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.

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.

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

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

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

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »