Sound Oil. A Crouching Tiger or Creeping Takeover?

untitled (15)‘Seize the moment’. A maxim that can pay dividends and one that worked for me yesterday. Sound Oil (LON: SOU) Interview with James Parsons

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I’ve been after an interview with Sound Oil (LON: SOU) for nigh on 6 months since approx. January 2014. They’d agreed in principle “when time allowed” or as I would euphemistically put it “When the Gods of Sound deigned”. So it was with great speed that I contacted the Company after learning that James Parsons CEO & one of the “Gods” of Sound, had postponed, till early next week, an @OfficialTipsTV Interview. I can tell you now that I will find it difficult to convince James Parsons or any one at Sound Oil to give me another interview. The dust will have to settle.

More gas on the way. More cash on the way!

More gas on the way. More cash on the way!

After the usual pleasantries I got to work on Parsons. First question had him spluttering & choking on his salad sandwich, (Parsons is a fitness fanatic). Never a good idea to start off an interview with a mouthful of salad!

BMD. “Can you tell me James how many times have you met ENI over the last two months and are you aware of ever growing rumours of takeover? I’m asking this because we know that you did have a meeting/dinner with high ranking officials from ENI whilst in Rome two months ago”. (It’s always good to blind side those that you want to get a reaction from)

JP Daniel I see you don’t believe in warm up questions ! I can’t possibly comment on such a rumour. What I would say is that as part of the Italian upstream sector we regularly meet up on a ‘voluntary basis’ with our competitors (over 15 companies) to discuss all kinds of industry matters over a broad range of subjects. Some of these are confidential and as I expect you probably know, we do not routinely comment on specifics”.

BMD. “OK James, well can you either confirm or deny that within this, for want of a better word ‘Voluntary group’ there are several major oil Companies two being Edison & ENI?”.

JP.  As I said we really do not comment on speculation”

BMD. “Would that be “No” we can’t confirm or deny or “No” Edison & ENI are not in the Voluntary group?”

JP. (Laughing) “Daniel this isn’t an interview it’s an interrogation worthy of Guantanamo bay. What next? Water-boarding? We don’t comment Dan”.

BMD. “Now we’ve established that Edison & ENI are in the “Voluntary group” Can you explain why over the last 2 years the team at the helm of Sound have become increasingly Italian?”

JP. “We have a fantastic team Dan and let me tell you I really do mean that. Technically they are world class and with them we have progressed at an extraordinary rate”.

BMD. “It’s true to say that the team in Milan are largely recruited from what I would term the ENI front bench. Is this a deliberate strategy on your part? Or just a coincidence that a multi billion dollar Italian global oil company’s former high ranking members are now on the Sound Oil team? I mean how did you achieve it James?”

And thus went the interview for over 40 minutes. It became abundantly clear that Sound Oil are in my opinion in some form of negotiation/discussion/farm in process or what I would term a ‘Crouching Tiger Creeping Takeover’ event. Whenever I tried to return to this theme the JP barriers quickly came up.

James Parsons is a Wiley, young Turk who can charm the birds out of the trees. He is a charismatic leader with an excellent Shell Oil CV. An individual who firmly believes that the Company are finally headed for greatness. I could not find any fault with any of his answers to my questions. Parsons is the right man in the right place at the right time.

Since he took over the running of the Company they have been turned into a lean, mean potential Lira making machine. They are now making hard cash. This will substantially increase over the next 12 months. With approx. $22,000,000 of free cash sitting in a bank in Rome. The Italian team are slowly but surely bringing home the pasta. Take the two producing assets Rapagnano (Gas) the other, Casa Tiberi (Gas) on production awaiting its official ‘Italian ticket’. Between these two small producers Sounds running costs are now all but fully covered. Yet they have a whole raft of assets that will slowly come on stream enhancing the balance sheet. Take a look at the Nervesa discovery this alone has a free cash net NPV of $40,000,000 dollars, while Badille is a massive Company asset. It’s a Company maker X 2. The numbers speak for themselves the base case is $654,000,000 while the upside case is $2,288,000,000 (2.3 billion dollars) Indeed the whole of Sound oil are based around it. Hence in my opinion the interest from the Crouching tigers (Oil Majors).

It’s all about the assets, the people and the ambition. They have a solid, growing, low risk business built around a series of existing discoveries which will generate circa $53,000,000 dollars of annual free cash flow. This fact alone represents a significant multiple on their current valuation. They are basically debt free, minus the obvious day to day G+A (General & Administrative). Cash on account more than covers liabilities

The recent announcement of a 27.5% farm in for the Nervesa discovery, while simultaneously securing significant institutional funding/investment from a Swiss based fund. (Continental Investment Partners). Bodes very well for my investment here. Now when a Swiss based fund come in and take 21% of the company out of circulation at a 70% premium then you know that Sound Oil are the real deal. For some reason this salient fact has been lost in the cacophony of madness that is the City of London.

The strategy is to build a middle tier upstream oil & gas player in the Mediterranean. The Italian Oil & Gas sector is one that scares many UK listers. Not so, the now mainly Italian managed, Sound whose ex ENI team have the proven ability to deliver operationally which includes that most elusive of gems. Italian permitting. It really is going to be one hell of a ride.

I asked JP This question. “In your honest opinion, taking off your Sound Oil CEO hat, would you invest your Mothers life savings?”

JP. “My God I’d heard all about how devious you were Levi. Now I know it’s true!”

BMD. “Come on James answer the question honestly. Would you invest? Give me one straight answer. Come on JP”.

JP. “I’ll give you this one Dan but that’s it. Absolutely. We are going to make it one way or another for our loyal investor base. Our foundations are solid and we can at any time, if we so chose, leverage off at will. Our low risk assets give us significant price upside even ignoring the larger risk plays and we have optionality going forward”.

Now that my friends is why I’m invested in Sound oil. They are an investment off the radar at the moment, but they will as sure as night follows day, come on screen. Debt free, Major Company making assets, producing assets, with existing discoveries such as Nervesa, Laura and SMG already in the bag awaiting drill/production. And with what Parsons describes as “A couple of hidden gems in our portfolio that have been kept under wraps” This is why I believe at least two Major global oil companies are sniffing around. 40p/50p if they get taken out over the next 12 months. Get researching.

Viva!

 

El Takeover?

 

Dan

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