Sound Oil

Initiation of coverage

Focused Italian gas player with big potential

Oil & gas

27 June 2014

Now that Sound has attracted a farm-in partner and strategic investor in
2014 (Niche Group and Continental Investment Partners), we foresee a
period of high activity approaching for Sound, with a rejuvenated balance
sheet and five material exploration and appraisal prospects scheduled for

Price

drilling in the coming 18-24 months. Of these, exploration prospect Badile

(scheduled to spud late 2014 pending a farm-out agreement) has company
maker potential, while continued appraisal of existing discoveries
Nervesa, Laura and SMG offers lower-risk incremental value to
shareholders.

Net cash (m) (post CIP deal completion)

Revenue
(m)

EBITDA
(m)

PBT*
(m)

Net (debt)/
cash (m)

Capex
(m)

12/12

0.00

(4.61)

(4.63)

6.83

(3.99)

12/13

0.48

(6.29)

(6.56)

(1.63)

(7.11)

12/14e

0.82

(2.55)

(2.63)

3.70

(0.80)

12/15e

4.22

0.72

0.18

(11.6)

(17.4)

Year end

10.75p

Market cap

35m
US$1.6/

Shares in issue (pre CIP)

7
327.8m

Free float

76%

Code

SOU

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

Note: *PBT is normalised, excluding intangible amortisation, exceptional items and share
based payments

New institutional partners transform outlook

Sound successfully introduced two institutional funds to the company in April 2014,
Niche Group, as farm-in partner on the Nervesa field, and Continental Investment
Partners (CIP), as cornerstone investor and provider of debt. In exchange for
27.5% of the Carita licence (containing the Nervesa field), Niche is paying 100% of
costs of an upcoming Nervesa appraisal well (5m). In the second deal in April CIP,
an Italian private wealth manager, agreed the injection of 14m in new capital to
Sound, comprised of an 7m equity issue (87.5m shares at 8p) and a 7m loan.

Badile exploration prospect, the company maker

Of the five exploration and appraisal wells scheduled for drilling across the
companys portfolio in the coming two years, exploration prospect Badile is the well
to watch as a potential company maker. As a backdrop to this exploration the
group continues a programme of low-risk appraisal at existing discoveries Nervesa,
Laura and Santa Maria Goretti, in addition to building production from recently
commissioned gas assets Rapagnano and Casa Tiberi.

Valuation: Success at Badile worth a potential 41p

Our analysis suggests a core NAV for Sound of 1.3p, with a further 12p attributable
to assets under appraisal: Nervesa and Santa Maria Goretti. Beyond this 13.3p we
suggest a further 19p as attributable to the groups sizeable remaining exploration
and appraisal prospects: Badile, Laura and Zibido. Although these prospects await
funding, we anticipate progression to farm-out agreement, and hence funding, for
both Laura and Badile to be announced by end-year 2014. Combining core,
appraisal and exploration assets for Sound suggests material upside to the shares,
though we stress that success at outsized exploration prospect Badile could alone
be worth a further 41p (based on a 2 for 1 farm-out agreement).

1m

3m

12m

Abs

24.3

75.5

27.6

Rel (local)

25.6

73.8

15.8

52-week high/low

12.88p

4.63p

Business description
Sound Oil is a 100% Italy-focused E&P company
with two fields in production, Rapagnano and Casa
Tiberi; three fields scheduled for further appraisal,
Nervesa, Laura and Santa Maria Goretti; and two
sizeable, drill-ready exploration prospects, Badile
and Zibido.

Next events
Nervesa second appraisal well

Q314

Badile FOA + exploration well

Q414/Q115

Santa Maria Goretti appraisal well

Q215

Zibido exploration well

Q215

Laura FOA + appraisal well

Q315

Analysts
Peter Lynch

+44 (0)20 3077 5731

Elaine Reynolds

+44 (0)20 3077 5757

Will Forbes

+44(0)20 3077 5749

Ian McLelland

+44(0)20 3077 5756

oilandgas@edisongroup.com
Edison profile page

Sound Oil is a research client of Edison Investment Research Limited

Investment summary
Company description: New partners recognise opportunity
AIM-listed E&P company Sound Oil holds majority working interests in 18 oil and gas licences
across Italy. Within these licences the group holds two producing gas assets, Rapagnano and Casa
Tiberi; three assets undergoing further appraisal, Nervesa, Laura and Santa Maria Goretti; and two
outsized exploration prospects, Badile and Zibido. In April 2014 Sound successfully introduced two
institutional funds to the company, Niche Group, as farm-in partner carrying 100% of the costs of
the upcoming appraisal well at Nervesa (5m), and Continental Investment Partners (CIP), as
cornerstone investor and provider of debt, injecting 14m to the company (comprised of 7m equity
and a 7m loan).
Operationally, the company plans to drill five exploration and appraisal wells in the coming two
years. Of these five wells, exploration prospect Badile, scheduled to spud in Q414 (pending a farmout agreement), is the well to watch as potential company maker. As a backdrop to exploration at
Badile the group continues with a programme of low-risk appraisal at existing discoveries Nervesa,
Laura and Santa Maria Goretti.

