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Personally I thought that was FSC was useful and conducted in a professional manner with no hype, nudges or winks. There were plenty of useful information given which has given me some comfort that the next chapter of Sound is about to start. Clearly they were limited to what they could say but I took the following away:
1. The JV partner is not being set up for this purpose so should have some historical context which can be analysed when voting for the deal and the partner is unconnected
2. The initial payment is not all being consumed by fees and part of it could be distributed
3. Visibility of the JV will be addressed in the transaction documents
4. They will follow a more low risk drilling programme than TE9/10 and I am sure the terms of the carry and drilling programme will be addressed
5. They are continuing exploring farm-in on Sidi and sounded confident about annoucing something soon
6. They are right sizing the company taking into account their involvement as non operating partners in the JV
7. The people left such as Brian, John, Garry and Fred can continuing in their role so I do not think the departure of JP and JJ will have too much of an impact. Further, Mohammed is well connected and has the experience for this kind of turnaround and obviously understand the importance of Tendrara to the Moroccan energy programme
8. They stand by their basin modelling results
There is enough there to give comfort that they are following due process and still believe in what they are doing. The transaction documents will be crucial as will any progress on Sidi. I think the share price has dismissed any upside to this share which I find surprising given how much potential there is.
Personally I am viewing our current predicament of comprising 3 distinct but interrelated parts:
1. The marketing process and structure of this deal
2. The structure of Sound going forward including Sidi
3. Civil or criminal action against JP and/or the entire Board
I am not a lawyer so cannot comment on the merits of 3 but I have generously described JP's conduct to be naive at best. I think for a PI centric company, a duty of care and restraint needed to be exercise in what was said- I think gathering the evidence and running it past legal minds is the right way forward so the action group being set up to consider this is the right way forward.
My focus is on 1 and 2. I think the fact that FSC has been set up is a credit to Sound and brave of them. In respect of 1, given it is an ongoing transaction which may or may not conclude, I think there will be significant limitations to what they can disclose. They should be able to tell us more on the marketing process followed and amplify on some of the statements made but there will be little they can say to disclose the identity and intentions of the buyer at this stage. I do personally believe that this was the best deal that they had as it a minimum fiduciary requirement of the Board and the share price has not yet reflected it- I note that the entire volume of shares sold since the deal was announced is still single digit which means most are holding.
However I think they can reveal more in respect of 2. We certainly need clarity on their commitments to Sidi, repayment of debt, future drilling and exploration programme, (dependent on 2), ongoing expense base and projected cash position and the operations of the holding company. I think the fact that the Chairman, CEO and CFO have left in the midst of a transaction is highly unusual and unlikely to be coincidental - however, they have at least appoint from within although we need to understand whether they are to be interim and critically who will be the CFO going forward particularly someone will need to manage the shareholders interest going forward. I, for one, look forward to the FSC and will not be a selling a single share.
The more surprising thing about the RNS was that the chairman is leaving. I think JP departure was unquestionable and I do like having the local representative as CEO who will be able to move us along. Such moves would have been done in conjunction with the proposed purchaser so there is a bigger play here, I think things are moving fast and we should be getting more clarity over the next few weeks. I do get sense of urgency now and I hope that it will conclude positively for our benefit.
I do not think there is any harm in putting together a list of concerns for Sound to consider. They could choose to address it but it would need to be publicly disclosed. And given the status of the transaction with ongoing negotiations, it is very unlikely that they can. However by raising our concerns now, they would need to take them into consideration and address them by the time the vote is required, simply because the PI have the majority of votes and Sound has always position itself as PI centric. The upside of raising them now means that there is ample time for them to considered. Personally I would stay focused on the merits of the deal.
The position of JP can be addressed through the normal procedures such as shareholding votes but the Board will already have noticed the massive decline in share price which normally leads to the CEO being asked to move on- I just feel that given he constructed the deal and established the contacts and positioning of Sound in Morocco, the Board would need to be careful in removing him at this stage of the transaction unless there is an available replacement.
