Member Info for ps200306

Three problems with that assessment. First, the debt projection is considerably higher than Zeus's though I will leave others to argue the toss on that one. Second, since the Attijariwafa debt is the lions share of the debt, Managem would be facing most of the same difficulties if this analysis were correct -- the concession would be only marginally profitable and I doubt they would be taking it on in that case.

But the third and most glaring error is the assumption of a flat production rate. At 30 mmscf/day it would take 35 years to extract the estimated recoverable volume of 377 bcf. Including the Phase 1 volumes that would reduce to 26 years. But that would be wrong on two further counts -- the take or pay contract with Afriquia is only for ten years. It would be silly to extend it for decades longer when Phase 2 gas is vastly cheaper to produce.

The much more important point is that nobody's going to be hanging around for several decades to extract the gas. A fifteen year life would be more expected. 30 mmscf/day is the INITIAL Phase 2 volume. Oil and gas fields don't produce at a flat rate over their lifetime -- production rises to a peak and eventually tails off. That involves the drilling of additional wells as the field matures. I don't know what the projected production curve is, but peak production of 100 mmscf/day wouldn't be out of the ordinary. And this is without the addition of SBK-1 and TE-4 which are reasonable prospects.

So, in summary, an element of GIGO going on here.

Kylie: "At the moment there is NO PROGRESS on those."

None that we've been TOLD about.

I'm sure the bondholders would be fascinated to hear your definition of "without any problems". In April 2021 their interest rate of 5% was slashed to 2%, with 3% deferred to 2027. They were also forced to convert €3.5m of the bond value into equity, at a price that is 3 times the current share price. They were supposed to start getting their principle back at a rate of 5% amortised every six months starting in December 2023. When that date arrived they were told that they'd get no principal repayments until December 2027. In the mean time they are getting less than the risk-free rate of return on their money.

As for them being "not in business to run an energy company", they've already had 10% of the company's equity forced on them. There's a difference between owning it and running it. Schlumberger for many years had an interest in the Tendrara concession without any hand in running the company. Now SOU themselves merely retain an interest, having relinquished operatorship. Nobody's talking about the bondholders running an energy company. There's no "running" to do as far as the Tendrara assets are concerned. Managem is responsible for that. The bondholders would simply take over the assets that the bond is secured against. SOU would become insolvent and cease to exist, with the existing share capital written down to zero. It's hardly without precedent -- Barryroe Offshore Energy on becoming insolvent was bought by an investor as a tax write-off vehicle. Shareholders got nothing.

The Tendara assets, net of debt, are worth perhaps a factor of eight times the current bond value. You might even get some of the debt written off in an insolvency, depending on the structure and seniority of the other debts. Would YOU turn down eight times what you were owed by a company that had stitched you up for many years? These guys are not cuddly philanthropists.

@kylie, yes, it goes without saying that we need Managem to deliver on all fronts: P1, P2 and drilling. Let's assume for the sake of argument they are progressing those. Then uncertainty over the debt will continue to be the main drag on share price.

@ediacaran, you say that addressing the debt will be less of a hurdle than previous occasions. I don't entirely agree. Yes, if P2 was announced and on track it might open up additional sources of funding... MAYBE (and at what cost?). On the other hand, with previous restructurings the bondholders had to suck it up because SOU had no assets under development that could pay them back. If they didn't put up and shut up they stood to lose everything. Once P2 looks like a slam dunk then they can take everything by foreclosing on the debt when it becomes due. They've been stretched over a barrel for years, this would be their chance for payback. Expecting any good will from them is ignoring the harsh realities of business.

Kylie, the Managem deal is indeed transformative. It gives SOU a $400m share of the Tendrara resources with a carry on all development activities. The fly in the ointment is the debt that becomes due before any such revenue can be realised. That is a hurdle that SOU needs to get over, and the share price will languish for as long as the uncertainty remains. I've put it to Graham in an AGM question that any hope of share price appreciation depends on answers to that NOW, not in some last minute restructuring in 2027.

Kylie, you're wondering why I'm hanging onto shares if it's all doom and gloom? It's not, and I'm not ready to cash in my chips yet. I'm just trying to be cognisant of, and up front about the challenges to come. The biggest thing holding back this share is uncertainty about the debt situation. SOU need a plan for the Eurobond situation NOW, not in 2027. A further renegotiation with the bondholders is essential to convince SH's that the the company's assets will not be foreclosed upon. Alternatively they need a plan for selling the company before that happens. A buyer who can take on the assets and the debt and can wait it out until Phase 2 revenue stands to make a tidy penny. I can't believe there wouldn't be an interested party at a minimum of, say, 2p/share. That would cost them £40m for what is approximately £140m of net revenue after debt. With a number of interested parties, SOU could probably get the sale price closer to the current Zeus valuation. But what we need is some up-frontness from Graham et al. about these considerations (as well as, of course, some more news flow about drilling and Phase 2 progress).

