Member Info for Soundingoff

Link to document:

https://docs.google.com/document/d/1N_RLm88vKu6eVBYI3IZ5LH-9U6tQ90eEpGHhn_4OOR0/edit?usp=sharing

Other discussions

There were other areas discussed, with some interesting observations on the macro environment. However most of the points are those already discussed here on a regular basis- shift to gas etc.


Technical event in September

This will cover TE9, TE10 and the seismic. I’m really looking forward to this, to expand on their analysis of the Palaeozoic.

Quotes:

Tim Marples on Anoual: It has a ‘whole bunch of prospects’
JJ with a smile on his face: ‘Stick with us’
JJ ‘The For Sale sign is definitely up’. Take this in context though, he wasn’t saying literally (well maybe, who knows…) but that everyone knows our stated aims
JJ ‘A sale is looking unlikely before drilling, but you never know’


I’m sure there’s plenty I’ve missed, but hopefully other people’s notes will pick up on them.

Apologies for any spelling/grammar errors as well, I could do with some sleep.

Sale of company

JP would not offer views on how he sees the sale of the company playing out- i.e. 1,2 or 3 wells drilled, or indeed if we are drilling at all. However, they do have a complicated decision tree that maps out all possible scenarios.

JP advised of the differences between selling the asset and selling the company. Not in tax terms, but disclosure. Essentially the former requires much less disclosure to the markets and so this is the route that would be taken if a company wanted to have a more ‘confidential’ sale.

Risked sale

I discussed the concept of a risked sale with JP and JJ. I did some very basic calculations recently to show the risked value pre-drilling based on COS (£4/£5). JP advised that another way to look at it would be to consider deferred/contingent value on the future drills rather than an upfront payment. JJ pointed me in the direction of some info to get a better understanding on how a risked sale could work in the O&G industry.


Risk of investment

The question was asked how they now view the risk compared with the position we were in last year. The general advice was that there is significant reduction in risk given the TE5 concession and the building of the seismic/inventory.


Consolidation

JP said that everyone knows it is being worked on, but they must make sure they don’t ‘mess up’ Eastern Morocco.


Sidi

JP reconfirmed his belief that Sidi is not material in relation to expectations about Eastern Morocco. It is also unlikely they would spin it off into a separate company, as the purchaser of Eastern Morocco would not be happy about the competition element in-country.

Hopefully they will have some information for us in one or two months. It is in progress, but it is a big asset. JP feels guilty they haven’t given it the time it deserves and it needs a Major to take it on. He confirmed smaller O&G companies such as SDX are unlikely to have the requirements necessary to take it on.


Luca

He has officially retired from the business and his goodbye dinner has been arranged. JP advised that Luca’s shareholding is not dissimilar from his, but he can confirm that Luca hasn’t sold any of his shares and will always be part of the Sound family (for however long that is).

Drilling

Each drill will be immediately tested as it will provide data for the following drill(s).

We may consider drilling TE12.

It was confirmed the drilling team are the same as previous Moroccan drills.


Seismic

They confirmed that the TAGI seismic is now fully understood. John said it should be another three months to finish interpreting the seismic relating to the Palaeozoic. Phase 1 and 2 are done at the TAGI level, but are being held up due to the Palaeozoic.

Tim said this is be best team he has worked with in terms of the speed in which they have been able to bring together the Aerial Grad, seismic and other technical aspects.


GSA

JP advised that we do want to have the GSA in place prior to drilling, but the price/outcome is important, not the timing. They want the concession approved as well as new licenses. Essentially be FID ready.

He gave some more detail about the GSA components, but I didn’t note them down- Take or Pay (ToRPs) etc. We’ll most likely sell to ONE (Office National de l’Electricite).


Pipeline

If TE9 is successful (or other wells), then they would give consideration to a larger pipeline. Or the opposite if all failed, but JP wouldn’t be in favour of this.


Value

The £1.50 per recoverable TCF was reconfirmed, along with the adjustment from NPV10 to NPV8 worth a 20% uplift. Starting earlier than planned would also have a significant uplift.

The Durham event format was slightly different from previous events, with a sit-down meal during discussions. The format worked really well, though JP suggested we may not see another investor event prior to sale. He did acknowledge that there may be a need to meet with investors depending on the outcome of the drill(s).

There isn’t too much technical information in my notes, as I didn’t get to chat to John this time. However, it looks like a few other posters are going to cover that off later, so thanks to them. I’m interested to hear about the information gleaned from TE8.

I did get to ask JP and JJ a few questions afterwards. You do have to remind yourself how lucky you are to get one-to-one access to CEOs of listed businesses of this size.

Basin model

JP confirmed it is unlikely the basin study will be updated again, with no further guidance on the 1/3/5% recoverability re the Monte Carlo simulation. The focus is now on the drilling.


