Plainly there’s disappointment around the news that Sound Energy PLC’s (LON:SOU) Italian exploration well has been unsuccessful, nonetheless, the asset base in Morocco is by no means the ‘fall back’ option.
Sound, on Monday, revealed its attentions would return to the operations in Morocco following the abandonment of the Badile well in Italy – after analysis indicated that the gas find, previously described as ‘encouraging’, was in fact likely to be sub-commercial.
WATCH: Sound Energy drop 'undue' after 'sub-commercial' Badile revelations - analyst
On AIM, Sound’s share price plummeted some 26% in knee-jerk to the Badile update.
Morocco successes underpin Sound’s valuation
It is, of course, important to highlight that Monday’s market reaction starkly underlines the vital decisions to target new opportunities beyond the Italian portfolio.
Badile had for a long time been seen as the primary value catalyst for Sound, before it took and succeeded with the Tendrara asset. The large gas field development project now underpins Sound’s substantial £440mln market valuation.
Indeed, the success in Morocco was been the overriding driver in the junior oil and gas group value growth (it peaking at around 102p amid positive appraisal news flow), and in the wake of Badile the operations in North Africa will likely dominate the group’s IR agenda.
Morocco is now Sound Energy’s focus
Completion of the TE-8 well earlier this year rounded off a supremely valuable programme of exploration and appraisal work for Sound.
The company has unearthed what it sees as a multi-TCF gas project at Tendrara.
Work earlier this year detailed and confirmed extensions to the Tendrara gas field. In March, the company highlighted that the TE-8 results represent a material derisking of the substantial gas resources estimated for the project, which are set between 3-10 trillion cubic feet.
Chief executive James Parsons said: “Sound Energy's first two wells at Tendrara unlocked the TAGI play.
“TE-8 has now established that the primary hydrocarbon system proven in Algeria extends into the more favourable Moroccan licence and fiscal regime.
“I believe therefore that TE-8 will prove to be the Paleozoic play-opener in Morocco.
“I am also pleased to confirm TAGI sands some 12 Km away from our previous discovery, which, although lower quality at this specific location, is expected to materially uplift our discovered volumes.”
Sidi Moktar is the next project up
In June, Sound kicked off a new programme at the Sidi Moktar project, where it is re-entering the Koba-1 well.
The plan is to re-enter the well to perforate and test Lower Liassic reservoir, as well as possibly the Argovian, Sound explained in a statement.
A similar programme is expected to follow Koba-1, at the Kamar-1 well (also part of Sidi Moktar).
Sound Energy highlighted that the Sidi Moktar area, which spans 2,700 square kilometres, is located close to infrastructure and gas demand, including a large scale phosphate plant which is owned by the Moroccan state.
Badile’s disappointing result
On Monday July 3, Sound told investors that the gas discovered in the Badile exploration well is likely to be “sub-commercial”.
In a stock market statement, the company reported that the well was drilled down to a depth of 4,472 metres, with further significant gas shows observed along with water influx and losses of mud into what are believed to be fractures in the formation.
Sound’s analysis suggests that a 12 metre gas column was encountered in the Upper Conchodon reservoir, below 4,375 metres, beneath which is believed to be a gas/water transition zone, the company added.
“The likely sub-commercial volumes at Badile are of course a disappointment,” said James Parsons, Sound Energy chief executive. “Our focus now returns to our more material Eastern Moroccan position, where the seismic acquisition has begun and we are positioning for further drilling in Q4 of this year."
Badile inspired sell-off overdone – expert
The 26% drop in Sound’s share price in the wake of Monday’s well update was “probably overdone”, so said oil companies expert Malcolm Graham Wood.
Malcolm Graham Wood, in his daily market blog, noted that he had valued Badile’s potential at around 50p per share before the exploration drilling began.
“Despite further ‘significant gas shows’ in the reservoir, unfortunately water influx and mud losses into what are believed to be fractures in the formation appear to have put paid to the commerciality,” he said.
“Although I have carried a potential value of 50p in case of success for over three years now, I dont think that any of that was really in the price and so today’s fall is probably overdone, this result back then would have been little short of disastrous.”
The analyst highlighted that Sound’s investors would now turn all attentions on Morocco, where he describes the assets as being “much more serious”.
“Eastern Morocco is showing signs of great prospectivity, strongly financed with good partners, backed by local funds and with exciting prospects that are quick, relatively easy and cheap to develop, certainly by Italian standards.
“Today’s 20% odd fall in the shares probably reflects sky high ambitions, but with Sidi Moktar still drilling may represent a buying opportunity for the wise.”