interest in Sidi Moktar, where it received Ministerial approval of a new eight-year petroleum agreement last year. In its 2018 results, Sound added that an Environmental Impact Assessment for its proposed seismic programme at the licence was underway. It also said it was assessing a potential farm-down of the asset, while retaining operatorship of the permits, ahead of possible exploration operations in 2019.
In an update towards the end of May, Parsons said that the company intends to return the divestment of the net proceeds of any sale of its assets in East Morocco to shareholders ‘in the most efficient manner possible’. Obviously, there is a significant risk that the assets won’t be sold and Sound’s weak run could continue. However, with shares sitting near historic lows, some investors will no doubt see value in buying the firm now as a way of getting exposure to the potentially considerable shareholder benefits of a major asset sale.
In June friend of TMS, Malcy caught up with Dr JJ Traynor of Sound Energy