SOU Sound Energy Plc

19 September 2024

SOUND ENERGY PLC

("Sound Energy", "Sound" or the "Company" and together with subsidiaries the ''Group'')

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2024

Sound Energy, the transition energy company, announces its unaudited half-year report for the six months ended 30 June 2024.

HIGHLIGHTS

Development of the Moroccan Tendrara Production Concession (the "Concession")

·      Phase 1 Micro LNG (''mLNG'') project (''Phase 1'')

o  Safely completed workover of both wells necessary for first gas,

o  Erected the base and the first layer of mLNG tank shell and initiated the inner tank construction

o  Extensive activity continued offsite with our contractor and its sub-contractors designing and constructing plant equipment for delivery on site end 2024

o  Processed gas expected to be produced at plant in 2025

·      Phase 2 Gas (pipeline) development (''Phase 2'')

o  Continued progress made for project financing from exclusive lead arranger, Attijariwafa Bank, Morocco's largest bank

Corporate

·      In June 2024 entered into a binding sale and purchase agreement with Managem SA, in respect of a partial divestment of the Group's Tendrara Production Concession and Grand Tendrara and Anoual exploration permits, through the sale of the Company's subsidiary, Sound Energy Morocco East Limited (SEME) which holds a net 55% working interest in the Tendrara Production Concession and 47.5% interests in the Grand Tendrara and Anoual exploration permits.

·      Post period, entered into a bridge financing debt facility for up to £1.5 million to provide the Group with additional flexibility

Graham Lyon, Executive Chairman said:

''I am grateful for continued support of all our shareholders and partners, and I can say that the first half of 2024 saw the significant milestone of partnering at Tendrara move closer to fruition.  Managem are a substantial company with a strong base in Morocco. They bring financing and in-depth local experience. Sound and Managem are working closely to effect a smooth transition of Operatorship control at Tendrara.  Whilst the Phase 1 development has been frustrated by delays, equipment, construction and well work has taken place at Tendrara, and a plan for delivery of LNG sales in 2025 established.

"Whilst the first half of the year has been busy with negotiation and agreement of the transaction with Managem, ensuring a smooth transition of operations and progressing Phase 2 towards a final investment decision will ensure the remainder of 2024 will be eventful. The Company will thereafter optimise its portfolio and structure to deliver optimum shareholder value, positioning the Company for production and for further growth. As our key project in Morocco is considered of strategic importance in the country, all efforts must be focused on ensuring a safe and efficient execution of our business plan within the resources available.

"I would like to thank the Ministries in Morocco and ONHYM, our state partner for their continued cooperation and increased support. Finally, a thank you to our staff who have and continue to drive the Company forward.''

For further information, visit www.soundenergyplc.com or follow us on X @soundenergyplc

Enquiries:

The information contained within this announcement is deemed by the Company to constitute inside information pursuant to Article 7 of EU Regulation 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 as amended.  Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

STATEMENT FROM THE EXECUTIVE CHAIRMAN

Continuing to execute on our strategy to deliver revenue generation

Our strategy of the phased development of the Tendrara gas discovery is well defined and whilst the economic and geopolitical environment continued to present challenges, the Company continues to make progress towards revenue generation.

Phase 1 Tendrara Micro LNG Project (mLNG) 

Work has advanced at site. Tank construction remains on the critical path to project delivery, however the base and first layer of the outer tank shell were erected, insulation was laid and further concrete laid to initiate the inner tank construction. Well completion at TE-6 was completed with corrosion resistant tubing and well head installed. Similar work at TE-7 was completed in early September 2024, thereby providing the wells required to meet the required gas delivery capacity.

Italfluid Geoenergy S.r.l and its sub-contractors continue with the design, construction and installation of plant equipment. The current forecast is for all plant equipment to be on site end 2024.  In addition to Italfluid's project scope of work Sound Energy, through its operating subsidiary Sound Energy Morocco East Limited (SEME), continues to prepare for the installation of the flow lines and ancillary heaters. Afriquia Gaz S.A is to procure and put in place the LNG transportation trucking, local storage and regasification facilities - these are due spring 2025.  Once on site, the processing and liquefaction equipment will be commissioned and integrated with the wells, storage, loading and trucking systems. Delays have occurred due to supply chain issues and hence commissioning is scheduled for the second quarter of 2025.

