George Frangeskides, Chairman at ALBA, explains why the Pilbara Lithium option ‘was too good to miss’. Watch the video here.
I cannot comment whether this company has been sold or there is a backstop price. I have worked in large corporates and in any transaction, it is about populating the data room with as much information as possible and letting potential buyers analyse this and come up with their own value. We will have a price in mind and this is where the negotiations will begin. I am fairly sure that Sound have a target price that they would like to achieve. The drill bits are just providing more data. Any valuation will be a sum of parts and they will analyse each part of the portfolio separately. I will send my own SOTP tomorrow but it is many multiples of the current share price. The share price is not an indicator of value and will have little bearing on the value that will be achieved on exit. I think we all need to work out what we believe will be the exit price as it is very clear that the company or assets will be sold in the next 6-9 months. To be honest, I would rather have JP negotiating for us than anyone else I know.
I think a decision needed to be made on whether to drill or not. They discussed the risk rewards of this quite openly. Once the decision was made, then there was no need to negotiate a pre-drill price as that would be spurious. The trading plan is a red herring in my view as frankly, it makes no difference to the final exit price. I bought this share because of the clear exit strategy and that is what I am holding on for. The short term share price is dictated more by sentiment than value. But personally, I think it is way overdone.
It is an interesting question whether they should have sold on seismic alone. This is the risk reward question that JP was referring to before announcing the drilling programme. If we had sold on seismic alone, I am sure that many would believe that we had undersold. The drill programme has highlighted the difficulties of drilling and the limitations of seismic. And a major would understand this so I think the drill programme has limited downside to the ultimate sale price and probably not as much upside as some might believe.
I am merely reiterating what Sound have been telling us for a while. I think they have been very clear on their intentions. I believe that the negative sentiment is way overdone as the significance of the 3 wells has been overstated.
I do not think there is a shortage of buyers. The fundamental point is that there are very likely to be structures like TE5 in this field. 3 wells is such a small number of wells to drill. Any major would undergo a much extensive drill programme. I think the seismic and the basin model have shown this is an attractive proposition coupled with all the favourable fiscal policies, macro demand for gas etc. It is almost harder to think who wouldnt be interested? At the end of the day it is all about price.
I think it is worth reminding ourselves of the strategy that the company has quite clearly and repeatedly stated. We will be entering a sale once the 3 drills exploration is complete, regardless of the results of the three wells. This is a crucial point. Plan B and plan A are the same thing- we are selling, hopefully mid 2019.
The 3 drills are a high risk, high reward exploration, as is the nature of the game. TE9 was a duster but as stated in the FSC, it did not change the estimates in the basin model. They also made it clear that all 3 wells are independent and success/failure of one well does not change the outlook for another. TE10 is another TAGI/ Paleozoic play. If TE10 is another duster, it further proves the difficulties of drilling on seismic alone and that the TAGI is not as straightforward as we had hoped. The location of TE11 will be decided upon in December and will be a Paleozoic play only as there will be no point in doing another TAGI regardless of the results of TE10. All in all, we are drilling 3 wells. Whether any of them affect the basin model is probably unlikely. Any major would do tens of drills in this area- we are only doing 3- the results of them do not change our strategy. Sound has been clear on this- we will sell regardless. I do not think a major will be too bothered if all 3 drills failed as they know it is high risk.
If all 3 are dusters, then we will sell on the seismic alone and the de-risking of the TE5 horst.
The de-risking of the TE5 horst relies on completing the GSA and BOT/FEED. The GSA is imminent and will enable us to put a firmer valuation on the asset. But it is certainly worth a lot more than the current share price.
Sidi was an opportunity that they bought on the cheap and can probably sell for multiples of what they paid. It is being subjected to farm-out and hopefully that will be finalised before sale. I think Luca’s baby is/was another opportunist buy which may or may not materialise- in any event, this will be sold at exit so at best, this is just another small asset in which Sound hope to make a quick buck.
