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

Sound Energy plc (LON: SOU) has a bright long-term future.

| 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.

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.

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.

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.

More on Investing Articles

Investing Articles

This 9.75% yielding FTSE 100 share is a total no-brainer for second income

This FTSE 100 insurance company is an absolutely brilliant source of second income and Harvey Jones reckons it will be…

Read more »

Dividend Shares

I could make £14.2k of passive income from £99 a week with this secret sauce

Jon Smith explains why sacrificing the immediate reward of dividends today can boost his long-term passive income prospects.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Which looks the better bank buy right now: Lloyds or NatWest shares?

Lloyds shares are a very popular pick among FTSE 100 investors, but I think there are several better choices overall,…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,000 in savings? Here’s how I’d target a £14,616 annual passive income with M&G shares!

Big passive income can be generated over time with 9.5%-yielding M&G shares, especially if the dividends paid are used to…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

If I’d put £1k in this FTSE 100 stock five years ago, here’s how much I’d have now!

Mark David Hartley works out what sort of profit he’d have made by investing in this FTSE 100 pick pre-pandemic.…

Read more »

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

After crashing 50%, is now the perfect time to buy this world-class FTSE 250 share?

The worst-performing share on the FTSE 250 over the last year is also the most exciting one of all. How…

Read more »

Illustration of flames over a black background
Investing Articles

Just released: July’s higher-risk, high-reward stock recommendation [PREMIUM PICKS]

Fire ideas will tend to be more adventurous and are designed for investors who can stomach a bit more volatility.

Read more »

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »