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Independent oil and gas explorer Sound Oil plc (LSE:SOU) has been measuring up to its name recently (I’m not exactly saying it wasn’t doing that in the past) – being sound with decisions and strategies, whether in disposing assets or securing funding for existing operations. In less than a week, the company has negotiated deals that provide the company with win-win situations.
Earlier today, Sound announced it will spud a well in Italy at half of the remaining appropriated budget without losing its control and ownership to the asset and will only lose about 8% of the net present value of the prospective gas deposit should the well proved successful in exchange for funding in the development of the said prospect.
The Nervesa appraisal well, a prospect targeting 21 billion cubic feet of gas (bcf), is scheduled to be drilled by the end of the year with the remaining budget of €2.9 million.
Sound has signed a deal with the Italian engineering firm CSTI, which will bear the cost of drilling the well estimated at €1.5 million to be paid in three equal tranches, as well as provide funding of about €4 million for the development of the facilities should the appraisal encounter gas.
Win-Win Situation
In exchange, CSTI will receive a maximum of 8% of the net present value of the asset and receive 36.5% of the net cash flow from Nervesa capped at €19.2 million.
An independent competent person’s report prepared by Fugro Robertson a year ago estimated an annual cash flow net of tax above US$14 million (€10.8 million) or above US$12 million (€9.2 million) for the first seven years of gas production, giving an aggregate NPV of US$62 million (€ 47.9 million).
Perhaps the greatest catch on this deal is Sound’s position when the undertaking does not proceed as expected.
“Should gas production not start at Nervesa for any reason, Sound Oil will have no liability to repay any funds to CSTI,” the company said in a statement.
Reshaping the Portfolio
Less than a week ago, Sound divested its 20% interest from a contract in Indonesia but will still receive a total of US$16 million (€12.3 million) from the asset for the first two discoveries.
Sound has been reshaping its portfolio, according to its Chief Executive, James Parsons, who held the post only since 11th October this year after being Chief Financial Officer of Sound for the past year, and the investors seem to be saying he’s doing a great job at it.
Over 17 million shares were traded by 10:00 AM GMT on the Alternative Investment Market in London, following the news, resulting in 4.5% increase in Sound’s share price, now at 1.15 pence. When Sound announced it divested its interest in Indonesia, more than 72 million shares swapped ownership in reaction to the news.
“We will continue to pursue these innovative structures, which secure additional funding without issuing new equity and without ceding material upside on our core assets,” Mr. Parsons commented on the deal.
Sound said it has £5.1 million (€6.3 million) in cash as at 30th June 2012 with no debt and will only spend €1.4 million (£1.13 million) for the Nervesa drilling.