Valuation: Success at Badile could be worth 41p

Our analysis suggests a core NAV for Sound of 1.3p, comprised of 1.6p in cash, two-year SG&A
expenses of 1.0p, and 0.6p in value attributable to producing assets Rapagnano and Casa Tiberi. In
addition, we suggest a further 12.0p in value attributable to the companys fully funded appraisal
assets Nervesa and Santa Maria Goretti.
Beyond this 13.3p total, we assess the groups sizeable, yet unfunded, exploration and appraisal
prospects (Badile, Zibido and Laura) as worth an additional 19p to the shares. Though we highlight,
given the companys success in raising capital to date, we would expect to see these assets fully
funded within the near term, most likely by means of a material farm-down of Sounds 100%
working interest in all three assets. Within this group we highlight the Badile prospect, scheduled to
spud by end-year, which, if successful, could be worth 41p to the shares.

Sensitivities: Permits to drill and outsized exploration

Our analysis of sensitivities for Sound suggests two areas of criticality: exploration risk and the
pace of permitting activity within Italy. Considering exploration risk, it should be noted that the
groups main prospect, Badile, is outsized relative to the company, and as such the result of
exploration at Badile is likely to markedly affect the shares.
The pace of permitting activity in Italy remains highly environmentally sensitive. Consequently, we
highlight delays to permitting as a risk to the companys expected pace of activity. In mitigation, we
would note the groups considerable success in alleviating this risk to date, both in acquiring a
portfolio of assets pre-engaged in the permitting process and hiring experienced personnel adept at
dealing with the challenges that operating onshore Italy presents.

Financials: Capital injection transforms outlook

In April 2014, Continental Investment Partners agreed a 14m injection to Sound, comprised of a
subscription for 87.5m shares priced at 8p (raising 7m) and a 7m loan to be drawn in two
tranches of 1.5m and 5.5m each. Of the 87.5m shares issued to CIP, 50% will be locked up for
18 months with the remaining 50% locked up for 12 months. Attached to both the 7m CIP loan and
the existing 1m loan from Simon Davies, Sound issued 76.9m warrants (split 67.3m CIP, 9.6m
Davies). We highlight that, with an exercise price of 10.4p (below the current share price) and
duration of three years, these warrants are a potential source of future funding for the group.

Sound Oil | 27 June 2014

Overview: Production build-out with funded exploration

Sound Oil is an AIM-listed exploration and production company with majority working interests in 18
licences, all located within Italy. This Italian portfolio was acquired via the astute acquisition of
Consul Oil & Gas back in 2010. From these assets Sound has had considerable success in building
the beginnings of an Italy-focused upstream portfolio, with two fields in production, Rapagnano and
Casa Tiberi; three fields scheduled for further appraisal, Nervesa, Laura and Santa Maria Goretti;
and two sizeable, drill-ready exploration prospects, Badile and Zibido.
Exhibit 1: Sound Oil, Po Valley focus

Exhibit 2: Italys extensive high pressure gas network

Source: Sound Oil

Source: Sound Oil

Now with funding in place, the group schedules five material exploration and appraisal wells across
this portfolio within the next two years following the introduction of a new farm-in partner and a
strategic investor in 2014. Of these five wells, exploration prospect Badile, scheduled to spud yearend 2014 pending a farm-out agreement, is the well to watch as a potential company maker. As a
backdrop to this exploration prospect the group continues a programme of low-risk appraisal at
existing discoveries Nervesa, Laura and Santa Maria Goretti, in addition to maintenance of
production at recently commissioned fields Rapagnano and Casa Tiberi.

Assets in production: Rapagnano and Casa Tiberi

The Rapagnano field is located onshore in the Marche Region of Italy. The field has been producing
gas for Sound Oil since May 2013 and is the companys first producing asset, providing annual
cash flow of 500k net to Sound.
First discovered in 1952, Rapagnano produced through one well completed across the Sabbie
formation up until shut-in in 1996. The same well was opened up again in 2000, when it produced
from the shallower A2 sands until being shut in again, in 2001. In early 2013 Sound Oil re-entered
this well, isolating the A2 perforations and re-perforating across the Sabbie reservoir. This well has
been producing steadily at around 0.35mmscf/d since coming onstream in 2013 and is expected to
remain in production out to 2025, producing 1.2bcf of gas net to Sound.

