The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
We know that Sound has accumulated a wealth of data which they have interpreted with their partners. We are not privy to that data. They have chosen not to commission a CPR for reasons that we do not know. Perhaps a buyer will apply a larger discount to the value without a CPR than they would have done with a CPR. We simply do not know.
The bottom line is that they appointed advisers to advise them on what how to proceed. The existence or not of CPRs is one of many factors that will be considered during the due diligence. I would not draw undue attention to the CPRs. There are far too many variables in play in a sale process.
I am sure you are well aware of this during your sale. We have to place reliance on the management, Board and their advisors to negotiate the best price or we can collectively reject their recommendations.
I do not think there is a need to produce CPRs. Any potential buyer will do their own independent assessment rather than rely on a third party CPR. The CPR does give some comfort especially to shareholders but I believe that its use in a sale situation is more limited. Majors will form their own judgement regardless of the existence of a CPR.
I believe that the criticism of JP's hype is valid but I, for example, bought into the story despite the hype. The trigger points for my investment and increased shareholdings were when:
1. Sound first acquired the license
2. When OGIF came on board as this derisk the political risks considerably
3. When Schlumberger agreed to carry out the seismic at their expense
4. When Schlumberger took a full participating interest.
Anyone running a small business (and Sound is small in an O&G context) knows that the key success criteria is to have the right capabilities wither directly or through partners. Sound and JP in particular has done this. Personally I think he hyped because he probably did believe that he could deliver all this when things were coming together and he is as shocked as we are with the drilling results. But I am not JP and so do not know what he was thinking. But as I have said before, he has negotiated well to date and so I think he is the right man to conduct the sale .
Sorry NDAs are signed frequently in all sort of situations and in early discussions where confidential data will be shared. The are no SP changing event. We are not going to be kept informed of the sale process until we need to and that is usually when there is an offer.
I think we need to realise how little we know of the sale process. If we look at what has happened to date, David Clarkson stepped down on 14 May before Simon Davies was appointed as chair on 23 May and Richard Liddell stepped into a normal Board role. All these events are linked with sale announcement on 22 May. Basically, they needed to do this reshuffle to prime themselves for sale. They would have been planning this sale process for some time. We do not know if anyone has visited the data room, where the brokers are in terms of marketing the assets to third parties and whether they have had any expressions of interest.
We are not going to know until we need to know.
We do know that this process has been activated for some time and we have seasoned sales professional trying to sell. We also know that this is a good time to sell the asset due to current M&A activities in the sector and oil prices. My feeling is that it is far more advanced than many of us believe and we should see some activities announced in Q3 and sale by end of year. But it is a gut feeling and no more. Imho, it makes sense to hold on if you can til then.
As we now in a sale process, I think we should concentrate on the inventory for sale:
1. In respect of the TE5 horst, we have CPRs, draft GSA agreement, BOOT which basically means that it will a quick process for a new party to bring into production.
2. A large exploration permit backed by full participation from a service partner, Schlumberger, along with a local representatives in OGIF to navigate the political dimensions.
3. 2850 lines of seismic largely analysed with near-term drilling targets identified
4. Sidi with 75% interest and large exploration permit with perforating and clean up test of Argovian
This is a considerable amount available for sale. I am firmly of the opinion that it is worth north of £300m after debt. I agree with others that an alternative strategy would be to raise money and carry on drilling- this is a plan B- and means that Sound are not negotiating from a point of distress. However, Sound will not do this as they set themselves for an exit and this has already been delayed. I am sure that from the early investors, there is no desire to delay the exit any further and I suspect management now wants to sell as well.
Personally I think JP should never hyped in the way he did as he made promises that he couldnt control (such as exit prices or timing) and that was probably his naivety and excitement- the company never needed that kind of hype as it was an attractive investment in its own right due to its clear exit strategy.
Notwithstanding this, I still believe he is the right man to negotiate- look at some of the deals that he has already negotiated- the acquisition of the exploration permits for Tendrara and Sidi, bringing on board OGIF, the deals with Enagas, Elecnor and Fomento, the draft GSA, the full participation of Schlumberger, the people he has attracted. The failings to date have been on the drilling side but that is not his expertise. I think it would be rare to come across someone who is able to negotiate all this- I agreed with the Board's assessment that he is dynamic and that Sound have built strong connections on the ground in Morocco. I just think he got overly excited but nevertheless, he is the man that I want negotiating the sale of the asset.
