Are You Ready To Pocket A 30% Return On Sound Oil plc?

Sound Oil plc (LON:SOU) is not an obvious investment case, but you should keep it on the radar after a strong performance since 2013.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Sound Oil (LSE: SOU) could be a terrific bet right now. What does it take to invest in it, though? 

Here are a couple of scenarios you ought to consider before snapping up its shares.

19.25p A Share: Is It A Fair Price? 

Its shares closed at 19.25p on Friday, some 7.25p below their 52-week high of 26.5p as of 28 April — a record that was hit when Sound Oil reported its 2014 preliminary results and announced the issuance of 63.1m new shares at a price of 19p a share.

The placing aimed to raise £12m, and also included “an equal number of detachable warrants to subscribe for new ordinary shares in the company at a price of 24p per ordinary share for a period of 5 years from issue”. 

“Should all of the warrants be exercised, the average issue price of all equity issued in connection with the placing would be 21.5p”, the oil explorer added. Based on these elements, Sound Oil seems fairly priced at around 20p a share, particularly because not much has happened since. In fact, Sound Oil continued to trade in the mid-20s for about three weeks until 19 May on the back of a couple of minor trading updates, Morocco and Nervesa, which supported the investment case. 

But soon after the stock started to fall, losing 36% in less than four weeks of trade as investors either overreacted to other trading updates or just took profit. On 16 June, Sound Oil closed at 15.3p; since then, the stock has surged 25%, and now it trades some 27% below its record high for the year. 

Performance

Sound Oil has risen 75% this year, 87% over the last 12 months, and 102% in the past two years. 

With 482.9m of shares outstanding, its market cap stands at £92m. 

It announced last week that it had received “valid acceptances and excess applications from eligible shareholders for a total of 15,599,752 open offer shares“, which did little to boost its stock price, given that the statement referred to the last £2.8m tranche of the £12m placing.

So, the spotlight now is on any upcoming operational trading update. While it’s impossible to predict any such outcome, what’s known is that its latest unaudited financials showed revenues of £1m, which doubled year on year and imply a revenue multiple of 92x, which isn’t a very reliable valuation metric. Further down the income statement, 2014 losses per share have almost halved on the back of lower exploration costs that should rise over time, however.

Mixed signals come for the income and cash flow statements. Let’s look at the balance sheet.  

Hunting For Value

Its unaudited cash balance of £12.6m as at 31 December 2014 amounts to a significant portion of its total assets, which stand at £38m — this is one element I like.

A back-of-the-envelope calculation suggests a realistic liquidation value of £30m, excluding the amount of cash it raised in its latest placing — I have assigned zero value to intangibles, which are worth £8m, but I have not applied any discount to ‘Property, plant and equipment’, whose book value stands at £13.2m. 

Here is the conundrum: the stock trades in line with the price of the placing (19p), so it looks like investors are eager to bet on management and the business’s prospects, which indicate possible upside in the region of 30% or more (this is my best-case scenario); but given that its market cap trebles its liquidation value, downside could be as much as 66% (based on trailing unaudited financials), which should be adjusted, however, in order to reflect a lower level of risk than liquidation in the light of its funding needs over the next 18 months.

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.

Alessandro Pasetti 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.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »