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Sound Energy - shares crash as Badile flops, is the company really pleased?

By Tom Winnifrith | Monday 3 July 2017

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.

Some folks are just lazy fucks. The team round at PR crony capitalists Vigo Communications who charge an arm and a leg for spinning for Sound Energy (SOU) appear to be such folks, as they put together today's disastrous press release using cut and paste. It starts "Sound Energy, the African and European focused upstream gas company, is pleased to provide an update on the drilling of the Badile exploration well, onshore Italy.". With what followed I bet the ranch that Sound was anything but pleased. Hint: the shares have crashed by 30% to 54.25p in early trade.

The news is that the Italian gas prospect at Badile, oh so heavily ramped and promoted, is almost certainly not commercial. There is a lot of blather about significant gas flows in both the the Upper and Primary Conchodon reservoirs. But then: , these suggest "a 12m gas column was encountered below 4375m measured drill depth in the Upper Conchodon, beneath which, the water influx and resisitivity data are consistent with a gas/water transition zone. The Company has assessed this gas volume as sub commercial. To verify this assessment, the Company is intending to run a limited set of logs which will, if confirmatory, likely be followed by operations to plug and abandon the well."

This does not make Sound a bad company or a write off, indeed after today its shares might actually be cheap. However,exploration is risky. Badile looked promising but even with all the most up to date state of the art technology in the world you cannot say that any prospect is a slam dunk. That was the schoolboy error of some of the most enthusiastic promoters of this story who did not realise that drill bit success was simply priced in already but was not guaranteed, far from it. To be fair, Sound boss James Parsons has not put a foot wrong to date but that does not make him Jesus H Christ. He cannot walk on water. He cannot turn water into wine. Or for that matter gas.

I look back to a research note from last December from Cantor's which suggested that the Badile prospect should be risk weighted at 34%, i.e that it was a 2-1 shot. The supporters of this stock were pricing it at about 10-1 on! that was their schoolboy error. The reaction this morning reflects not only the fact that Badile is almost certainly a write off but also the fact that folks no longer see Parsons as being the new Messiah and thus a man certain to hit hydrocarbons every time he drills. The sell off is thus, arguably, a bit unfair.

I see that in that Cantor note the core NAV ( that is cash, producing assets, the valuation of the Moroccan appraisal assets, minus debt and other liabilities) was assessed at 39.3p per share, Italian exploration upside was 10.6p per share and Moroccan exploration upside was 53.1p so giving a target price of 103p per share - £863.1 million. If we now write back Italy to zero ( which is harsh) you still have a 90p target.

Personally I do not buy into the Cantor number crunching on Morocco. I regard that too as overly generous by a long chalk. So I would not be rushing to buy the shares myself but I accept that news from North Africa could provide support. However the fall today is reflective of a changed perception of Parsons ( he is a talented mortal no more than that), the unrealistic expectations of AIM investors ( who do think drilling is risk free) and some of the low grade share ramping which played on the above points at the expense of solid analysis like this cautious and prudent piece from Gary Newman in March of this year.

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