Trellis- I see where you are coming from but as you know, these deals will have a detailed shareholders agreement with the necessary minority protections (they will have 51% in place at the start), constitution of the Board of JV and strategic agreements and major/minor expenditure approval processes etc. These protections will revealed in the circular. We cannot lose any visibility from a public listed company to a private entity so Sound will need to address this. I dont think I am being optimistic - I am just being pragmatic- we need to see how our interests are protected and this will be revealed in due course.
Testpack3- I think you presented a credible alternative and this deal has to prove to be better. They must have considered going alone and raising further money from other sources. This deal needs to be demonstrably better. I think we need to decouple any conversations about JP from the merits of the deal but I do not believe that it will be an appalling deal because it simply has to be better than the alternatives.
Trellis- I am supportive of any efforts to get further clarity and if they are willing to provide it, then that is great. If I reflect back then my basis for investing was due to the deal they struck with OGIF (derisking political risks) and Schumberger, the seismic, BOT/FEED, GSA and the basic geology of the area- there must be more than the TE5 horst. All these facts remain in place. The strategic mistake they have made is the high risk/high reward programme which has unfortunately meant the risk outweighed the rewards. Despite this they have been clear that they are also building data (even if the drilling was unsuccessful) for an exit and they have done this. When building a PI- centric company, I do think JP should have been careful in what he said and so I can understand the reaction towards him- however, he is the one who put a lot of these structures/mechanisms in place. I do believe that Sound will structure the best deal for the shareholders as it is their interests as well as ours to get this concluded.
We need to recognise that firstly, the other party is conducting their due diligence and secondly, all the terms have not been finalised and are subject to change. At the moment only a high level understanding has been signed which will require a lot of details to be filled in. Anyone who has ever worked on a deal of this magnitude (it is transformational for the company) will know that nothing is agreed until all the t's are crossed and i's dotted. I think Sound tried to be positive in giving as much details as it did with the first RNS but it has backfired. I do not think there is much that Sound can say between now and February other than provide blanket reassurances of doing the best they can.
I remain surprised with the lack of clarity provided by the last 2 RNS that has led to speculations and an adverse market reaction. I think Sound simply needed to have informed the market that they are now in exclusive discussions and due diligence with an unnamed party rather than specify the broad details (which, as expected, led to more questions than answers) particularly if all the terms have not yet been finalised and are still in negotiations. They will need to provide the clarity in the shareholders circular for voting. I have no doubt that they will address the basic questions to ensure that the deal is value accretive such as ensuring that the shareholders interests are protected similar to now as a listed company, the future contingent option makes sense for both sides and is not given away on the exact same terms as the initial payment (otherwise there would be no point in structuring it as an option), the likely drilling programme and production that will follow for which we have a carry, and what will happen with the remaining assets (in particular Sidi). Only once we have these details can we properly assess the merits of the deal.
But any basic deal maker will ensure that the deal is better than what we have now or other alternatives such as the continuation of the company in its current form with the possibility of a drilling programme (after raising additional funds). Personally I don't understand why anyone would sell at current levels- we need to set aside any personal views on JP (I think he was just naively over-eager to market) and look at the deal in the cold light of day once we have the details. It will be better than the alternatives.
I agree that the unnamed party will have existing interest in Morocco and the deal has already been unofficially approved by ONHYM and OGIF. This is why there is more substance to the deal than we already know. I imagined all parties are keen to now bring TE5 into production. Once this happen, there will be an immediate uplift for all parties involved and they can pursue the drilling programme slightly away from the limelight knowing that it is self funded. This is why the deal is probably the best in the long run for Sound although it does mean that we do not have an immediate payout. Looking at the volumes being traded over the last 3 days, it is clear that most will now hold on to see how this materialises. My suspicion is that this deal is not the end story and will be a first step towards the restructuring of Sound. And this is before Sidi which I suspect that they either sell or structure similarly. I personally cannot see Sound retaining the long-term interest here and they will sell completely at some point perhaps at the time of production or drilling. IMHO it is pointless to sell at these prices as the upside is far superior to the current price.