Phase 2 Tendrara Processing and Pipeline Project 

Progress continued to be made with the Phase 2 development project in H1 2024, primarily in terms of securing development funding.

Significant progress has been made regarding project funding with Attijariwafa Bank, Morocco's largest bank, as exclusive lead arranger of a senior debt facility, a binding conditioned agreement was entered into in 2023. To address one of the remaining Condition Precedents, discussions with ONEE to adapt the Gas Sales Agreement (GSA) regarding bankability have progressed. The announcement of a binding sale and purchase agreement to sell the UK subsidiary SEME to Managem SA provides the matching equity finance to the Attijariwafa bank debt. Once the sale of SEME is closed, an update to the FEED study is required to satisfy bank financing alongside the GSA and selection of an EPC contractor.

Exploration

During and post period, the Company and ONHYM have proposed extensions to the Anoual Exploration Licence to the relevant Ministries and await approval.

Corporate 

Following the commencement in 2022 of a process to secure participation of a strategic partner at Tendrara, and the previously announced non-binding term sheet in June 2023, the Company entered a binding Sale and Purchase Agreement (SPA) with Managem SA for the sale of SEME. Managem is a well-established pan-African mining group with a market capitalisation in excess of $US2.5 billion (April 2024), seeking to diversify its portfolio into upstream gas. Subject to the disclosed conditions precedents being satisfied, the Company will sell the entire share capital of SEME with an effective date of 1 January 2022, pursuant to which Managem will acquire the following interests in the SEME's Moroccan assets: 

·    55.0% of the Concession (Sound Energy to retain 20% interest, through Sound Energy Meridja Limited), including the liability for payments arising from the Schlumberger net profit interest (NPI) agreement (pursuant to the acquisition of Schlumberger Silk Route Services Limited in 2021)

·    47.5% of the Grand Tendrara Permit (Sound Energy to retain 27.5% interest, through Arran Energy Holdings Limited)

·    47.5% of the Anoual Exploration Permit (Sound Energy to retain 27.5% interest, through Arran Energy Holdings Limited)

The SPA consideration payable to or on behalf of the Group includes:

·      Estimated US$12.0 million in Concession Phase 1 development back costs through to July 2024 net to a 55% interest in the Concession and payable to the Group in cash on completion.

·      Estimated US$1.0 million in back costs in respect of Concession Phase 2 development and Exploration Permits back costs payable to the Company in cash on completion.

·      Up to US$24.5 million net carry through Managem funding of the Group's remaining 20% interest in future Concession Phase 2 development.

·    Contingent consideration of US$1.5 million payable to the Group no later than one year after first gas from Concession Phase 2 development.

·    US$3.6 million net carry through funding the Group's remaining 27.5% Grand Tendrara Permit interest in drilling exploration well SBK-1.

·      US$2.6 million net carry through funding the Group's remaining 27.5% Anoual Permit interest in drilling exploration well M5.

The combination of closing the transactions with Managem and Attijariwafa Bank will provide the funding required to allow the Company to take the Final Investment Decision on the Phase 2 development and to construct and develop the much-needed pipeline infrastructure at Tendrara.

In light of the agreed sale of SEME to Managem, the Company is required to compare the carrying value of its intangible and development assets with the fair market value (less cost of disposal). The Company determined that an impairment charge totalling £146.2 million was required for both the assets held for sale and the retained assets (refer to notes 4 and 5 of the interim financial statements).

During the half year, 30 million shares were issued as partial conversion of outstanding interest on the convertible loan facility entered into in 2023, followed post period by a further 50 million shares, all at 1 pence per share and accrued interest remaining sits at £ 887,500.

Broker

In March 2024, Zeus Capital Limited was appointed as sole broker and issued a research note in July 2024 initiating its coverage of the Company.

Board Changes

Following the signing the SPA with Managem, and with the transaction providing financial and operational security for the next phase of the Company's development, Mr Simon Ashby-Rudd a non-executive director of the Company, informed the Board that he did not intend to put himself forward for re-election as a director of the Company at the Company's AGM held on 28 June 2024. I thank Simon for his contribution over the year and for his specific M&A advice and support.  

Graham Lyon

Chairman (Executive)

OPERATIONS REVIEW

Tendrara Development: Micro LNG (mLNG)

Sound Energy is pursuing the Field Development Plan underpinning the Concession centred around the TE-5 Horst gas discovery.  The development is progressing in two phases. Phase 1, targeting industrial consumers for gas sales, is intended to prioritise first cash flows from the Concession via a mLNG production scheme. The planned Phase 2 development provides gas to power via state energy power stations. It is centred around the installation of a 120km gas export pipeline to help fully unlock the gas potential of this region and lower the cost of development for future discoveries. Both phases address different markets in Morocco; the industrial energy user and the state power producer, both of which have strong and growing demand, with Tendrara gas playing an important role in supporting Morocco's strategy to lower carbon emissions.  As Morocco continues to grow both industrially and domestically, and as other fuel sources become scarcer in-country, there is opportunity to supply more of the energy mix.  Morocco's imports of natural gas from Spain through the GME pipeline rose by a 403% during 2023. 

Progress of the Phase 1 Development Project

This first phase focuses on the existing TE-6 and TE-7 wells of the TE-5 Horst. First gas will be achieved by tying the currently suspended TE-6 and TE-7 gas wells with flowlines connected to the inlet of a skid mounted, combined gas processing and mLNG plant. 

In 2021, the Company entered into a lease contract with Italfluid Geoenergy S.r.l. (''Italfluid'') for the design, construction, commissioning, operation, and maintenance of the mLNG facilities under a 10-year lease arrangement. The mLNG facilities, which will also treat and process raw gas produced from the wells prior to liquefaction, is the principal part of the surface facilities required to be built and operated as part of this first phase of development. Also in 2021, the Company entered into a Sale and Purchase Agreement with Afriquia Gaz to offtake the LNG produced.  The LNG will be delivered to on-site storage from the outlet of the mLNG facilities whereupon Afriquia Gaz will lift and take title for LNG for transportation, distribution and sale to the Moroccan industrial market.

Groundworks for the construction of the mLNG facility commenced March 2022 following completion of surveying and remediation works to the access road for the facility.  The raised foundation platform for the LNG storage tank, and pads for the skid mounted units, including the compressor package, were completed in 2023 along with the necessary piping and cabling for the firefighting system which have been installed along with fencing and lighting towers.  During 2024, installation of the necessary insulation and construction of the outer and inner tank shells of the tank commenced and will progress throughout the remainder of the year.  Facilities engineering and manufacturing continued to progress with major vendors under the Italfluid contract.  In 2023 the Company selected Gas to Liquid Equipment (GLE) to provide engineering and procurement services for the flowline system and associated well head facility equipment for the gas gathering system to transport the gas from the well heads to the mLNG plant. 

During the first half of 2024, Bedrock Drilling Ltd - contracted to design, plan and execute the necessary work overs of the TE-6 and TE-7 wells in preparation for turning these appraisal gas wells into long term gas producers - successfully completed replacement of the carbon steel production tubing with corrosion resistant Cr13 steel in TE-6.  The remaining works on TE-7 were completed in early September 2024 when additional wellhead equipment to complete the running of the new completion tubing into TE-7 arrived at site. 

Throughout 2024 the equipment packages for the gas plant are to be completed and tested in the workshops and will be brought from workshops located around the world, delivered to site via the main ports in Morocco and then assembled on site.  To date, Italfluid has received components of the amine unit which will be used to remove the carbon dioxide from the raw gas stream and packages for air compression, nitrogen generation and corrosion inhibitor injection at their Moroccan storage base.

Progress of the Phase 2 Development Project

Based upon the current development capital estimates the funding arising from the Managem SPA combined with the agreed project debt financing from Attijariwafa Bank, will provide Sound Energy with the required funds to achieve first gas under its Phase 2 Tendrara Production Concession development plan whilst retaining a significant 20% interest in the Concession. 

Eastern Morocco

Eastern Morocco licences

Exploration

Our Eastern Morocco Licences comprising the Concession together with the Anoual and Grand Tendrara exploration permits are positioned in a region containing a potential extension of the established petroleum plays of Algerian Triassic Province and Saharan Hercynian Platform. The presence of the key geological elements of the Algerian Trias Argilo-Gréseux Inférieur or 'TAGI' gas play are already proven within the licence areas with the underlying Palaeozoic, representing a significant upside opportunity to be explored.

