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Q&A With James Parsons of Sound Oil

By Doc Holiday | Wednesday 17 July 2013

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Q. 1) Let’s start with some background here – could you please give Investors a brief reminder of the Nervesa permit

Nervesa, as most of our investors will know, is an ex ENI discovery in the Po Valley, Northern Italy. The Carita permit (in which the Nervesa discovery sits) covers 530 square kilometres so it is a fairly large are and although we have focused mainly on the existing discovery there are other exploration opportunities within the permit. The original Nervesa well was drilled in 1985 in the Southern sector by ENI and flowed for a couple of years before they shut it down on the back of low commodity prices and also water ingress into the well. Through a series of acquisitions in 2010/11 Sound have built up a 100% equity interest in this permit.

Q. 2) You have just released the result of the appraisal well post logging. What is the key message to investors on this find?

We have confirmed, following logging, some 46 metres (true vertical depth) of net gas pay in 13 separate zones. We are now commencing completion after which we will test the well and then be able to confirm to investors our view on the quantity of commercial hydrocarbons.

The key messages to investors are therefore:

Whilst we still have to complete a well test it appears this gas discovery is large enough to provide funding alternatives for the 2014 drill programme. This is critical and was the reason we drilled Nervesa first.

My team have now demonstrated with both Rapagnano and Nervesa that we deliver on our promises and that we have the technical and operational capability to manage production and execute complex drills safely.

Q. 3) You mentioned funding alternatives for the 2014 drill programme – can you elaborate?

Absolutely. Our plan is to leverage off the combination of Rapagnano and Nervesa in two ways. Firstly is to secure a Reserve Based Lending facility on these assets, which would provide access to significant funds. The second alternative, which we will likely explore after well testing, is to divest of a portion of this discovery. These two alternatives are not mutually exclusive. The funds they generate would enable us to drill the second Nervesa well around the end of the year and fund Laura, another low risk ex ENI discovery – potentially both without further equity dilution. So when we talk about leveraging off the success at Nervesa this is what are referring to – without of course forgetting the simple fact that this will generate important cash flows from 2015, which will serve to underpin our market valuation.

Q. 4) Leading on to the ace in the deck Badile, After much speculation and anticipation you have decided to take Badile further forward alone, Could you comment on your thinking here and how much interest there is from other parties ?

As you say Badile really is an exciting prospect for our investors. Just to recap this an exploration prospect again in Northern Italy with some Euro 300 million of independently assessed Net Present Value. With that sort of NPV this asset is a transformational event for the company. Following a successful exploration well on Badile I could see Sound very quickly selling the entire discovery for a large amount of cash and achieving the end game in one step. There is risk on Badile but there is also massive reward.

As you rightly point out we have had a lot of interest from third parties in this prospect. We recently turned down one formal offer from an Italian major and are still in discussions with various other parties. However my plan here is not to rush to farm out the asset too early or too cheap but instead to de-risk it by completing our professional technical work and securing the Environmental Impact Assessment and various approvals to drill. Investors may have seen that we recently hired a very senior ENI professional, Leonardo Spicci, who joins our Milan office as part of my Executive Team with a view to leading the Badile project. Once we have de-risked this asset the offers we receive will, I believe, improve and the Board and I can then decide our next step – whether to farm out or take it 100%. Obviously success at Nervesa strengthens our hand on this one !

Q. 5) Recently Sound Oil met with the Italian ministry with regards to the Laura permit. What are Sound oils near term plans for Laura and its development

Laura is a 30 bcf ex discovery 4km offshore in Southern Italy – like Nervesa this is a low risk asset however in this case it is much larger and we are drilling to exactly the same bottom hole location so the risk is lower. We have been in discussions with the Italian ministry to pursue an innovative alternative where we drill this offshore reservoir from onshore. This has been done many times before and the distances are very manageable and the technology proven. The beauty of this approach is it has cheaper development costs and fewer environmental issues. Laura is large enough that it will support the government’s ambitions to stimulate domestic production and will generate important royalty revenue for local communities.

So the plan here is clear – in 2014 we will drill Laura with a view to that appraisal well becoming directly a producing well. And the expected cash flows from this one well are circa Euro 20M pa, which will further underpin our business.

We expect the permit on Laura to be received later this month so watch this space….

Q. 6) James Clearly the Nervesa result pegs Sound Oil on the map now in Italy, Do you have any further comments in regards to the future of Sound Oil and its likely hood to harness its investors with tangible value to couple to its significant upside in Badile,Laura, Zibido and Strombone etc.

So far we have demonstrated that we can deliver at the drillbit – and that is critical for any small cap oil company and will expose our investors to significant upside in Italy. However our strategy is broader than that and includes growth outside of Italy and consolidation with our competitors locally. We are looking to build a European / Mediterranean business of some scale and have a team to deliver that which is a blend of commercial, technical, operational and financial capability. The recipe for success here is a mix of a strong portfolio and a capable team with a clear strategy and high energy action orientation.

James can I take the opportunity to thank you on behalf of myself, and the Investors for taking the time out in a busy schedule by projecting a clear vision to your retail shareholders.

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