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Sound Oil plc Jumps After Being Awarded Production Concession

Shares of oil minnow Sound Oil (LSE: SOU) jumped by as much as 8% in early trade this morning after the company announced that it been awarded the production concession for its Italian Casa Tonetto project. 

Sound Oil’s Casa Tonetto project includes the Nervesa discovery located in north-east Italy, which was first drilled by the company during 2013. Exploration drilling revealed that the prospect had the potential for three wells and the initial test well produced a total gas flow rate of 2.7 million standard cubic feet per day. 

The granting of the production concession is the final step in the permitting process to enable commercial production from first well drilled by Sound Oil during 2013. With the permit in place, Sound Oil can now commence the construction of the production facilities at the project. Based on current projections, first commercial gas production is expected later this year. 

Commenting on the concession news, Sound Oil’s chief executive, James Parsons, said:

“First commercial gas at Nervesa will be a significant milestone for the Company…
“Similar to the Company’s other existing onshore discoveries, Nervesa benefits from very strong gas prices. A Gas Sales Agreement with a long-term partner is expected to be signed shortly.”

Next steps

2015 has been a transformative year for Sound Oil. The company’s preliminary results for the financial period ended 31 December 2014 showed production growth that exceeded management’s expectations, up 97% year on year, and a doubling of revenue. In addition, excluding exceptional items, group operating losses for the period declined by 60%. 

What’s more, the company’s outlook has drastically improved. City analysts are now expecting Sound to report full-year 2015 revenues of £8.1m, up a staggering 710% year on year. Further growth is expected during 2016. Analysts have pencilled in revenue growth 70% for 2016. 

And unlike many other oil minnows, Sound Oil has a solid cash balance with which to fund growth.

At the end of April, the company announced a placing to raise £12m, adding to the unaudited cash balance of £12.6m reported with full-year 2014 results. With an estimated £24.6m of cash on hand, Sound Oil has plenty of financial headroom for growth.

However, it’s unclear how much of this cash has been spent on exploration activities so far this year. Although, as City analysts expect Sound Oil to report a pre-tax profit of £1.3m for 2015, it’s reasonable to assume that the company is generating cash from operations to supplement its existing cash pile. 

Expensive growth

With Sound Oil’s maiden profit expected this year, it’s little wonder that the company’s shares have gained 70% year to date. 

Still, after recent gains Sound Oil’s shares now trade at a forward P/E of 242, which does not leave much room for error if things don’t go to plan.

Nonetheless, based on current City forecasts, if everything goes to plan over the next 18 months, Sound Oil will report EPS 0.5p for full-year 2016, up 616% year on year. With such rapid growth predicted, figures suggest Sound Oil is trading at a PEG ratio of 0.1.

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Rupert Hargreaves 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.