Sound Oil

[frizzers]

Sound Oil is buying the assets of Mitre Energy.

 

£11m via a placement at 7.5p. The issue is expected to be well received and well oversubscribed.

 

But Sound Oil is currently trading at 7p, I believe. So why buy in at the placement?

 

Anyone have any thoughts. There's not much about them online.

 

http://bigcharts.marketwatch.com/quickchar...d=2016591&time=

 

Here's some of the blurb:

 

Summary

_ Sound Oil plc (Sound) is listing on AIM to raise £10.8MM to fund its gas

ventures in Indonesia.

_ Sound has acquired Mitra Energia, a privately held Indonesian

company with the following asset interests:

- 34.49% WI in Bangkanai PSC, gas supply project.

- 20% WI in Citarum PSC exploration license.

_ Bangkanai represents the core value of Sound in the form of a proven

gas field in the Kalimantan province of Indonesia.

_ In the Competent Persons Report1 about 250bcf gross proven plus

probable (2P) reserves are attributed to the Kerendan gas field along

with a small amount of condensate.

_ Earlier work by the Operator, Elnusa Bangkanai Energy Limited (EBE),

attributed a smaller 142bcf 2P gross value, based on a more

conservative assessment of the field.

_ Consequently, the gas off-take agreement negotiated with the local

power station in Bangkanai province is based on this lower reserve.

_ There are enough independent reserve valuations2 for us to be

confident that the Kerendan gas field has 2P reserves in excess of

300bcf.

_ The 20% interest in Citarum PSC is a pure exploration play in an area

just south of the Ardjuna basin, onshore Java.

_ This is a well established basin with mostly small and medium sized

gas fields and the prospects there are more likely to be gas.

_ The company needs to acquire and process 2D seismic before we can

be more certain about prospectivity but for now there appears to be

two attractive gas prospects (343bcf and 91bcf gross unrisked).

_ There may also be exploration upside on Bangkanai.

_ But the benefit of acquiring Mitra Energy is not just asset based.

_ Mitra is well connected to the Far eastern E&P market and should be

able to source new opportunities for the company not just in Indonesia

but in Thailand, Malaysia and Vietnam where there are multiple

opportunities that we are aware of for smaller E&P’s.

 

Conclusion

_ In our opinion the Far Eastern hydrocarbon basins have been overlooked

by many western E&P’s, in favor of West Africa and the North Sea.

_ We don’t know why that is – it may be partly to do with an overhang from

the financial crisis that affected these so called ‘Tiger economies’ in the

last global recession or it could be simply a cultural barrier.

_ As our benchmark data shows on the following page – hydrocarbons have

been historically cheap to find and develop and net income from produced

barrels has been relatively high, in relative global terms

_ In addition there is demand for electricity in Indonesia and the Sound

assets have a ready off taker in the form of a local 200MW power plant.

_ Indonesia’s power sector is opening up, following reforms enacted in early

2005 for Independent Power Providers.

_ If the Bangkanai PSC produces at a constrained plateau of between

20MMcfd-30MMcfd for the next 25 years (as preliminary engineering

indicates it can), then the Sound Oil 34.49% working interest is worth

between $14MM-$32MM.

_ Exploration upside in the Citarum PSC is immature and needs further

work, but exploration potential is not why we like this company.

_ Decent cash flow has to be the foundation of any E&P in our opinion and

with this a company can grow quickly with further appraisal and

exploration opportunities.

_ The growth potential in Sound is in extending the gas supply contract to

the local power plant and this is really where our valuation hinges.

_ The core value of the currently negotiated 142bcf 2P gross value

(equivalent to 133bcf sales gas) is worth about 1.2p a share3 to Sound on

a long term $2.98/mcf fixed gas price and $55/bbl condensate.

_ If the gas supply extends to 317bcf (additional 152bcf sales gas) then this

is worth a further 1.6p, risked at 95% chance of success.

_ Exploration adds another 1.9p and we have been quite strict on the

geological risking and this number could grow in time.

_ So this adds to 4.6p a share or 7.9p with the £10.8MM cash and $20MM

raised at the IPO and a start in a little exploited region by UK based E&P’s.

 

 

 

Sound Oil Strategy

 

Commentary

_ Sound Oil is acquiring 100% of the share capital of Mitra Energia.

_ Sound will issue 223million shares to Mitra shareholders so that they will

hold 42% of the enlarged Sound Oil.

_ The Mitra acquisition brings a locally well connected management team as

well as interesting assets and this is important for future deal flow.

_ The reason for the acquisition is to allow Sound Oil to participate in two oil

and gas licenses in the Far East, namely:

- Bangkanai PSC production license (Kerendan gas field).

- Citarum PSC Exploration license.

_ The Kerendan gas field is contracted to supply gas to a nearby power plant

in Tanjung with a gas sales agreement in place.

_ Sound is pursuing a strategy of securing proven gas reserves with

commercial off take as the foundation of a portfolio of Far Eastern

exploration and production interests.

_ The main considerations in pursuing this strategy are

- Cost of entry (finding and development costs)

- Chance of success (geological opportunity)

- Likely returns (cash flow and capital return basis)

_ We can check certain generic metrics to see how the Far East compares

globally

- Finding and development costs are comparatively low for the Far East.

- Net income per barrel has averaged $7.57/boe for the last 5 years.

- Return on capital over 5 years has been on of the highest globally at 27%.

_ So in general terms the Asia Pacific region is a relatively low cost and

profitable base for an E&P business and this is positive.

_ We would suggest that a 27% return on capital should be an absolute

minimum investment hurdle for investing into Sound Oil and this looks like

an achievable target so far based on our calculations of the IRR range

associated with the Kerendan gas field alone (25%-39%).

_ The upside exploration would not add value now but later.

Conclusion

Sound Oil is pursuing assets in the ‘right place’ from a global industry

metrics perspective. But more than this the company is very well

connected into the Asia Pacific market at a deal and asset/basin level.

[drbubb]

I met the CEO of Mitra some time ago,

He seemed an intelligent and business-like guy. So I expect the business is solid

[Guest Guest_Frizzers_*]

Are you buying into the placement, Dr B

 

How about Ariana?

[Guest The Engineer]

I would be interested to know the source of information on the gas sales agreement with "a Tanjung power station". Tanjung is about 200 km from the Kerendan gas field and the cost of a pipeline a substantial investment, not easily recouped for such a low rate of delivery and low gas price. It was for these reasons that the original owners pf the PSC, Unocal, were never able to make it a viable investment.

[drbubb]

Strange chart ... update