After I voiced my doubts on the value of Sound Energy (LSE: SOU) shares in July, the price dipped to below 40p. It’s rebounded a little to today’s 41.6p, but the overall trend since scraping £1 per share in early 2017 has been steadily downwards.
But what are the prospects for a renewed bullish phase? Earlier in August the company updated us on its seismic acquisition programme in Eastern Morocco, telling us the project was completed on time and within budget. Reducing the seismic unknowns certainly lowers the risks associated with the field, and it’s allowed the company to finalise the location of its TE-10 exploration well.
The new seismic data also indicates further structures to the northwest of the existing target, providing a new candidate for the planned TE-11 well.
We now have a further reduction in risk, with Friday’s news of an eight-year agreement uniting a number of the firm’s earlier agreements, and including its production concession application for the Tendara discovery.
Chief executive James Parsons was “delighted to announce that we have contractually secured our rights on this potentially transformational acreage up to 2026,” and it does seem to be a significant step. So why am I not convinced to buy the shares?
Well, it’s a huge job moving from identifying and quantifying a company’s oil and gas prospects to actual drilling and production, and oil investors have a chronic tendency to overvalue a set of prospects while underestimating the practical difficulties and costs of getting them to market.
Sound Energy is still at too early a stage and is too risky for me.
A better play?
Enter AIM-listed Eco (Atlantic) Oil & Gas (LSE: ECO), a tiddler which flew under my radar until its share price started to soar this year. After a 7% gain on Friday morning, we’ve now seen the shares more than double over the past 12 months, though we’re still look at a very modest market cap of £56m.
The latest news is actually about a different company, ExxonMobil, which has announced a new discovery in Guyana. With 60 metres of net pay of “high-quality, oil-bearing sandstone reservoir,” it does sound like a significant find, but what’s it got to do with Eco?
The company said: “Exxon’s Hammerhead-1 oil discovery is located approximately 7km from Eco’s Orinduik licence boundary.” The Orinduik licence is operated by Eco with a 40% interest, and Tullow Oil holding the other 60%. Eco reckons the Exxon well “has very positive implications for Eco and Tullow’s adjacent acreage,” and it’s hard to disagree.
At Eco’s last year-end, cash on hand stood at C$14.3m (£8.45m), with chief executive Gil Holzman describing it as “our best financial results yet” though that has largely been the result of payments for farm-in options, private placements, etc. Net losses came in at C$8.36m (£4.94m).
Eco could be just another oily hopeful that’s sitting on attractive-looking assets, but assets which are nowhere near production, and it’s still burning cash. On the other hand, it has a strong partner in Tullow, and those nearby Exxon assets do sound good.
My main fear is that we could be at the same point Sound Energy was before the initial bullishness started to wane.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.