RE: RECOVERY4 Dec 2020 15:47
"The share price went from 16p to 100p in the space of 2 months between June to September 2016. Over priced and over hyped, we would all agree, but is it not the nature of AIM? If it went from these levels back down to 1p , why would it mot happen again?"
Several reasons. First, there was an active drilling campaign going on. Investors were told that the Moroccan geology was an analog to the productive Algerian gas fields. Shareholders were bedazzled by an upside case of 31 Tcf. It seemed we were only going to have to poke a straw in the ground and gas would flow. It turns out that the Moroccan TAGI is beset by problems of low porosity, which resulted in the all three of SOU's wells being dusters. It doesn't mean there's no more gas, but it calls into question SOU's ability to finance its discovery.
Second, we were told that one Tcf of gas was worth 150p on the share price. The existing TE-5 horst was three quarters of a Tcf so some investors probably thought the high valuation was underpinned by actual assets. Turns out that the 150p referred to SOU's share of recoverable gas which is less than 0.2 Tcf. You'd need to check how many new shares and warrants SOU have issued since then, and also the fact that unless it can get debt financing for the LNG project it will have to give away yet more. Last year's abortive deal would have reduced SOU's share by between half and more than two thirds.
Bottom line: TE-5 might eventually be worth somewhere from 10 to 20p/share if SOU can get it developed without giving away the farm in the process. The proceeds could also be used to do further drilling though that's likely years away. SOU's problems are more immediate -- how to raise debt finance and keep the lights on until gas starts flowing. It's a big ask. Forget about 100p+ valuations. That was a mirage based on people swallowing a lot of hype and having no idea how to actually value the company.
Sign In
Follow the stocks
