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I'd like to start with a question to private investors: Do you remember Sound Energy three years ago?

Wednesday, 15th February 2017 08:44 - by Stefania Barbaglio

I’d like to start with a question to private investors: Do you remember Sound Energy three years ago?

Well, I do. I was their in-house Investor Relations Officer. Sound Oil & Gas, as they were then called, were trading just above 10p with a market capitalisation of X. It was early days, with small production from Rapagnano, Casa Tiberi, appraisal planned at Nervesa and Badile, the big exploration well close to Milan with a then NPV of £400M, which has now increased.

The original ‘Sound Oil’ was founded on a portfolio of Italian assets, underpinned by a strong management and operational team lead by a charismatic leader and CEO, James Parsons. Now it has a market capitalisation of more than £500M, which now reflects the company’- high value assets in Morocco as well as Italy.

On 24th February, Saffron Energy (LON: SRON) IPO on the Alternative Investment Market (AIM). Saffron Energy should be on every investor’s watch-list and under the spotlight. I like to compare Saffron to the early Sound Oil. They are a gas production and development company focused on the Lombardy and Emilia Romagna regions of Northern Italy. There is a strong ex -ENI operational team based in Italy, good assets- three gas fields, one of which is in production, two with first gas expected in 2017 -and a CEO, Michael Masterman, who has a track record of success in growing small companies. Indeed, he oversaw the financing of the $1billion Murrin Murrin Nickel and Cobalt project in Western Australia while working for Anaconda Nickel. He is also CEO of W Resources and Chairman of Po Valley. Masterman and the CEO Sara Edmonson… saw the opportunity in Po Valley.

In fact, Saffron’s core assets are being spun out from the Australian-listed Po Valley Energy (ASX: PVE) with the aim of establishing a more representative valuation together with a funding solution to unlock the upside of each asset.

The London equity markets are a natural choice for listing Italian gas production assets and Saffron Energy will be pretty attractive to UK and European investors who will see the opportunity to jump on the journey at a very early stage. Let’s remember Sound Energy’s success.

Saffron Energy Plc expected admission to the London’s AIM market on the 24 February. Po Valley will retain approximately 65% stake in Saffron following the listing.

Saffron producing portfolio & its 3 core natural gas fields

Sillaro: In the province of Bologna, currently producing over 400 mcfpd. Since production commenced in 2010, it has proved a strong revenue and cash flow generator, generating over EUR 30 million in revenue and EUR 23 million in operating cash-flow. The company plans to drill a new deviated development well in 2018 to access the bulk of the P2 reserves and triple production.

Close to Sound Energy’s Milan Badile gas play, there is Bezzeca (90% owned by SRON), an approved production field which was successfully financed in July 2016 and on schedule to bring the Bezzecca-1 well into production next month.

Saffron’s third asset is the Sant’ Alberto gas field (100% owned by Saffron), located near to the Sillaro field, which should come on-stream in the second half of this year.

These assets are held through Saffron’s wholly owned Italian subsidiary, Northsun Italia S.p.A. Independent consultants have estimated the gas inventory within the Saffron portfolio asset base to total around 8.2 billion cubic feet of gas (BCF)[1].

 The company will float on the Alternative Investment Market in London on 24th February under the ticker SRON with a market capitalisation of £7.68M at 5pence per share, having raised GBP2.5m IPO capital via the boutique broker Turner Pope Investments Ltd. The funds will be used primarily to fund accelerated development of all three gas field.

Why does Saffron represent an attractive early-stage investment opportunity?

Plenty of news-flow is expected. The listing is only the beginning of the journey; similar to when I was working for Sound Oil & Gas. Soon, the company will announce the start-up of production from the Bezzecca gas field close to Milan; a news catalyst to look forward to over the next month.  The gas from the Bezzeca 1 will be processed from the Vitalba processing plant located only 7 km away and ready to be connected through the newly constructed tie-in pipeline.  Then, it will be the turn of Sant’Alberto, where production is expected in Q3 as soon as on-site infrastructure is completed. They also plan to drill additional wells on Bezzecca and Sillaro in late 2018.

Cash Flow generation. With Bezzecca joining Sillaro on production in early 2017 and Sant’Alberto following later in the year, the high margin gas field will generate strong returns and cash-flow to support the company’s progression and -I can’t see, why not - possibly pay dividends sometime in the future? CEO Masterman believes the company’s production will go up from 1.5million cubic feet to 4million in the next couple of years. This is a pretty good base to build a strong business on.

Attractive Italian gas market. Do not forget: Italy is a very good market for natural gas. The gas is pure: it’s 99% methane, so the processing plant can be small and the gas goes straight into the Italian national grid from the well. Infrastructure is already in place and very efficient. Considering the fact that gas prices in northern Italy are very high, Saffron will have low operating costs and attractive high price returns for their gas.

It really is an exciting time ahead for the Small SRON. It could become the next Sound Energy and how many of us now regret not buying SOU at 5p?

 

[1] Please refer to ASX Announcement dated 25 November 2016 “Producing and Near-Production Field Reserves Revision” which details the Company’s reserves and resources for the three assets held by Saffron Energy and which contains all information required by ASX Chapter 5 listing rules applicable to the reporting of oil and gas activities and reserves and contingent resources.

 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.


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