Sound Energy recently appointed Graham Lyon as Executive Chairman, and since then he has settled down to the task of delivering a substantial natural gas project in Eastern Morocco for Sound Energy and for #SOU shareholders.
In an interview with @Donald Leggatt, Head of Investor Relations at London South East, I began by asking him to sum up the strengths and challenges which he inherited. Graham said that some may describe it as a 'poisoned chalice.' "We had a reputation which the shareholders have certainly struggled with, and we have a recapitalisation issue in Sound, but there are lots of positives, and that's what took me on board".
According to Graham, these are Sound's strengths
1. Morocco is an an investment-friendly country which is good to do business in
2. Ten year tax holiday
3. The Moroccan legal system is considered to be 'one of the best in Africa'
4. Sound have a lot of acreage in Morocco and with it significant exploration potential
5. Sound have 310 bcf of net discovered resource in Morocco, where the gas price is high
6. #SOU have a supportive shareholder. 20% of the shares are owned by the state
7. Sound is a slim but competent organisation with motivated, hard working staff
As Graham put it "We have retweaked the strategy to look for cash generation and preservation, which is crucial during Covid. If we can convert Sound step by step into a cash converting machine then that's the way to succeed". Breaking the development down into different portions is "a good way to do this, and the Micro LNG is the first stage. Its a good way to get early capital coming back into the business."
Sound has signed a Heads of Agreement for a 10 year Take and Pay offtake of LNG with a local well-known Moroccan conglomerate "and hopefully we will sign them up fully in the Autumn". Sound will be the gas wholesaler of LNG, a new product in Morocco, and part of the transition to more low carbon fuels in the country. Crucially, the offtaker is the distributor and will pay for the transportation from Tendrara to market and will truck it, probably in ISO tankers and then regassify it for the end user.
Although Covid is capable of upsetting any timetable, the plan is still for Final Investment Decisions for the Micro LNG plant and the Tendrara gas pipeline (which links to the Mahgreb pipeline) to be taken before the year end. "Its certainly our target to do that."
Graham told us that since the development has been broken down into phases, he is now in talks with 3 EPC contractors to potentially undertake building the Micro LNG plant, and they may ultimately get involved in the pipeline construction as well. They may even provide some finance by taking a stake in the project. The project costs which were mentioned previously are "at the top end of the costs range and the talks are going well".
The capital raised in the placing and Broker Option, almost £3.5M, will take the business well beyond FID and into March. "The reason it won't take us into June is because we have a Bond repayment to deal with". This was done at 'market conditions' with no discount to get it away. "Combine this with the money raised in the Heads of Terms which is £13.5M worth of debt and £2M of equity, it puts a debt/equity ratio of two thirds to one third. I'd say it's 'unlikely' we will use equity to pay for the remaining costs of FID."
A Farm-in with another partner is also a possibility and discussions are taking place currently. "We have signed several NDA's for people to come and have a look at the business, there are groups in the datarooms at the moment, and potentially even some of the EPC contractors would be interested in taking a position and funding it as they go along. I'd describe this as normal business practice." It has to be a good deal for Sound shareholders however.