The bottom line is that we must not detract from the strategy that Sound is pursuing. We are selling next year based on all the information and data we have then. The sale process should be relatively quick. The real question that we should be trying to work out is what the sale price is likely to be in various scenarios including the worse case scenario that all 3 wells are dusters- in my view it will be multiples of the current share price. This is why the share price is cheap- it reflects sentiment, not strategy or value. But I, for one, appreciate the clear strategy and exit.
I am quite relaxed about this management. I think JP has shown considerable talent in deal-making. His hype is unbecoming of a CEO but he is quite young and inexperienced in that respect. But I trust he will get us a good price. JJ is qualified geologist/CFO, a great combination with the experience to complement JP. I think he is far superior than Will and Mary. BM came with a big reputation and recruited a strong team- he is the one who I think will be most disappointed as his reputation (which he has cultivated over his career) is most at risk.I sense some tension within the team in the last FSC but that is probably expected. This team is probably as good as any on AIM. They just need to deliver the shareholder value we have come to expect and the one they have hyped.
It is a matter of perspective. I am cautious in what I invest in and how much I invest in. In Sound's case, I threw caution out of the window and went big. And not because of JP but despite JP. I never bought into the hype regarding the LE or the 10baggers etc. Anyway, my thoughts:
1. I agree that they have been deliberately ambiguous on the wording regarding the £/TCF. They knew that it was being misinterpreted so even though they were factually correct, they could have been clearer.
2. Goodwill will not be affected by sentiment towards management as a buyer will not be buying management. Any goodwill arising will purely be negotiated and I hope JP can deliver here.
4. It is a red herring now anyway. We are where we are.
5. I think there is some genuine value not discount. It will be worth a few penny per share
6. I am not sure why he has gone to a sale of assets but it appears he has. Maybe any buyer simply wants the assets and not the company. In practice, I am not sure how much difference it will make to the actual sale price. Perhaps we can get clarity here.
8. I have worked in corporate and trust me, share options were sometimes perceived more valuable than the underlying shares as the upside would be geared. On the presentation deck, there are indication of institutional holdings and I was referring to that.
At the end, I do not think we have anything to gain by hounding management. We are in this together. I think they are trying and I am trying to focus on constructive advice to them rather than wanting any of them out.
My view on what has happened is as follows:
1. JJ guidance on TCF value to Sound was exactly that. Just a short-cut guidance. As I have stated before, a more comprehensive value on TE5 is around 25p
2. Value is not necessarily fair value- ie what a willing buyer/seller would trade them. I expect that Sound would negotiate a better price than 25p given that they have de-risk a fair amount of this and will have concluded on a GSA, BOT etc by then
3. These guys have plenty of transactional experience. They have been setting up a data room for a while. If they need a CPR to finalise a deal, they will commission one.
4. JP has been clear that three wells drilling was a high risk strategy. He did talk about the possibility of selling on seismic alone but I suspect that we would have all thought that would have been premature and they should drill. Ironically, failed drills will make the sale easier.
5. The rest of Tendrara and Sidi have some value. Not much, as Sound have not done too much with them even by the time a sale materialises. I doubt they will be worth much more than what Sound paid for them.
6. Intriguingly, JP is talking about selling the asset rather than the company. I suspect this could be more tax efficient and/or a cleaner sale. I do not think any sale will really be happening until end H1 2019/H2 2019.
7. I think they will have rethink on TE11 and what they want to achieve after TE9. Had TE9 been successful, they could have simply pursue the Palaeozoic theory but they probably need to further prove TAGI on TE!1
8. I cannot imagine OGIF, CIP or any of the invested institutions are sitting idle. PI have 63% of the company and these large institutions have over a third. They will be turning the screw on Sound's management.Even management have a lot of skin in the game through share options and shares. JP can rightly say that the three drills are high risk and we are one 1/3 of the way through but it doesnt change the end game.
8. The quality of the seismic is a concern but I think they ultimately needed to weigh up the costs/timing of further analysis/data v getting on with the drilling programme. Again, I think they will relook at what they need to maximise the sale value in a cost effective way and if they need to improve it further, I am sure they will.
