Q: Sound Oil has made great progress of late however the result at the second Nervesa well is of course disappointing. What are your key messages for shareholders at this time?
A: Hi Doc.
I would just like to start by confirming that Sound Oil remains in a very strong position. We have circa Euro 26M cash, a diversified portfolio, a committed team and a very active drill programme. We have an increasingly institutional register and we have a loyal retail shareholder base which we value. It is important to remember the context to this recent Nervesa well… we already have one successful well on the structure, it is just one of our assets and it is far from our largest. It is the nature of an upstream business that we drill wells and inevitably they are not all going to be successful. I have to say we didn’t expect this well result however we are mature enough to take the hit on the chin, accept the temporary set back, pick ourselves up, dust ourselves off and get on with delivering our end game.
If we take it back to fundamentals – I believe our strategy here is the right one. We are building a mid cap Mediterranean gas business with strong thematic linkage… Our gas focus shelters us from the recent oil price decline and plays to “gas as a cleaner fuel” in an increasingly carbon aware society. It is also well timed if you look at the Oil Majors shifting to gas (the Shell / BG deal being a good recent example). We also see significant price upside as relationships between Europe and Russia deteriorate. In addition our regional focus positions us to take advantage of building political momentum in both Morocco and Italy to stimulate domestic demand.
Q: Thanks James. The strategy does sound like a case of “right hydrocarbon, right place and right time” although perhaps a few more sidewards steps in order to topple the big one.
A: Yes Indeed. Let me also add that at times like these I find it helpful to remind myself and my shareholders why I joined Sound Oil. I joined for the Badile exploration well, which is potentially transformational for Sound Oil. Badile is gas, has a mid case NPV10 of Euro 486M with an upside potential many times that ! And then we have recently added a Moroccan portfolio which is again gas and potentially even larger than Badile. So it is important to keep Nervesa in context – we have one successful well on this structure which will achieve first gas later this year and the truth is this result does not change our strategy or our chances of achieving it. I have every intention of remaining focused on executing our Med gas strategy over the next couple of years.
Q: You alluded to an active drill programme, what does the rest of the year look like and how do you see the weak oil price effecting Sound Oil’s (Gas) production.
A: We have a busy period ahead. Firstly this year we will be achieving the concession and then first gas from the first Nervesa well. This secures Sound, for the first time, as a significant cash generator. We will also, near term, finalise the permitting for Badile, farm this asset out and then commence drilling, probably in Q1 2016. Before then we intend to drill the first well on the Moroccan Tendrara license – and that’s a well which could unlock the entire project – which is a multiple on Badile. Then we have Laura to permit, farm out and drill – all before summer 2016. So the next 12 months are certainly busy, to answer the latter part of the question i think you raise a fair point however this part of Europe is something of a sweet spot for gas thus returning a strong price. It’s my opinion that Sound Oil are well sheltered for upto a year with any effects proceeding timeline ” Marginal ” – for what its worth I see more upside to the down in the OP.
Q: And if I have done my sums correctly you are basically funded for that programme, aren’t you ?
A: Yes indeed with Euro 26M cash, and that’s excluding any open offer proceeds, we are fully funded for Italy and Morocco. On top of that we will farm out Badile and we have some transformation deals we have been working for a while which will further reduce the cash required to develop our assets.
Q: I did notice you extended the open offer, whats the story there ?
A: The open offer was, and is, a chance for our loyal private investors to benefit from the same terms as our recent institutional placing. Once we realised Nervesa was not as permeable as we had hoped, although we still had reperforating and an acid wash to attempt, I didn’t want to trap our investors into their open offer commitments so we announced an update with the facts as they stood (notwithstanding there was some uncertainty around the well at that stage) and extended the open offer, including offering the right to withdraw. Today we locked down the revised timetable. So now investors have a chance to continue to subscribe or not, as they wish. As you know Doc we believe in fair treatment of our investors so I have no regrets there – that’s a table-stake for me.
Q: Well thanks for your time James. By the way I did also notice today that you received the EIA on the Dora / Dalla asset. That’s one of your more interesting yet less well known assets isn’t it James?
A: Yes Dora is an existing discovery, 21Km offshore in 60 metres water depth Doc, which AGIP/Shell drilled in 1972. It is right next door to ENI offshore infrastructure and should be reasonably easy to commercialise so we were very pleased with today’s award. There is definitely a “pro gas” tailwind behind the permitting process in Italy now which should benefit us in the coming months. This news doesn’t change the outcome on Nervesa of course but it does reinforce the point that we have a large portfolio and are not hostage to the fortunes of just one well on one asset.
And let me just re-emphasise my commitment to this company… I took over as CEO in October 2012 after about one year as CFO. In 2012, we set a strategy, restructured the company and since then have worked to build a company based on solid fundamentals and fair treatment of our investors. Recently we have expanded to onshore Morocco which dovetails nicely with our onshore Italian portfolio. We have a good team, a strong and balanced portfolio and a robust strategy. We have come a long way but still have a distance to travel – and I’m in it for the longhaul as I believe in our rewards of our end game.
I appreciate you taking the time out to talk to us here at valuethemarkets but more importantly your investors.