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Buy Sound Oil at 7.875p

By Doc Holiday | Friday 17 May 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.

Unlike most AIM listed oil and gas stocks Sound Oil (SOU) actually has some, albeit modest, revenues. It recently announced its first gas production at its Rapagnano field, bought from ENI. The gas was delivered to the local gas distributor, starting on Wednesday May 15. The company stated that the gas was produced at a rate of 14,600 cubic metres (or 0.5mln cubic feet) per day.

Under its contracted gas sales agreement Sound receives €0.316 per cubic metre (which is US$11.2 per thousand cubic feet) for the initial sales to Steca Energia. Sound says it expects the gas operation to deliver annual cash flow, after operating costs, of c€400,000.

Rapagnano represents a modest revenue stream for the company but it is the first step in taking Sound from the ranks of explorers to producers and there is far more to come. The drilling commencement (Spud) of Carita (Nervesa) a high value and Ex-Agip concession in the North which was last operated 30yrs ago was signed off at $15 a barrel. We learned today that the rig is on its way. With oil now trading at between $90-$100 the NPV of this 21 billion cubic feet prospect is £37 million. It has a one in three or four chance of success.

Sound oil has also made a brave and possibly game changing decision to reject a farm in proposal and retain a 100% interest in its Badile prospect in Northern Italy which may contain up to 185 billion cubic feet of gas. This is clearly a gamble but if it works could take the company, at a stroke, into the ranks of mid-tier producers.

Sound Oil has an indigenous team of ex- ENI personnel working out of Milan navigating the bureaucracy of the Italian ministry whilst liaising with ENI and the contracted parties over the forthcoming drilling campaign.

Following a recent placing Sound has net cash of c£9 million and is therefore fully funded. On a risk reward basis this looks a very attractive play.

To read Zak Mir’s recent TA appraisal of Sound click here.

Having worked throughout Europe chasing various industry dreams, Doc H now circumnavigates the investment world converting rich pockets of information into imaginative, avant-garde valuation theories for l’investisseur rudimentaire détail. Follow him on Twitter @DDS_Doc_Holiday and check out Doc’s website.

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