Prospects

They know more about the TE9 Palaeozic target. The drill will be extended 600m past the TAGI and should clip a trap down there.

The team would not be drawn on the size of the TE10 Palaeozoic or the Palaeozoic High.

The TE10 Palaeozoic element could be compared with OSD1, but they need more data first.

The Palaeozoic data processing is at an early stage. They only started it recently and most of the data referred to in the last RNS was received three weeks ago.

In terms of the analogous TE9 structures, they expanded on their thinking around this area together with the migration of the gas.

They refer to the ‘string of pearls’ from A1 to SBK, with 3 or 4 targets/structures. There is also A4 which is very interesting.

John explained how they believe the gas has migrated North from the gas kitchen (central and Southern on our area) and into the Palaeozoic High. I tried to envisage what they were suggesting and I asked JP if it could be compared to a main river running from South to North and SBK, TE9, A1 etc being tributaries off it. He confirmed this would be a fair analogy. I find this point very interesting and potentially very significant. I’m looking forward to more information on this in September, along with a better explanation to investors than my attempt… The Veyron Zone.

John explained this area in much more detail, so others may have taken better notes on this. Though the ramifications of this are fairly clear to see. I think the September event will really help investors understand the big picture.

John once again confirmed that the basin has all the criteria needed to make this as good as it gets.

I went last night, travelling Birmingham-Durham-Birmingham, so a bit tired this morning, especially after 7 detours on the way back for accidents/roadworks.

I've got lots of notes to write up but a busy day today, so I'll get it summarised tonight or Saturday.

The key point from last night is the opening up of the Palaeozoic and how special they see this as an opportunity. Brian is on holiday, otherwise he would have attended as well.

If you haven't booked tickets for the September technical day (if indeed there are any left?), do. It's going to look at everything- the drills, TE9, TE10 and seismic. The Palaeozoic is being opened up as we speak, so it will be very interesting to see how they've moved on from now.

The RNSs with the correct figures are an interesting read if you have the time or inclination.

The reduced figures after adjusting for all the variables are there or thereabouts, but it's not about valuations or complete accuracy. After all, Sound have one employee who's sole purpose is updating our models...

What is does highlight is the incredibly high value of each Moroccan TCF and our huge potential. Right now we have to accept it is potential, but we simply don't know what level of certainly a buyer would take from our seismic and what value they would attribute to it.

SE- Cove was 15 TCF confirmed and 15TCF potential at the time of sale. What is interesting is when you adjust for their percentage of the field, offshore status, the fact it is going to be used for LNG and the Mozambique tax rates on O&G.

Once you take all that into account, the read-across comparison with Sound is the equivalent of Cove having around 0.5TCF confirmed and 0.5 TCF potential. Right now we have 20+ times more potential. Quite surprising when you really drill down into the figures.

Andarko (the majority owner of the field) still haven't got enough off take agreements to go for FID, where they require around $20 billion to develop the field...

It's great to get some news on the Palaeozoic. The cash raise could be to leave that option open for them. If you can drill it, a buyer has to include value for it.

TE10 was only a TAGI drill. It's now going into the Palaeozoic as well. Very significant.

Thanks Trellis, but I think you've pretty much ignored my question ;)

As I've said previously, I can understand why the SP is where it is in terms of a physical valuation. Also both Cove and Sound are very technical asset plays and so are quite unique in investing terms.

I see the following problems:

- Volumes are low because new investors want more proof of proven reserves/external validation etc
- LTHs hold the stock they want and don't want to buy more (or want more validation to purchase)
- Traders are waiting for the drill to be confirmed to buy in for the inevitable rise. Who wants to trade a flat share?
- Institutions want much more certainty. They aren't bothered about 5 baggers. They want certain gains.

Trellis- Ignore the fact we are talking about Sound for a minute. I like to deal in facts and apply real-life scenarios to my investments.

You have posted this:

'If in a now less than mid cap share buyers piled in on the potential 5 quid nothing on earth would keep the SP at 39.Fact is nobody is. Roughly same SP? 58 end jan(only 6 months ago) 39 now. Your idea of roughly differs from mine by a 1/3rd. MM manipulation/traders(who actually need the sp to move unlike last 3 months) Again all total wishful thinking. The fact is the price for everything we have got is 39p and nobody is buying in on the potential. That should set alarm bells ringing, but of course the golden ticket guys on here will not hear of a word of criticism.'

Please could you explain to me why the Cove asset (minus cash) was valued by the market at 46p three months before it was sold for 216p (plus cash)? That is a multiple of 4.7 times. Why didn't people pile in then?