The bottom line for me is that we need to get behind management for the remaining drill programme rather than hound them with any perception issues of poor governance or insider trading. I am sure they are feeling the anxiety. In my view, even in the worse case outcome of 3 failed drills, we are worth a lot more than the current share price.
There are of course various ways to value the existing discovery. JJ has given a very rough rule of thumb. In my view, JJ's guidance was always a short-cut number to provide guidance and he has rightly caveat it every time given it dependencies of various variables. He was arguably ambiguous in his wording but he has always referred to Sound's interest. A more thorough valuation by a broker has valued Sound's interest in TE5 horst at 25p NAV allowing for development costs, the favourable fiscal regime and first gas production in 2021. We are not going to produce but someone with deeper pockets will do this.
The actual price realised on liquidation will of course be a matter of negotiation and depends largely on the GSA. To this we need to add something for the rest of Tendrara and Sidi- these are worth something. This is where the negotiation skills come into play. There is of course, the high risk, upside of the two drills yet to come.
In my view, the share price fall is way overcooked but reflects the negative sentiment to management at the moment. I think we need to ignore this and put a value on what we have which is seriously above the current price.
Having reflected on the FSC, my take is that a new sense of realism has descended upon the company and us. The tone was much more abrupt, professional and devoid of hype which is what I wanted. It is clear that they are making no promises on TE10 and TE11 (and exercising more caution than before) but they will drill them and we will know the results by March 2019. After that the sale of the Morocco portfolio goes into overdrive, regardless of the outcome. Hopefully by then, the GSA will be concluded and progress would have been made on Sidi. I do not believe that there will be any further consolidation given their responses to Luca’s baby. Further, I do not think there is a plan B or anything of the sort, and management will stay until they conclude the liquidity event.
The worse-case scenario is that if the two drills are unsuccessful, we are effectively selling on the back of TE5 and the GSA will be key determinant of price. There will be some value attributed to the rest of the Tendrara licence (based on the seismic and basin model but not a significant amount in price per share, say 5p) but there will also be some discount for the estimates placed on the existing discovery. There should also be some value for Sidi but I suspect not much more than what Sound have paid for it given how little has been done on this.
You can put your own value on TE5 but from what I have read, TE5 is probably worth 30p-40p for Sound and so we could see a total sale value in the range of 50p although hope Rothschild and JP earn their bread and double that. This to me is the bottom value and assumes they are able to negotiate an exit price but why there is considerable upside to today’s share price. Nevertheless it would have been a heck of a ride.
If TE10 or TE11 is successful, the entire nature of the game changes and the value jumps beyond the share price that anyone has paid to date. How much this will be is anyone’s guess and not worth speculating. It is this glimmer of hope that keeps Sound interesting and we should put our support behind the geologists as there is no alternative.
For people like me, I will stay until the LE as I believe that this is worth far more than today’s share price and I will just have to ride the volatility in the share price until then.
Like many here, I am nursing a massive paper loss on Sound and it represents a significant proportion of my portfolio. This has been a painful last few days.
Having thought further about it, my annoyance is not at the TE9 failure - this, I accept, is the high risk nature of the O&G business but at the complete overpromising/ underdelivery by JP.
I am tired of his use of emoji, hastags and nudge/winks mannerism. He has not delivered on Luca's baby, Sidi farm-out, GSA etc all of which could help underpin the share price. What he has simply done is led us along blindly on these value-enhancing activities (which are nothing to do with the drill bits) by forever stating that they are just around the corner.
I, for one, have always ignored the hype around majors sniffing at our company, the LE - these were never in Sound control- or a plan B- every company has a contingency plan but that does not mean that the plan B will create value but could be a way out. I have also ignored his trading plan because I think the management team have enough skin in the game through share options etc and I would probably have done something similar if I was in his position.
But I am annoyed that Sound has not delivered on various items that they claim they were just about to deliver. I hope JP grows up and starts taking this seriously and delivers what he says or treat us sensibly and cut out the hype.
On TE9, I still believe in the geology and that there is more gas to be found. Whether this team can do it, I am no longer so sure. But at least, we do have an underpin in TE5 and I am sure it is worth more than the current share price. I would welcome an independent review of what happened in Te9 and lesson learnt before they drill TE11. I think TE10 is already happening and the cost of drilling TE10 will probably be marginal compared to the cost of stopping.
