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Why Sound Energy plc has growth potential even after 2016’s 312% gain

Image: Glencore plc. Fair Use.

Upstream gas company Sound Energy (LSE: SOU) has released an encouraging update today. It expects drilling to commence at its Badile exploration well in Italy during March, which shows that it’s making encouraging progress. Furthermore, it could be set to benefit from a higher gas price over the long term. Demand for cleaner fossil fuels is forecast to rise, which could provide a boost to the company’s profitability over the coming years.

Sound Energy’s update states that ground works at the well site are now complete and that the conductor pipe was set last week. Furthermore, the rig to be used on the project has been mobilised, with its completion set for the end of February in time for the start of drilling in March.

The Badile exploration well is expected to be drilled to a total depth of 4.6km in order to test the hydrocarbon potential of the Lower Jurassic Conchodon Dolomite. An independently assessed, 100% unrisked, best case estimate suggests that there could be as much as 178bn standard cubic feet of gas present. This would clearly be a major discovery for the business and with the upside high case of 670bn standard cubic feet of gas, it could have a significant impact on the company’s share price in future.

Increasing demand

Of course, Sound Energy is also set to deliver improved returns as a result of rising demand for cleaner forms of energy. Although gas is a fossil fuel, it’s a cleaner alternative to other fossil fuels and so demand is expected to rise in future years. For example, gas emits only half the greenhouse gases of coal and is seen as a more sustainable alternative to oil over the long run.

While expenditure on gas production capacity is set to increase over the coming years, demand from China and the emerging world, as well as its potential as a substitute in the developed world, means that increased supply may be met by higher demand. Therefore, Sound Energy has the potential to continue to rise even after its 312% share price gain of 2016.

A lower risk opportunity?

While Sound Energy has a bright future, it remains a relatively risky stock to buy. It’s unprofitable and lacks the financial strength or diversity of a larger resources peer such as Glencore (LSE: GLEN). The latter has made excellent progress with its strategy to improve the strength of its balance sheet, with cost cuts and asset disposals improving its financial position. And with it having a highly diversified business model as well as a sound strategy and improving bottom line, Glencore looks set to deliver high rewards in 2017 and beyond.

Therefore, Glencore offers a lower risk profile than Sound Energy and may be worth buying ahead of it. However, the latter remains an enticing buy, especially for less risk-averse investors.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.