The bottom line is that I believe that JP is the right man to negotiate the sale and we will exit at way above the current share price.
I do not think they are negotiating from a position of weakness. They actually have experienced operators (JP, JJ and now the chairman) in this, despite what we might think of them. The internal confidence in seismic is not shot- they undertook a high risk strategy which unfortunately didnt come for them but their basin model is unchanged and they have identified a number of potential further drilling targets.
At the end of the day, they are stating that someone with deeper balance sheet has a better chance due to the multiple drills required. We know that any major can take their time and do multiple drills, away from the public eye, unlike small operators like Sound.
Anyone looking at the data will make up their own mind about what they see and decide whether to proceed. Sound has always put itself up for sale (by publicly declaring its exit strategy) so has put everything together, in terms of data, to be ready for sale. This is a completely different mindset than if you were hoping to go into production and then find yourself selling- the quality of data would not be the same. I have exited a couple of businesses myself so I know the business model is completely different.
Basically, their moment has arrived and now they have to delivered and I am confident that they will.
Just to clarify I was only referring to Sound share of the licence and after debt. Severance pay will be low- most employees are ex-pats. Basically I think our assets are worth at least £300m after debt. This equates to 26p per share. The seismic is still valuable- the basin model is unaffected but the COS is lowered. Any buyer will own all the data that has been accumulated by Sound and that data is valuable. We need to remember that Sound have put the BOT, pipeline agreement in place, have a draft GSA and will leave the FID to a buyer to decide- in other words they have considerably derisk TE5 going into production. Any buyer will need to work with all people who own the rest of the licence and this will be factored into the negotiations ie the transaction is not so straightforward due to other interests.Nevertheless I think there are a number of parties already familiar with Morocco and how to work there and so these obstacles are likely to be a minor issue. I am confident that the transaction will proceed quickly and we should be looking to receive a minimum of 30p per share but I expect more.
I think the sale price will comprise of the following, at a minimum:
1. The TE5 discovery- if we use the progressive report (https://www.soundenergyplc.com/media/1594/exciting-times-ahead.pdf) as any sort of guide, it is worth £286m
2. The seismic carried out- this is worth at least cost, say £15m
3. Sidi- probably worth £20m or so at a minimum based roughly on what it cost and the initial farmout deal back in 2016
offset by debt of £25m
Total value is around £300m which on a fully diluted basis equates to around 26p. This is the absolute minimum that is a no-brainer. I think the market price has ignored much of the positive outcome of TE6, TE7 which is massive through which we have CPRs etc. I am mopping up shares at these low prices- remember for every seller, there are buyers waiting who are probably thinking like me- the shares are not illiquid. It doesnt matter what you think of JP, BM, JJ etc and all the broken promises and hype- the assets are worth what they are. This is not a distressed sale so they will sell at a fair market price. Personally I expect Sound to negotiate a much higher price than the minimum above.
Ironically a good AGM even though the event could not be recorded as management answered all the questions that they could- only ones they didn't were due to sensitivity and confidentially restrictions. Arguably they are still on strategy ie they have drilled some wells and now have put the asset for sale. JP quite confident on this and said that this is where he can make his contribution. BM gave a technical analysis on TE10 but interesting stated that it doesnt affect the basin model but the COS is revised downwards. Basically they have the asset all ready for sale so it is a case of seeing what price they can realise and what structure. They are still have the support of their partners. I am just going to sit back and see what they can realise but I expect it to be a multiple of the current share price.
Like others, I am surprised and disappointed with the outcome of TE10. It is part of the game but nevertheless, I was expecting this. I think the AGM tomorrow is crucial as JP will have to lay out a clear way forward. The cash balance is extremely low even after 50% cost reduction, it means that the business will have to liquidate within 12 months if not earlier as I cannot them raising cash at these equity prices or issuing debt. That means they will either drill TE11 and sell out within 12 months or sell now and not do TE11. We need this clarity and hopefully will get this tomorrow. I think the market has heavily underpriced the combined worth of TE5 and Sidi which I still believe to be worth £400m+ so JP will have to structure an exit so that it does not look like a distressed sale. This is the challenge that lies ahead of him and this is now how he must earn his trust and credibility back. Personally I think he will be able to do this but we need a clear direction in the AGM tomorrow.
