Sound Oil (LSE: SOU) is down 12% at the of writing following its two latest updates, which were released today.Here are a few elements you should consider before either buying or selling into its shares.
Todays First Update
As upstream oil and gas company with a market cap of almost 100m and operations in theMediterranean area, Sound Oilcertainly deserves attention, given that it isexpected to report fast-rising earnings over the medium term. Its also attractive because following a recent placement it seems to be well funded, as its balance sheet shows.Itsaidtoday that ithad entered into a farm-in agreement with the Moroccan Oil and Gas Investment Fund in relation to the Tendrara licence, onshore Morocco.
Theres exploration upside here, at least according to Sound Oil,whichwill acquire, upon completion, a 55% working interest in Tendrara.Under the terms of the agreement, Sound Oil will pay the full cost of the three wells, of which only the first well would be a firm commitment. Thedrilling of the first well is expected to cost about 6 million, and will commence in Q4 2015 thecommitment to fund the second and third wells will depend upon the results of the first well.
All good here: theres risk, but the explorer could generate some cash flow sooner than expected, and is funded, so its plan makes sense.
The onshore Tendrara licence includes two stranded gas discoveries with low risk appraisal potential and significant blue sky exploration upside, the group said, adding that preliminary internal estimates of existing discovery volumes are broadly comparable to estimated volumes (post a successful drill) at the companys Badile licence in Italy.
Nervesa Gas Discovery Update
The second appraisal well at theNervesa discoveryinItaly isnt faring as investors expected, and heres where things get a bit more complicated.
As announced on 20 May 2015, the company identified gas shows in multiple intervals in the Upper Miocene San Dona Formation. It hasnow successfully perforated and completed seven intervals in the lower section of the reservoir where the most significant gas shows were identified.
What does this mean, really?
As initially feared, Sound Oil confirmed that initial gas flows have identified that multiple perforated intervals (between 1929 and 1988 metres depth) are indeed gas bearing, but are however of relatively low permeability.
Well, then delays become inevitable, with clean-up operations set to follow, and only later Sound Oilwill decide whether to initiate a well test directly or to utilise stimulation techniques beforehand.
Investors were not pleased with its key Nervesa update, but should you really give it a pass at its current price? On the one hand, at 17.8p a share Sound Oil has lost 30% of value since 5 May. On the other, it currently trades in line with its 52-week median, which suggests that investors are not entirely sure about what the next update may bring.
Finally, consider that its implied earnings multiple stands over 30x, on a forward basis, which is not a prohibited valuation, if Sound Oil delivers but then theres no dividend attached to the stock, which has already risen more than 50% this year.
In fairness, for less risk it is not difficult t0 find an alternative equity investment with more solid prospects of growth: in fact, I’d buya 300m gem, whose shares are set tooutperform those of its rivals, while delivering an outstanding growth rate.
Check out its forward trading multiples, which are only in the mid-teens! If its earnings have bottomed out — its balance sheet has become more solid in the last 12 months — stellar capital gains could be on the cards: found out the name of this value and growth playin this new report, which iscompletely freefor a limited amount of time.