We need clear clarity on when all these various activities will be delivered and management to be held accountable. We also need clear clarity on what happened with TE9 and how we are going to learn from this. And then we need clear clarity on the strategy for the company going ahead. I hope the FSC provide this but I am not holding my breath.
I thought it was a fascinating meeting. Great transparency and far more technical details than expected. There is no doubt that they have done all they can to maximise their chances of success with the upcoming two drills. It now comes down to the geology which I believe in. The geologists were believable and passionate about what they have done and the excitement of what they have is tangible. Every conversation that I had indicated that this is a dream find for them and a one-in-a-lifetime opportunity to discover a massive find, make a difference and make money. It now comes back to sitting put and see the specialists do the work. Basically we have a fantastic team (including Schlum) working systemically and as detailed as possible on a great site. I rather they take the time and do whatever analysis they needed to do than do a rushed job as TE8 undoubtedly was. Furthermore they have built up a comprehensive data room ready to sell to any third party.
The whole delay in timelines is frustrating and this is where I think the CEO has let us down by over-promising (and building up unnecessary hype) but this whole potential is due to him and I would rather have him on our side as he is supremely confident on transactions.
We need one of the three drills to come through and we have a game-changer, two successes may ironically make us too expensive. I think the whole Sidi/ consolidation is a red herring and not a fall-back for if the drills do not come through, all faith will have been lost and no-one will rely on this team for further drills. Nevertheless, in that scenario the value of the company based on existing findings (and forthcoming GSA) will probably be close to the current share price. In other words, we have significant potential upside to the share price based on these 2 or 3 drills. I am not going anywhere and will sit back- latest, by the end of the year, we should know where we stand on TE9, by Q1 2019 on TE10.
Interesting FSC. I think a new sense of realism has crept into the company regarding timetables and LE. There was clear explanations of the rationale for the delays to date and various scenarios that can play out. Most importantly, there is a real sense excitement about the drilling programme and the outcome of the seismic and basin model. We will be hearing of the GSA soon (in next month or so) which will finalise our NAV based on our discoveries- I suspect this will end up 10-20% higher than our current share price. Then the "best exploration team" have done all their work to maximise their chances of success in TE9 and TE10. I cant see getting sold before the results of at lease these two wells is known but if any one of them is successful, the share price and value of the company will rocket up. Then there are all the unknown possibilities such as Sidi and Luca's deal which will only add to our share price. If we step back and ignore the slippage in timetables but concentrate on what we already have including a healthier balance sheet, the geology and our future potentials, I think the upside possibilities are massive. The team is doing all their can to put everything in place for a sale (albeit slower than they had previously indicated but for valid reasons) from the pipeline agreement, managing, navigating and cultivating the local relationships and gathering as much data as possible. I will be sitting back and watching this story unfold- it is like an epic novel which just gets better as we read through it.
Thanks for the feedback. I thought the AGM was excellent and there was lots of time to ask questions. Highlights for me: 1. The technical staff are very competent and probably one of the best in the industry. They are passionate about what they are doing and are doing all they can to maximise their COS on TE9 and TE10. Their analysis is really impressive and far superior to what was available at the time TE8 was done. The location of these drills will be decided by the team. This gave me confidence that at least one of the 3 drills will come through. 2. The basin model update should end up with numbers similar/ same as 9-17-31. The guy behind this has come in fresh (been in Sound a year) and derived the model using his past experience in BG. This is a new basin model and will be of the same quality used in major companies. 3. All the technical guys are impressed with the size and quality of Tendrara. It is hard to believe that TE5 is the only gas-producing structure in this field- there will be others! 4. The CFO (JJ) understands all the technical detail (PhD in geology) as well as being in control of the purse. He will not spend unless he is convinced of the need to spend. His interests are completing aligned with ours. 5. Whilst all this technical analysis is taking place, JP and JJ are lining up deals. I think they have potential deals lined up pre drills, post drills and it is all about maximising reward relative to risk. 6. There will be an announcement on Sidi- JP has mentioned this many times publicly over the last few months and so something will be coming through. 7. I am intrigued by the consolidation opportunity. It will be fascinating to see how this will be value enhancing and fit in with our exit plans. 8. The deal process or LE will happen before the next AGM- there was no need for JP to open with "this might be the last AGM" unless he really believes it. This is not to say the LE will happen by then but I guess the process of a final deal will be announced by then. 9. The answers to the trading plan and CIP distribution of shares were plausible and made sense. I think we need to move on from that. 10. Personally my confidence in the team (particularly the technical guys) is sky-high. The setting of The Geological Society was apt- at the end of the day it is all about the geology (not share plans)!