Cont'd...

### Key risk indicators to watch:

* Is there a viable **refinancing plan** in place?

* Are there financial covenants that could trigger **early enforcement**?

* Is the future revenue interest **collateralized**? (this is crucial to know)

* Is the board preparing for **insolvency defense** or strategic restructuring?

---

### Final thoughts:

The company is **on a collision course with the debt maturity in 2027**, unless it:

* Raises significant equity capital,

* Successfully refinances, or

* Sells the revenue interest to prepay debt.

In the absence of such moves, creditors will likely act to take control — and can legally do so.

Cont'd ...

#### 3. Insolvency risk

* If the company cannot pay its debts as they fall due, it is **insolvent** (on a cash-flow basis).

* Even before 2027, if the company is clearly unable to repay/refinance, creditors could argue that the company should go into **administration** earlier.

* In administration, administrators would control the future revenue interest and possibly sell it to repay creditors.

#### 4. Creditor-shareholder dynamic

* The ~10% shareholder-creditors will have **limited influence alone** (10%) but may act strategically:

* Support enforcement to trigger a restructuring or administration.

* Coordinate with the secured creditor (depending on relationships).

* Try to participate in a debt-for-equity swap to increase ownership/control.

#### 5. Unknown collateral on revenue interest

* If the future revenue interest is already pledged -- the secured creditor can enforce directly.

* If not pledged, the secured creditor could still pursue **insolvency** to gain control over it.

* Whether pledged or not, the fact that the company may be unable to refinance makes enforcement or insolvency very likely unless a restructuring is agreed.

---

### Bottom line:

* **Yes — the creditors could almost certainly take over the company or its interests *before first revenue* arrives,** if the company cannot refinance or repay the secured debt.

* The key timing point is **2027**, but if it becomes clear well before 2027 that the company cannot refinance, creditors could move earlier.

* The future revenue interest is at real risk — either through direct enforcement or via insolvency.

* The creditor-shareholders with 10% will have leverage but not full control on their own; the secured creditor is the most powerful actor here.

Cont'd ..

When SOU's Eurobond debt was last restructured, the bondholders stood to lose everything if SOU defaulted. Yes, they had security over SOU's Tendrara assets but there was no guarantee these could be developed. With the Managem deal things have changed. I described SOU's Eurobond debt to ChatGPT, as well as Afriquia Gaz as significant creditors and shareholders. Here's its take:

### Recap of your situation

* Company sold oil reserves but retained a future revenue interest.

* **Secured debt was *not repaid*** — still outstanding and large (~2× company market cap).

* You don’t know if future revenue interest was pledged as collateral.

* Creditor-shareholders own ~10% of the company.

* Secured debt matures in **2027**, first revenue is **2028 or later** -- clear mismatch.

* No revenue until 2028 -- high risk of inability to service or refinance the debt.

---

### Implications and risks

#### 1. Debt maturity risk -- **very serious**

* The company will not generate revenue before 2028 -- unless it has **ample cash** or can refinance the debt, it will likely default when the secured debt matures in 2027.

* Given that the debt is 2× the market cap, refinancing may be very difficult without giving up control or substantial dilution.

#### 2. Enforcement of secured debt

* If the secured debt is not repaid in 2027, the secured creditor can:

* **Accelerate the debt** if not already matured.

* **Enforce security** — if the future revenue interest is part of the collateral, they can seize it.

* If the future revenue interest is not pledged, the creditor may still force the company into insolvency (administration/liquidation) to reach it indirectly.

.

SOU's 2024 annual report says that "as new operator, Managem plans to conclude all activities to undertake FID in 2025". Planning is all well and good but is there any CONTRACTUAL obligation for Managem to progress at any particular rate? It would have been quite some oversight for SOU not to receive any contractual guarantees on "best endeavours" at the very least. On the other hand, SOU were in no position to dictate terms. They are hoping to teeter over the finish line to major revenue before debt kills them off. Managem has no such restrictions. To be sure, they will have to progress the Anoual drill at some point to keep the exploration license alive. But for the most part they can take their own sweet time.

President and CEO M. Imad Toumi interviewed for Managem's 2024 annual report (emphasis mine):

"The development of natural gas is part of our desire to diversify our resource portfolio and contribute to Morocco's energy sovereignty. The partnership with Sound Energy, centered on the Tendrara project, aims to develop a local resource capable of meeting the country's energy needs. This project includes a first production phase estimated at 100 million cubic meters per year, with commissioning expected by the end of 2025. We are also CONSIDERING (nous envisageons également) a second phase with the production of more than 530 million cubic meters per year. This initiative aligns with the Kingdom's strategic priorities of developing a more balanced and lower-carbon energy mix."

