Why I'd buy and hold Sound Energy plc for the next five years after its 40% decline
At the end of last year, it looked as if shares in Sound Energy(LSE: SOU) were heading into the stratosphere. During the third quarter, the shares rose over 400% in the space of a few months following many successes at the well head for the firm.
Sound Energy picked up the Tendrara asset in Morocco during 2015, and a successful drilling programme last year proved that management had made the right decision with several test wells yielding impressive results. Following last year's activity, management announced earlier this year that its Morocco prospects contain an estimated "3trn cubic feet low case to 10trn cubic feet upside case."
The last time I wrote about Sound, City analysts were expecting the company to report its maiden profit this year. Indeed, in November last year, I wrote: "A pre-tax profit of £3.7m is expected on revenue of £12.5m." However, it now seems as if analysts have lost confidence in the firm.
A pre-tax loss of £3.3m is projected for 2017 on revenues of £800,000. To add insult to injury, management has issued millions of new shares over the past year, diluting existing parties. At the end of last year, the company raised £24m by way of a placing and earlier this year management agreed to issue 272m shares to the Morocco Oil & Gas fund in exchange for additional property ownership rights.
Lower profits forecasts, dilution, and cash burn are weighing on investor sentiment, and year-to-date shares in the business have declined by around 40%. Nonetheless, despite these declines, I believe the company remains an attractive long-term buy.
Look to the long term
Sound's primary asset is its Tendrara field in Morocco. With as many as 10trn cubic feet of gas underground, when the company is finally able to monetise this asset, investors will be well rewarded.
At the beginning of August, management announced that it had received preliminary approval for the route of the gas export pipeline which will connect to the main pipeline from the TE-5 Horst discovery at Tendrara, taking it one step closer to this goal.
As well as working on Tendrara, the small-cap energy company is expanding its presence across Morocco, acquiring prospects Meridja (now renamed Anoual) and Matarka over the summer. Located in East Morocco, management believes these new interests could be transformational for the company.
Patience is a virtue
Early stage, small-cap oil & gas companies take time to develop, and Sound is unlikely to become the next BP overnight. Still, the company is working hard to increase its asset base and monetise its Moroccan assets, which have the potential to generate lucrative returns for the firm and its investors.
Therefore, I believe the best strategy for investors is to buy and forget about Sound. The company is a speculative bet, so it's not suitable for everyone. However, for patient, risk-tolerant investors, this small-cap could be an attractive buy.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes