Proactive Investors
Ian Lyall
Drill success has flagged up the world-class potential of its Tendrara acreage.
What a year it has been for Sound Energy PLC (LON:SOU), whose shares have quadrupled over the past 12 months.
Success in Morocco, where it has drilled two wells, has flagged up the world-class potential of its Tendrara acreage.
It moves into 2017 fully financed having concluded a £26mln share placing in late November and ready to advance into the next phase of development.
So what should we expect from the oil sector’s outstanding performer of 2016?
Well, in a short, more of the same. Tendrara will continue to be the focus, but we should also have drilling results from a well in Italy, which also has the potential to move the dial.
We should also receive the results of the extended reservoir test of TE-7, the company’s second well in Morocco, which was drilled horizontally.
It flowed at 32mln standard cubic feet of gas a day and could eventually go “significantly above” 40mln standard cubic feet.
To put that into context, Sound told analysts and investors ahead of its first ever well on Tendrara that 3.5mln standard cubic feet of gas would be commercial.
The new landmark was hit during the clean-up phase and post stimulation.
The company is planning a third well on Tendrara, called TE-8, on the outer fringes of the TAGI reservoir to test the extent of this gas-bearing layer.
The company hasn’t actually tapped the Paleozoic horizon, below the TAGI, which could also be host to significant accumulations of gas. But it will with the next drill hole.
In a presentation given to private investors in Edinburgh in October, Parsons said the Tendrara discovery could be host to “tens of tcf” (trillion cubic feet) of gas.
Asked to be more specific, he said it might be of the order of ENI’s Zohr gas field, offshore Egypt, which weighs in at 30tcf. Currently, the internal estimates are a lot more modest at 300-500bn cubic feet of gas, rising to 1.5bn if TE-8 is successful.
The confidence of Sound’s management has been bolstered by the results TE-7.
“What we learned after we drilled TE-6 well is all the various wells on this structure and beyond, including TE-2, which is 30km to the north-east, is they all sit on the same gas gradient,” said Parsons.
“That’s a near-perfect correlation and doesn’t happen very often.
“There are not many hypotheses you can develop that can explain that other than this is a huge connected reservoir.
“If that were the case you could plot it out as in a simplistic way as tens of tcf.”
Independent oil analyst Malcolm Graham-Wood reckons Tendrara is host to 3-5tcf. He said every 1tcf discovered is worth £1 to the share price (the stock is currently changing hands for 73p).
“If it gets to the stage of being a really huge development then clearly bigger companies than Sound will take an interest,” he said in a recent interview.
“But the good thing is, because it’s not an offshore development or a huge, long [development] needing a significant amount of cash, it’s something that Sound can develop themselves for the time being.”
According to the latest presentation Sound will start the process of finalising the development plan and concession application for Tendrara in next year and the year after.
In tandem there will be further development and step-out wells, the re-entry of historic wells and acquisition of seismic data.
The latest funding will no doubt help in this regard.
Tendrara up and running by 2019
By 2019 it is hoped Tendrara will be up, running and generating significant cash flow for the business.
Aside from Sound Energy’s existing production operations in Italy – which are valuable as cost-covering cash generation – the growth and upside in the portfolio comes from three assets – the aforementioned Tendrara, Sidi Moktar (Morocco) and Badile (Italy).
Ground work is already underway on Badile, a potential ‘needle-moving’ well in northern Italy.
The licence has a bit of ‘nearology’ to it as it is next to the ENI-run Gaggiano oil field, which is host to around 400mln barrels of crude.
In fact ENI originally held the permit and shot some 460 line-kilometres of seismic before surrendering it 12 years ago.
Work in 2013 by the oil and gas reservoir evaluation specialist, ERC Equipoise, confirmed Badile as a potentially high-impact prospect.
It reckoned it was worth more than £400mln if hydrocarbons were uncovered in the quantities anticipated.
The figure was based on a gross prospective resource of 178bn standard cubic feet of (bscf) gas and 12mln barrels of gas condensate.
That was a “mid-case” estimate. The high and the low cases were respectively 673bscf and 46bscf.
Sid Moktar, meanwhile, only really officially joined the portfolio in the middle of the month when the Sound completed the acquisition of a 75% stake in the licence area.
So it will be interesting to see how exploration and development programme plays out here.
CEO Parsons in a recent interview said Sound was “opportunistically” looking around for potential acquisitions to add to the portfolio.
However he is also very excited about what the company already has under its management.
“The recipe here is high-value piped gas,” he said.
“It is assets that have the potential to be super-giant. You look at our three strategic plays; they could be huge if they work in the upside case.
“We have really been looking at that balance of risk and reward.”