I think this share is gradually getting rerated based on the recent two RNS on TE10 and subsequent emails from JP which he allowed to get published. It had been looking ridiculously cheap particularly given the confirmed discovery of TE5. After Badile and other over-promises, there is no doubt that Sound had adopted a more cautious and professional manner in their communication to investors and after TE9, JP was subjected to horrific (and unjust) abuse so Sound would have been even more careful in their choice of words and language.
So to have written the two RNS (which were signed off by Brian) and emails in this light means that they must be optimistic in what they have found and this is further evidenced by the Q1 presentation released today- the language is so positive on TE10 .
TE10 will have a compound impact in that not only will it add to the NAV (if the gas is commercial), it will also validate the basin model further but will also improve the valuation on the rest of Tendrara licence by placing more confidence on the work done. A marginal improvement in confidence gives a geared improvement in the valuation given the size of the field (up to 31 TCF).
The presentation was also telling for two reasons- it appears that Sound are still pursuing further consolidation opportunities - probably for a quick turnaround- and the timetable ended in June which underlines the fact that they will be putting the assets for sale in Q2/Q3 this year. IMHO, the exit will be happening this year and I believe at price which will be a multiple of the current share price.
I have never listened to the hype. Even JJ gave a definition of 10baggers in the fireside which is not how any investor would interpret it. I think we should value what we have and what is the potential. And this became more clear to me in the FSC and CC. We have much more than 23p in the bag. 23p solely relates to TE5. And even that is far higher than the current share price!
Very happy with the FSC and CC, We know have clarity on:
1. Valuation- we know TE5 is worth around 23p by a number of broker reports and valuation methods. We can put our own values on the rest of the licence and Sidi. I still maintain that our sale price will be a minimum of 80p if TE10/TE11 are dusters but hope the team can get more. If one of them come through, they will add to the NAV and raise the price- how much is too earlier to say but it will be far in excess of the current share price.
2. Where we are operationally compared to strategy. They are to be commended to staying the original strategy and seeking an exit in 2019 regardless of the results of the next drills. I would be surprised if they do any further drills. By then we should have sorted out the farm-in for Sidi,any consolidation opportunities, GSA, BOT/FEED.
3. Support from their partners including OGIF. I think the letter was necessary to calm down any lingering fears , This must mean that any political risks are under control
4. The unity of the team. They were consistent with each other, with what they have said in the past and provided more colour. Furthermore, with their share options being so out-of-the-money, they are as determined as us to get the share price upwards. I think they are far more professional and transparent than any team on AIM.
5. Future upside potential. We will get a bounce in the share, IMHO, once the GSA is announced, if any of the drills come through, if the consolidation is announced and value-enhancing, if Sidi farm-in happens and once the sale process happens. Of course, any bad news on the drills will knock back the shares but I think will have limited impact on the ultimate sale price. In other words, IMHO, the share price is way under the sale price and so I am staying until then.
I would not expect much institutional activity especially if they are looking to exit in 2019. It would deemed to be trading which may not fit in with their risk mandate. I do not think there will be any institutional activity unless one was trying to buy a sizeable holding if they were interested in buying the whole company but I think it is premature for that. Any major institution would normally wait until there was a sale process in place.
We are now at share price levels that is largely being driven by sentiment. The fundamentals of the company are worth a lot more than the implied market capitalisation. I accept that we need a GSA to underpin the value of TE5 horst but I cannot comprehend a situation where the GSA is not finalised especially given all the other agreements that we have in place and the macro importance of the gas. This has to be worth way in excess of the market capitalisation. If you add Sidi (even at cost) and the money spent on the seismic, then we have significant upside.
At the end of the day, if you believe that the asset/company can and will be sold, then the share price is not reflective of the basic sale value.
I was a little surprised by the tone of the RNS on TE10 given that Sound would know of the market reaction but then again, I really believe that Sound will go ahead with the liquidity event regardless of the results of the drill programme and will then establish a fair value for what they have.
I guess it now comes down to whether you believe the Sound management are credible individuals or not. IMHO, if they were not, they would not have undergone the level of communication and exposure that they have over the last few years. The conference call will be again an example of their transparency and again an example that they following through a strategy that they laid out a while back.
I am scooping up more and more of the stock at these prices.