We know the first payment will be used for transaction expenses and related costs. There may be some left over from the next payment of $16m. My point is that the holding company typically will have a very small running cost and so any spare cash will be paid out. The new partner will have a majority stake in the JV so will be running it.
The last two RNS are giving us some clues about how Sound will operate in the future if the deal succeeds to completion. Sound cannot announce their strategy until the deal is done in case it does not complete. However, I think the wording in today RNS was inappropriate as it has left us confused and it was unnecessary to describe the company as becoming a carried, non-operating company without giving further details on what is happening with the future drilling programme and Sidi .
It does feel like that Sound will be a holding company and all activities in Eastern Morocco will be carried by the joint venture. All costs and people will sit in the JV. Perhaps Sidi will be structured similarly. The important point from my perspective is that Sound will now have the ability through the joint venture to continue its exploration and drilling programme and TE5 production will be funded. Hence we will still retain upside in any future discoveries albeit at a smaller ratio. My guess is that once the transaction is done, the restructure will allow some form of dividend payment (possibly at the time of FID) of any spare cash as there will be no need to keep it at Sound level. Although this is not the clean exit outcome that many of us were looking for, it is far superior to retaining a company which was running out of cash (which is the situation that Sound was in) so that is positive. I still think the share price is now ludicrously cheap but it has become a longer play.
The BOD will at some point tell us what the new strategy is and how they intend to take the company forward. This will be done at or near conclusion of the deal. We need to remember the outcome of the deal will be an extremely healthy balance sheet that enables us to do pursue different strategies. I know that it means the continuation of the company rather than a clean break but it is a smart move giving upside potential. The comments on JP are distraction - the Board will decide whether and what basis is he the right man to take us forward which is dependent on what we decide to do. The buyer cannot be a related party as it would be disclosed now in the RNS so I am assuming it is a private equity fund with interest in Morocco. The big picture is that it does change the profile of energy supplies in Morocco is this comes to production which will then affect the landscape and value. I am buying more at these ludicrous prices.
For once, I think Malcy is right. The base value (assuming the due diligence is successful) is 18p and there are various upside scenarios and potential. I am not sure that we will see this all the way to production and something further will be negotiated. These are definitely interesting times.
Like many, I was hoping that the sale would have been an exit and that we could sell up and move on. I am also disappointed that it is not a major that has bought. However, I think this is the probably the only sensible deal that could be negotiated. Basically what has been sold is TE5 horst at a discounted price (to give the buyer upside) and no or little value has probably been placed on the rest of Tendrara. The net effect is that we now have a base line on the shares of around $220m, a healthy balance sheet (the debt can be paid off and there will be cash for ongoing activities) and potential to do further drilling if we choose to do so. If we continue, it means that we are involved in production as well as exploration which is a different skill set. Personally I think this deal is step one of a few steps for this company. We do not know what the future intentions or strategy is but I am pleased that the marketing exercise has come to fruition and we have a deal and that we now have options on how to move forward. The share price is so undervalued compared to the value of this deal.
I have been reading the posts from time to time but like many others, I am well under on the biggest investment in my portfolio. However, I still believe that the marketing process that Sound has undertaken will be concluded by the end of the year with an offer. There is a clear resolve to get the asset sold and move onto the next stage, whether that is a full liquidation or a smaller company focusing just on Southern Morocco remains to be seen. I do not see any appetite for the board to continue with Eastern Morocco as they do not have the balance sheet to do so and any capital raising will be too expensive. At the end of the day, Sound is a relatively small company to properly utilise this asset and it is better sold to a much larger player than can conduct the drilling without as much as spotlight and scrutiny that Sound have had. They undertook a high risk, high reward strategy which ultimately didn't play out and have now accepted their own limitations and move on.