Let's hope by this stage they are doing a lot more than "considering". Here was SOU's own list of conditions precedent to the Attijariwafa Phase 2 loan:

· Governmental and Ministerial approvals;

· Tax authority clearance of loan structure;

· Amendment of certain Governance documents to lenders satisfaction;

· Amendment of Gas Sales Agreement to lenders satisfaction;

· Conclusion of Pipeline interconnection agreements to the lenders' satisfaction;

· FEED update to lenders’ satisfaction & agreement(s) in place with different contractors such as EPC, Rig provider, O&M etc.;

· Various ancillary plans and budgets;

· Completion of further DD (including insurance, E&S, Tax, etc.) to be satisfactory for the lender(s);

· Finalisation and entry of binding Loan Financing

· documentation in satisfactory form for the lender(s);

· First drawdown from debt facility conditioned to simultaneous capital contribution in ensuring maximum gearing of 65%

It's a long list. Nearly seven months in you'd expect some of this to be completed. Are we going to be updated on where any of it is at? So far it's crickets. Surely the AGM is SOU's opportunity to provide some specific information and not just mumblings about "continuing progress".

My guess is Graham will be gone within six months. He hinted at it in interview previously. He turns 68 in October. He passed his five year mark with SOU in February. From his point of view his job is done, having steered SOU off the rocks to sell its only significant assets to Managem. He's had his own payout already so doesn't need to hang around for any other LTIP remuneration. With the most optimistic view he'll be in his 70s by the time Phase 2 revenue comes in, and that's all a Managem gig anyway. There are no big SOU projects for him to make his mark on. He will definitely ride off into the sunset this year. If you want a bet on likely announcements at the AGM, that's mine.

Ediacaran, I'm all for keeping Sidi if we can farm it out and get a carry on the seismic and eventual drilling. Don't want to squander existing shareholder equity on anything with a low COS though.

"Can anyone rationalise the lack of comms with this share...?"

Well, yeah, we've always been treated like mushrooms so nothing's changed. One problem is we don't even know which milestones will be announced let alone have a timetable for them, hence no way of tracking progress.

With regard to drilling there's nothing to say a rig mobilisation couldn't be announced tomorrow with well results then only weeks away. Or there may be nothing in the works. We just don't know. With regard to the Tendrara concession, we can guess at certain milestones:

* Completion of LNG plant construction / start of commissioning

* Completion of Phase 2 FEED

* Bank approval

* Regulatory approvals

* FID

Will all those things be announced? Again, we don't know. And without a timetable there's no way to know if things are slipping or progressing according to plan. If I was trying to stir up interest in a share, I'd put out a plan with plenty of fat in it ... and try to tick off the milestones ahead of schedule. If I wanted to depress the share price I'd do what's currently being done ... maintain radio silence and announce delays after deadlines have already been missed.

GL's share purchases provide a glimmer of hope. Good on him for taking advantage of the low share price. If it displays a measure of confidence I won't begrudge him making an extra few shillings. Someone pointed out it implies there will be no near-term announcements. However, let's not forget SOU aren't calling the shots. GL may be more intimate with the schedule than the rest of us, but I doubt it could be construed as insider trading for him to just observe that Managem are progressing to plan. At least, I hope that's what he's doing.

Kylie, thanks for the response, sorry for the delay. I don't remember babblingbrook but may just have slipped my memory. I've been around since the latter half of 2016, so coming up on 9 years -- a youngster compared to some others here. Can't disagree with you that SOU has consistently performed below expectations. Or that further attempts to raise funds could cause problems. At some point we would be better off if they just sold the whole thing. Hard to imagine that even at firesale prices they couldn't get more than the current share price.

I do remember the euphoria back then and how misguided it was in retrospect. Both Parsons and a large cohort on the board here were talking as if finding 31 Tcf was a slam dunk. From subsequent revelations it sound like Mitchener must have known that carbonate cementation was the Achilles heel of Moroccan gas exploration. Even if the Tcfs existed, you have to have sufficient chance of success or you will end up doing what SOU did -- drilling three dusters in a row. It's like the Martingale strategy at roulette: mathematically it can't fail but with the proviso that you need unlimited money.

I believe SOUs prospects are better now, but only if they don't squander money and if Managem deliver the goodies as promised. Otherwise returns will evaporate even as the end goal comes into view. I'm not interested in any further drills beyond the two carried ones. I'd prefer to see the Sidi license relinquished than a repeat of the 2023 convertible bond fiasco. That could well end up costing $25 million of shareholder dilution. ]

So, Kylie, in the same interests of transparency ... what's YOUR story? Disgruntled former shareholder? Prophet of doom? Principled defender of the dispossessed? Mother Teresa of the bulletin board?