Trellis- The three wells add to the NAV. The GSA, FEED and BOT will also add to the NAV. Successful wells give more confidence in the seismic and the analysis we have done and will improve the goodwill we obtain. But they do not invalidate the seismic if they are unsuccessful. That is the point that I am making. I do not think my figures are bullish but even if you think they are, I just struggle to see how our market capitalisation reflects what we already have. Time will tell. And I am prepared to wait.
I do not see a paradox. The seismic has helped derisk the field. There s no doubt about that. We have a far clearer model of the field now that we had before. This was not a cheap or trivial exercise. It is a separate question on whether the seismic has the details for successful wells. I think this is where the confusion lies. The failure in TE9 does not imply a failure elsewhere and does not invalidate the seismic. This is the critical point. We are doing 3 independent wells. There are a number of independent structures and we are gathering more and more data with each well.The independence of the wells mean that the relevance of the drilling programme is overstated in that it is not necessarily indicative of the rest of the field. Buyers buy data as well as gas. I think if the seismic had shown only a few structures or more dependencies between them, then we would have a problem and could attribute a low price to the field. But it did not. And that is why JP's theory hold.
I think we need to be clear that this is not an exploration portfolio. We have gas in TE5. We have found similar structures elsewhere. 3 wells does not prove or disprove these structures. I think you need to revert to the transactions guys in JP and JJ to understand how a valuation is done. I have met them a number of times and their thinking is consistent with what I have seen in this industry. The bottom line is that the rest of the field has value- the question is how much- the "big unknown". I have tried to give an indicative value but the actual sale price is a matter of negotiation. To dismiss the value of the rest of the field is extremely conservative and in my view, invalid.
Even if you apply a recoverability of 50%,that would not change the value too much. The main variables are the percentage applied to the seismic and the TCF taken credit. PNE- I do not think Brian implied there is no value in the seismics. JPand JJ have been very clear that there is considerable value in the rest of the field and have outlined one valuation method. They have done various deals and so should know what they are talking about. I know from looking at past deals, that this valuation method is similar to what happens when a transaction takes place and hence I believe is one way to put a value on the rest of Tendrara and Anoaul.
In a sale scenario, a prospective buyer would value each component separately. There are three main components:
1. The TE5 horst
2. The rest of Eastern Morocco- Tendrara and Anoual
3. Sidi
Te5- we will have a clearer idea of its valuation post the GSA and BOT/FEED. Using conventional valuation or brokers report or Sound’s rough guidance, everything is pointing to a value in excess of 25p for the TE5 horst ie £250m.
The rest of Tendrara or Anoual is the big unknown. The worse case scenario is that all 3 wells are dusters and we are selling on the basis of the seismic alone and basin model. JP has referred to using 10% credit if we just have seismic but lets assume that we only get 5% value given that the 3 wells are dusters which highlight the uncertainty in the model. My guess is that the basin model 9-17- 31 will remain unchanged after all 3 wells because the wells are testing only a small area.
We then need to apply recoverability (say 60%), Sound share (47.5%) and a value per TCF. If we use 5% of the mid-case 17 TCF, then the value if 17TCF *60% recoverability*47.5%* £1.5 per TCF, then we are looking at another 36p per share for Eastern Morocco. Remember this is the case worse scenario. The main variables are the 5% and the 17 TCF used. If we had use 10% and 31 TCF, then the value could be £1.32.
If one well comes through, that well will be treated like TE5 and we can put a firmer value on that structure. It will add to the net asset value. This is an important point. It will increase the net asset value only but the actual sale price will be the net asset value+ goodwill so we do not know how it will affect the goodwill element (in all probability, it will improve goodwill). In other words, a successful well will probably not change the basin model but could affect the variables above (eg we might use 10% not 5%). In other words, we do not need any success on the wells to get a value on the basin model. A successful well may affect the variables used to value the basin model but it may not.
For Sidi, we paid largely in shares but from the Sisi trip, I heard the value of Sidi was in excess of £100m (from the Petromac guy) based on what has been done to date. We can probably get further clarity on this number as even £100m is a substantial percentage of our current market capitalisation.
There is also some further goodwill value given the relationships that have been built and derisking some of the political risks, particularly due to the pipeline deals that have been struck.
In my view, the bottom line sale value is around 80p and my mid case is around £1 but I think the team will negotiate a sale price higher than this. In any event, I think we get a multiple of the current share price on exit. But that is my view.