At one point they were valued by the majority owners of the field at 170p per share, but the SP was only 110p? Again, why?

I've supplied my answer the other day if you want to have at look at my post. I'm not sure I have the answers, but I have put my thoughts down. It'd be good to hear yours rather than abrasive comments about wishful thinking and dreamers.

Nice to see some more figures. My own view is that a 6% read-across on similar structures would be quite low if TE9 is successful. Clearly being conservative is good though.

Where did they mention 8-10 similar A structures, as I thought we were at 5-6?

If TE9 is successful, then the increase in value is substantial in my view, as it would validate the seismic on TE10, 11 and the overall seismic. The risked value of the remaining drills would dwarf the current derisked value IMO. I don't believe we'd get to drill TE10, but we'd be hugely underpined, so it wouldn't really be an issue either way.

Thanks Tony.

Agreed 250. That is why I was trying to explain to Neptunes. His quoted figures are what is know now, and not at the time. Much of their value was potential, rather than actuals. When you scale back for field ownership, offshore vs onshore gas pricing and fiscal advantages, Cove's share were low single digit TCFs. Quite surprising when you drill down.

Neptunes- The quote you've used is unfortunately misleading. As Ozzie has pointed out, the proved TCFs and seismic TCFs were considerably lower than that. You also need to consider the percentage owned of the field. That has a significant bearing on potential offers.

Thanks Table.

I have had plenty of time to review, analyse and discuss this investment with others, including those with no connection to the investment and I am solely invested on the risk vs reward of this share. As noted by Fellrunner previously, the only situation that would make me review my investment here (reduce by some proportion), would be if we don’t have the GSA prior to drilling. I expect the chances of that to be slim and of course we would have to assess the situation at the time. The short-term risk vs reward is beyond exceptional in my opinion.

Let’s face it, since we drilled TE8, this share has not satisfied the short term nature of many AIM gamblers (no drilling), those who like more calculated risks (SDX etc) or the risk averse looking for dividends and safety.

Frankly, not much of this matters now. Drilling is very close or we’re sold.

Thanks for that Jag.

I’m not surprised we’re at this level to be honest and I don’t think there is any conspiracy.

50p is the value of the TE5 horst based on the mid case on an NPV10 basis at $8 per scuff. Until we have the GSA, the true value can’t be calculated and is not certain. So I’m unsurprised we are valued at a discount.

We have plenty of figures on Sidi, but they’re only estimates at the moment. I don’t think much attention is being paid to Sidi from investors, and it won’t be considered in value terms until we have a farm-out. I would liken this asset to Tendrara before we drilled TE6. If we have no route to monetisation (due to our stated aims on Eastern Morocco) I can again understand it being of low value to investors.

In terms of the seismic and whether it is good or bad, I go back to our points about Schlumberger. They would not bother if this wasn’t of a significant scale. Significant to them is certainly significant to us. The basin study has upgraded the estimates and almost half of the mid case TCFs are being targeted by drilling, either directly or via analogous structures. I cannot see how the seismic could be ‘bad’, far from it. All of Sound’s internal estimates have been validated externally to date.

And then the big question is how do you value the seismic? We are in a very rare, almost unique position with the potential size of this asset being in the hands of a small O&G explorer. There aren’t many instances of this and Cove is the go-to example. Reviewing the history of this company is eye-opening and you can see why it’s not just PIs who have compared the Eastern Morocco asset to the Cove story. I’ve posted a few times about the story there, but at no point was fair value given to those assets. Cove only owned 8.5% of the license. When the major shareholders in the field (Andarko etc) were valuing Cove’s share of the field at £1.70 per share, the SP was still at £1.10. Value was not achieved until sale (£2.40 per share) and people were having the debate we are now. Unfortunately for us, there just isn’t the historical information for us to reliably value our seismic.

Sometimes you just have to accept that the market has one value and it isn’t always fair value in your opinion. I don’t believe the ‘market is always right’. For example, I’m sure you’d agree that’s the case with SDX. I could name plenty of other shares in a similar position and I’ve done well from them.

I think we are in a period where technology has moved on so much, that for O&G, mining etc, the assessment of the potential assets via seismic and other methods is becoming more and more certain. I am heavily in MTR (associated investments of) because of the technology being used to prove up (with great success) copper.

Viper- You do realise we are about to drill three back to back drills.. We are fully funded for those drills. Those three drills and the corresponding analogous structures are targeting gas with a sales value of close to $50 billion. It's been far too long coming for most PIs, but it is coming. Talking about being on notice is frankly ludicrous.

I shall be passing through the area next week. Is there much to see if I swing on by- peering through the fence of the mine itself, local exhibition or Sirius HQ. I'm well versed on the investment itself, but not what there is visible up there.

Thanks in advance.