Yeah, you got me Kylie. I was spoofing all along ...

... not. I have never knowingly called things other than as I see them. I've never tried to talk things up or down whether I did or didn't own shares. I've never pretended I owned shares when I didn't, or vice versa. I've only ever quoted sources available to everyone ... though amazingly it seems not everyone can be bothered to read RNSs, broker notes, and annual reports along with the fine print. I'm not going to pretend that everything is plain sailing for SOU just because I now own a ton of shares. It's more important than ever to warn shareholders about the risks of creeping dilution. On the other hand, I don't ascribe malice to SOU management the way you do. That doesn't mean I take everything GL says at face value. His job (unlike mine) *IS* to talk up the company's prospects. He's clearly been trying to paint a rosy picture for years when SOU has been on the brink of insolvency. I still think SOU is in a vastly better position since the Managem deal but a) they're not out of the woods, b) if there is no sign of either drilling or Phase 2 FID by year end I will probably change my tune. Basically, SOU is worth a punt but people should keep their eyes open.

Oh, and, I've never been coy about sharing my exact holdings. With the obvious proviso that there's no way I can prove I didn't just whip out Photoshop, here's a screenshot taken one minute ago: https://i.postimg.cc/QCC3yVRt/image.png

"There will be a day when it flies again, but WHEN?"

Never. Not if you're imagining that it's going to get back near a pound, or likely even a tenth of that. For starters, imagine SOU was *actually* worth a pound back then. Today there are three times as many shares and SOU own a fifth as much of the Tendrara concession as it did then. Divide your pound by fifteen and you're already down at 6p. But the fact of the matter is that based on existing assets alone, SOU was way overvalued at £1. Remember the famous "£1.50 per Tcf"? The horst is about a third of a Tcf and SOU owned half of it at the time, so by my reckoning something like 28p was closer to SOU's value. That was when everyone was blissfully ignorant of the difficulties and costs of extraction. Eight years later, some of those costs are now being carried. I see no reason to doubt Zeus's estimation of 3p per share after debt, and AFTER the projects are fully derisked. That will go up somewhat with proximity to go-live dates as discounts in the calculations are rolled back. On the other hand, any delays will have the opposite effect. In the unlikely event of success at all three of SBK-1, M5, and TE-4 (which SOU don't have the money for) you could see 10p+. Right now, I'd be more focused on SOU surviving until its ship (of the desert) comes in.

Ediacaran: "PS I can see your point of view but it’s bad optics & damages sentiment. Is there another bonus for first revenue?? I just hope additional funds are not required between now and 2026."

I take your point too. And, unfortunately, additional funds *will* be required...

" The directors have reviewed the Company’s cash flow forecasts for the next 12-month period to April 2026. The Company’s forecasts and projections indicate that, to fulfil its other obligations, primarily the Company’s SIDI Moktar permit commitments, the Company will require additional funding ... the directors believe that there are several corporate funding options available to the Company, including a farm-down on the Sidi Moktar permit, and various debt, equity and equity-linked funding options" (Note 1, P.71 of the AR).

SOU have to run seismic on Sidi next year or risk losing the license. I'd say the chances of finding a farm-down partner are slim to none, based on past precedent. The cash situation is not rosy -- £3.1m in the bank as of end of March. We have to hope that the funding options are not as dilutive as the disastrous 2023 convertible loan note. Of course, we were bust without it, but it has eaten into shareholder equity *and* reduced the post-Managem cash pile.

We've also given away much needed cash for the conversion of the Italfluid contract from lease to EPC. That will increase SOU's share of Phase 1 revenue to compensate, but it doesn't help if there's a funding gap between now and then. Moreover, even the increased Phase 1 revenue will not cover G&A, and there is looming debt repayment in 2027. Further drilling success is also of no help here.

SOU is not out of the woods yet and any delays to Phase 1 or 2 could cause more value destruction if not existential problems. Time is money, and SOU have wasted a lot of it. Those are the things the Adams of this world are blissfully ignorant of while they spout their carp about good news and soaring share prices.

As shareholders have discovered, assets below ground are worth zero if they cannot be recovered. Companies that held the same acreage as SOU learned that lesson the hard way. The company that drilled Koba-1 in Sidi Moktar was dissolved in 2017. SOU came very close to suffering the same fate in the last two years, having failed to monetise its assets in the previous five. There's every chance that, having struck the deal with Managem, SOU will now earn 200 million dollars of gas sales revenue. I couldn't be accused of being GL's biggest fan, but from his point of view this is the culmination of four years of dragging a nearly bust company out of the mire. A once-off $500k bonus doesn't seem excessive to me for such a turnaround.