These licences cover a surface area of over 23,000 square kilometres, but so far only thirteen wells have been drilled, of which six are either located within or local to the Concession. Exploration drilling beyond the region of the Concession has been limited and the Group maintains a portfolio of features identified from previous operators' studies, plus new targets identified by Sound Energy from the recent geophysical data acquisition, subsequent processing and ongoing interpretation studies. These features are internally classified as either prospects, leads or concepts based upon their level of technical maturity and represent potential future exploration drilling targets.

Whilst the Company has strategically prioritised its gas monetisation strategy through the phased development of the TE-5 Horst (Tendrara Production Concession), the Company has also re-evaluated its extensive exploration portfolio within the Grand Tendrara and Anoual exploration permits surrounding the Concession. By integrating the acquired data and learnings from previous drilling campaigns with acquired and reprocessed seismic datasets, the Company has high graded several potential near term subsalt drilling opportunities within the TAGI gas reservoir, the proven reservoir of the TE-5 Horst gas accumulation.

In June 2024 the Company concluded a competitive farm-out process in the underexplored but highly prospective Tendrara Basin in Eastern Morocco. This opportunity provides access to high impact, short term exploration opportunities, in a stable country with very attractive fiscal terms. By entering into a binding SPA with Managem, the Company has secured the funding required for the drilling two high graded exploration wells, one on Grand Tendrara and one at Anoual which each have the potential to be commercialised through the planned infrastructure of Phase 2. 

At Grand Tendrara, an exploration well is planned on the structure previously drilled by the SBK-1 well in 2000, with an estimated unrisked exploration potential of 140 Bcf gross Pmean Gas Initially in Place ('GIIP'). SBK-1 flowed gas to surface during testing in 2000 at a peak rate of 4.41 mmscf/d post acidification but was not tested with mechanical stimulation.  Mechanical stimulation has proven to be a key technology to commercially unlock the potential of the TAGI gas reservoir in the TE-5 Horst gas accumulation and accordingly the Company believes this offers potential to unlock commerciality elsewhere in the basin. 

At Anoual a well is planned to be drilled on the M5 prospect located on the Anoual permits, with an estimated unrisked exploration potential of 943 Bcf gross Pmean GIIP. The timing of drilling of both well will be agreed with Managem following completion of the SPA.

Southern Morocco

Southern Morocco licence

Southern Morocco Exploration

The Sidi Moktar licence is located in the Essaouira Basin in Southern Morocco. The licence covers a combined area of 4,712 km2. The Group views the Sidi Moktar licences as an exciting opportunity to explore high impact prospectivity within the sub-salt Triassic and Palaeozoic plays in the under-explored Essaouira Basin in the West of Morocco.

The Sidi Moktar permit hosts a variety of proven plays. The licence hosts 44 vintage wells drilled between the 1950s and the present. Previous exploration has been predominantly focused on the shallower post-salt plays. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoirs in the field are Triassic aged sands, directly analogous to the deeper exploration plays in the Sidi Moktar licence. The Meskala field and its associated gas processing facility are linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for domestic and export markets. This pipeline passes across the Sidi Moktar licence. The discovery of the Meskala field proved the existence of a deeper petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt seal and provides support for evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within this deeper play fairway. The Company believes that the deeper, sub-salt Triassic and Palaeozoic plays may contain significant prospective resources, in excess of any discovered volumes in the shallower stratigraphy.

The Company's evaluation of the exploration potential of Sidi Moktar, following an independent technical review, includes a mapped portfolio of sub-salt, Triassic and Palaeozoic leads in a variety of hydrocarbon trap types. Sound Energy is developing a work programme to mature the licence with specific focus on the deeper, sub-salt plays.  The Company believes additional seismic acquisition and processing is required to mature these leads into drillable exploration prospects.

Preparations for this seismic acquisition campaign have commenced with the completion and approval of an EIA in late 2019.

The Company continues to seek to progress a farm out process for this permit, offering an opportunity to a technically competent partner to acquire a material position in this large tract of prospective acreage.  In parallel, the Company continues to engage in dialogue with a number of seismic acquisition and processing contractors for potential services to undertake the survey.

Condensed Interim Consolidated Income Statement

Condensed Interim Consolidated Balance Sheet