Following my note yesterday on why I topped up, I feel even more confident after the fireside chat that this SP will be heading north. In particular, further clarity was provided on: 1.Timing on update on basin model for end May/early June. The prospect inventory will be progressively updated as the seismic is interpreted and verified by RPS. The Lakbir well will be CPR'd end August and the rest of the portfolio will follow. 2. All the technical analysis around TE9 and TE10 appear positive 3. We can expect something to come out of "further growth in Morocco" workstream which Luca is running and there should be news for investors shortly. 4. Sound do not believe consolidation and maximising the sale price of our existing assets are mutually exclusive and can achieve both. 5.They have line of sight on about $25 million, looking at the bank balance, and monies we are due from the exit from Italy and so are adequately funded. 6. The story, messages and transparency is all consistent for some time now. Although timing has slipped (materially in some instances), the team is focused on getting this right rather than rushing. There will be substantial newsflow coming through now. It feels like 2016 again! I think we will see upwards drift for some time. Look forward to the AGM. It is very unusual to get so many opportunities to ask questions and seek clarity for any issues that you may have. All my concerns have been addressed so I am now going to sit back and watch the ride.
I have topped up today (on top of my considerable holding- considerable in my context) following the feedback and video from Norwich. My rationale is: 1. Share price is trading around NAV based on what has already been discovered in TE5 2. Seismic is an additional value, carried out competently by an external party, Schlumberger 3. The drill programme is being done carefully. This is obviously high-risk but we have the technical competencies to do this the best we can and we have taken our time in analysing the drill locations. We have a team as good as any in this field. Even if all this failed (unlikely in my view), 1 and 2 easily justify the current price. One success and the value will easily jump. 4. A broker has a price target of 60p and an upside case of 200p. Broker notes are done after detailed discussions with management and analysis at a level that PI do not normally do. 5. JP has given his explanation for his share sale. Even though I do not agree with it, insofar I wouldnt have done it if I was in his position, his rationale is a personal choice and has a certain logic which he is comfortable with. Furthermore, management are clearly all behind the company and passionate about it and are presenting a unified front. They are not hiding. 6. We are operating in a stable-ish political, fiscal micro and macro environment and all the noise around gas and self-sustainability is encouraging. 7. There are majors surrounding us, looking at us. There is demand from other organisations looking to enter this gas market and there is a lot of global cash looking for a home. We are an attractive acquisition. Even though II are not buying exploration stock (they don't need to), there is lots of interest in buying attractive assets. We have a team who have deep experience in selling assets and will sell us in the best light. 8. Sidi is worth something and will be a sweetener or sold in its own right. Further consolidation may be done and should be value enhancing. 9. We have enough cash to last us til the so-called liquidity event. The company is managing its cash balances properly. Any cash raise done will only be on the back of successful drilling or consolidation opportunities in my view. 10. The LE should be done within the next year so this is a short-term stock, if you bought now. All in all, the shares look cheap to me. Look forward to the FSC.
Agreed. As you say, what we have is potentially worth 57p if we use Sound's guidance. We need to discount it by 40% to get the current share price. Quite a prudent discount allowing for risk. Even if we didn't use their guidance (eg use our own models), it is likely to end higher than the current share price.
Yes we need to allow for Sound share(47.5%), risk factors, volatility of gas prices, exchange rates etc. Even after all that, the value of what we have found in TE5 will be close to the current share price .