Any corporate transactions takes time to progress particularly in this sector and in Morocco where there are many external political complications to manage. All external communications will need to be done in conjunction with their advisers so it should be expected that little or no communication will emerged until something has to be announced. I do not expect to hear anything for a while yet. If they do not receive any offer, Sound and their advisers would lose their credibility but I cannot forsee this scenario. IMHO, any acceptable offer will have to be well in excess of the current share price so I am hanging on til the end of the year to see how this plays out.
I understand that if you have lost trust with JP, then nothing that will be said or done will regain that other than an attractive exit. Sound is so much more than JP and I am certainly not tarnishing all of them with the same brush. If you can ignore the hype including timing and focus on the strategy that they laid out, then they are still on strategy. Whether we agree to this is a moot point, as it is certainly the pitch they are putting out to prospective purchaser (as evidenced by JJ recent interview). I certainly believe (or choose to believe) that they will achieve far more than the current share price in their negotiations.
I think we should put the announcement in the context of what Sound have historically communicated:
1. They are still "on strategy": they completed 2 out of 3 drills, put the third drilling on pause and have now put their key asset for sale (which may or may not involve the whole company being on sale).
2. The placing does not change that as it gives them more runway to operate along with the reduction in salary for six months -which is probably worth another £100,000 or so- remember it is a reduction of base salary which only forms a small-ish part of the executive's total remuneration.
3. The key is that the reduction of salary is only for 6 months which gives them the option to renew this arrangement- this indicates to me that they are hoping to have concluded the marketing exercise by then and will know whether they are selling or not.
4. The placing is private and they have not offered it to the public- they had a ready-made individual or institution who was willing to give them the money knowing full well the sale process is underway- such a person(s) must be highly confident they will get a multiple of their capital back on sale. Previous placements were placed when the company was at exploration stage so the risk profile for their investment was completely different.
5.Sound management are well aware of the negative sentiment and hostility towards them by a majority of PIs. They are willing to risk their irk again with an announcement with so little information that they must be confident that, on balance, it is worth it.
In summary, I believe that the marketing process will conclude in the next six months and they would be looking to raise a multiple of the placement price of 10p.
The only positive that I can deduce from this morning RNS is that we have a floor price of 10p as that is the price at which a placement is bought. They knew how negative the market sentiment would be but have weigh up the need for the extra cash relative to this. They have obviously projected a need for extra capital and along with the reduction of salary, they have extended their run way (ie the point at which they run out of cash) by at least a couple of months.
The only thing that I can think of is that they have reduced the salaries of the exploration team in line with the reduced workload, and consequently JP/JJ have also taken some reduction. It makes me think that the pause is likely to be permanent and that they will sell. Anyone who has worked in this part of the world will know that any sale takes a relatively long time due to the bureaucracy involved. I suspect they are expecting the sale to take longer than they originally anticipated hence the need for the extra runway.
If the money was to be used for further drilling or TE10, I think that this would have been mentioned as that is a more positive, proactive use of the money. So IMHO, a sale is more likely but the process may take longer than we expected (maybe Q1 2020).
I know there is some anxiety to get the sale done and/or to be done with Sound (largely due to the hype built around a liquidity event) but I was wondering about the alternatives that are opened to management:
1. Sell the whole company in a single transaction
2. See Tendrara only with/without contingent payments and keep going with Sidi (potentially after a farm-in)
3. Continue drilling (perhaps after a capital raise) with possibly a more intensive drilling programme than before, including updating the seismic and CPRs, and keep going with Sidi
4. Take the TE5 horst to production (maybe after a capital raise), continue drilling and Sidi
5. Sell Sidi only and keep going with Tendrara
6. Conclude any consolidation opportunities along with one of the above
I am sure there are a few other alternatives. The point of this message is not to advocate any of these alternatives but just to point out that each alternative has a minimum value and Sound should/must be following the one that maximises value. I am sure they are not doing 1 or 2 because of emotional fatigue or (partially) trying to meet past hype/promises. We could put a best estimate value on each of the alternatives allowing for risk/reward to understand why Sound are choosing the path they are following. Perhaps we can get more clarity on their choice in the FSC. However, I would be surprised if any of the alternatives above is worth less than the current share price.