Sound Energy plc’s £24m cash call should propel the shares back to 100p

One of AIM’s greatest success stories, Sound Energy (LSE: SOU) has today announced that it intends to raise £24m by way of a fully underwritten open offer to help the company fund development activity on its Tendrara licence, onshore Morocco.

The company has decided to conduct the fundraising via online funding platform to give private investors the opportunity to get in on the deal before institutional investors snap up the entire allotment. And it’s likely that investors will move quickly to take advantage of this opportunity. Sound Energy has had plenty of good luck this year and shares in the company are up by more than 400% since June.

These gains can be traced to its success at the wellhead in Morocco. Sound Energy picked up the Tendrara asset in Morocco last summer and a successful drilling programme this year has proved that management was right to do so.

Beyond expectations 

At the beginning of November, the group reported that TE-7, as the company’s second well is called, was drilled to just under 3,500 metres and a total of 8.8m standard cubic feet a day was produced from just 28% of the gross reservoir interval without the need for stimulation. 

Testing has continued throughout the month, and today Sound has reported that the well can produce up to 40m standard cubic feet per day of gas. As Sound owns such an attractive asset, it makes sense for the company to tap the market for extra funds to develop the prospect. Issuing new shares is probably the best way for the firm to go about this. Taking on debt may mean less dilution for shareholders, but it also means the company will have to pay a hefty interest bill, which could slow the group’s progress.

Cash in the bank

With funds in the bank, Sound will be able to continue its well testing and development. Still, the company has told the market that it’s hoping to produce its first commercial gas from the Tendrara property at some point during the first half of 2019 and with an aggressive drilling programme at its other prospects planned in the meantime, I wouldn’t rule out further fundraising over the next 24 months. 

That being said, according to City estimates the company will report its maiden profit next year. A pre-tax profit of £3.7m is expected on revenue of £12.5m. Profitability will increase the company’s attractiveness to investors and should make it easier for the group to find finance to develop oil and gas prospects.

As it will be several years before Sound brings its flagship Moroccan prospects on stream, it’s hard to place a value on shares in the company. Nonetheless based on the company’s current situation and after today’s fundraising, which should alleviate any concerns about Sound’s financial position, City analysts believe the shares could be worth 104p each. Over the long term, they could be worth significantly more.

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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.