Why Are Sound Oil plc and APR Energy PLC Falling Today?

Roland Head explains why Sound Oil plc (LON:SOU) and APR Energy PLC (LON:APR) are two of todays’ biggest fallers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Small-cap oil and gas firm Sound Oil (LSE: SOU) and temporary power provider APR Energy (LSE: APR) both fell by 20% or more when the stock market opened this morning.

What’s gone wrong at each of these firms and what does it mean for shareholders?

Sound Oil

Shares in Italy-focused Sound Oil fell by as much as 20% when markets opened this morning, after the firm said that it has decided to abandon the second appraisal well drilled at its Nervesa discovery.

Sound said that, despite stimulation and reperforation operations on the lower section of the target reservoir, it had “been unable to secure a stabilised flow rate”. With “no material gas shows in the upper section of the target reservoir”, Sound had decided to abandon the well.

This is bad news but not a total surprise, in my view. Last week, Sound warned that the lower section of the well appeared to be “of relatively low permeability”.

The good news is that the first appraisal well drilled at the Nervesa discovery is expected to become a producer. The company plans to start the construction of production facilities shortly.

Sound is also progressing towards drilling an exploration well on the potentially exciting Badile prospect, which has a mid-case prospective resource of 178 billion cubic feet of gas.

However, today’s news was significant enough to persuade the company to delay the acceptance deadline for its current open offer, through which it is trying to raise €5m from shareholders.

APR Energy

Shares in temporary power provider APR Energy fell to a low of 146p in January, but have recovered strongly since then, rising by 170% to a high of 400p in March.

It now seems that investors priced in a recovery far too quickly. APR shares fell by around 30% this morning, after the firm said that 2015 profits would be “significantly below market expectations”.

The firm also warned that it could breach its financial covenants later this year and said its chief operating officer, Brian Rich, had left the business with immediate effect for “personal reasons”.

APR says that today’s profit warning is the result of new contract negotiations being delayed and higher-than-expected demobilisation costs in Libya.

It was the Libya fiasco that caused APR shares to start sliding last year, after the firm’s contracts were not renewed, following months of delays and unpaid bills.

What’s the outlook now?

Even before today’s announcement, analysts were forecasting a full-year loss of about 23p per share for APR in 2015. The firm was also expected to report 38% drop in revenue, highlighting the impact of the loss of its Libya business.

In my view, todays’ profit warning suggests that a return to profitability will be a big challenge for APR. I suspect the firm’s net debt of $546m could become a costly headache. Ultimately, it’s very difficult to value shares in a business with possible debt problems and loss-making operations.

If you want exposure to this sector, I believe Aggreko is a more attractive alternative. I’d avoid APR until the firm’s outlook becomes clearer.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

1 Warren Buffett stock I’m buying now

Coca-Cola is the fourth-largest holding in Warren Buffett’s Berkshire Hathaway. I’ll explain why I’m following Buffett and buying more.

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

I bought 4,403 Lloyds shares in June and 4,856 in September. Here’s what they’re worth now

Harvey Jones thought he was bagging a FTSE 100 bargain when he bought Lloyds shares on two occasions last year.…

Read more »

Young woman holding up three fingers
Investing Articles

I’m itching to buy these 3 hidden FTSE gems in a Stocks and Shares ISA

Harvey Jones is keen to add these three FTSE 100 companies to his Stocks and Shares ISA before April. Only…

Read more »

Close up of a group of friends enjoying a movie in the cinema
Investing Articles

How I’d try and turn just £1 a day into a fabulous £54,485 passive income for life

By investing small, regular sums in FTSE 100 shares I can potentially generate a huge passive income stream. It won't…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying under a dozen shares

Christopher Ruane explains why less could be more when it comes to building a share portfolio if he wants to…

Read more »

Investing Articles

Rolls-Royce shares are up over 1,000% since 2020! Am I too late to buy?

Rolls-Royce shares now cost over tenfold what they did in the firm's 2020 rights issue. Our writer thinks they may…

Read more »

Investing Articles

1 top UK growth stock for my tech portfolio in 2024

Up 30% in just one year, this growth stock looks positioned to continue on the path of substantial gains, according…

Read more »

Buffett at the BRK AGM
Investing Articles

I’d follow Warren Buffett to target effortless passive income

Warren Buffett knows a thing or two about building passive income streams. By learning from the Sage of Omaha, so…

Read more »