Sound Oil | 27 June 2014

Exhibit 3: Rapagnano

Exhibit 4: Casa Tiberi

Source: Sound Oil

Source: Sound Oil

The next field to come on production for Sound will be Casa Tiberi. The field development of Casa
Tiberi remains on track, with first production expected by July 2014. The Casa Tiberi-1 discovery
well was drilled in late 2011 and tested gas at a commercial rate of 0.3mmscf/d. The company
expects to produce P50 reserves from Casa Tiberi of around 0.2bcf, though will wait for a sustained
period of output before firming this estimate.

Nervesa: Under appraisal, first gas 2015

The Nervesa field is located in the Carita Permit in the Veneto region of north-east Italy. The field
was discovered by the Nervesa-1 well, drilled in 1985 by ENI and produced from a single sand
interval (9a), for two years from 1989. Sounds interpretation of ENIs discovery well was that it had
been positioned too close to the gas-water contact (GWC) and hence produced water within two
years of production. On this basis, Sound Oil drilled a successful appraisal well at Nervesa in 2013,
the Sant Andrea, testing gas at a rate of 2.7mmscf/d, supporting the companys theory. The higher
than expected output from Sant Andrea allowed a positive revision of the reservoir model for
Nervesa, resulting in a 16% increase in the P50 estimate of reserves, from 20.7bcf to 24bcf.

Second appraisal well at Nervesa, spud expected Q314

Given the success of the Sant Andrea well, the company now plans to drill the second well of its
three-well Nervesa development programme in the second half of 2014. As shown in Exhibit 6, the
Sant Andrea well successfully proved-up the northern part of the Nervesa field, while the second
appraisal well will target the southern limb, which is thought to contain the bulk of resources to be
developed. If the groups second appraisal well at Nervesa is successful, the company plans to
build a production plant near the appraisal well location to separate and treat the gas before
exporting it to the local network via the SNAM high-pressure line, located around 100m from the
field.

Sound Oil | 27 June 2014

Exhibit 5: Carita permit

Exhibit 6: Nervesa well locations

Source: Sound Oil

Source: Sound Oil

Reserves upside if lower zones charged

Although the Nervesa reservoir is made up of 24 sand intervals, the current reserves estimates are
based on the lowermost intervals only, sands 5 to 9a. However, the Sant Andrea appraisal well did
achieve gas flow from intervals 14 and 15, hence further resource additions could be allocated to
these sands if proven to be gas bearing and charged in the upcoming appraisal well.

Under appraisal: Santa Maria Goretti in the right postcode

The north edge of Sounds Santa Maria Goretti (SMG) permit sits just to the south of producing gas
fields Grottammare and Carassai, as shown in Exhibits 7 and 8. To the south of these fields and
within the SMG permit, Total has drilled three wells between 1969 and 1982. These wells were
placed on trend with the Grottammare-Carassai fields. Two of these wells, Torrente Tesino-1 and
Torrente Tesino-2, exhibited zones that can be correlated with the producing Level 1 reservoir found
in Grottammare and Carassai.
Exhibit 7: Santa Maria Goretti permit

Exhibit 8: Santa Maria Goretti

Source: Sound Oil

Source: Sound Oil

In addition to the level 1 reservoir, Sound has identified a 150m thick sequence of thin sand layers
sitting above Level 1; the company believes this formation can be produced at a commercial rate.

Sound Oil | 27 June 2014

Sound plans an appraisal well, Torrente Tesino-3, located around 150m to the north of Torrente
Tesino-2, to target both the 150m thin bed formation and the Level 1 reservoir. This appraisal well is
scheduled to spud by Q215 and based on current Sound estimates, is expected to cost around
9m. In the event of success at St. Maria Goretti, the well could be tied into the existing Carassai
treatment plant located only 1.5km away.

Under appraisal: Laura, drilling from onshore to offshore

As shown in Exhibit 9 the Laura prospect sits 4km off the coast of Italy in the Gulf of Taranto. The
field was discovered by ENI in 1980 from the original discovery well, Laura-1. Sound estimates the
field to contain 30bcf of gas reserves based on the 2010 CPR, commissioned by Sound. Proving
this reserves estimate is the purpose of Sounds planned appraisal well at Laura, scheduled to spud
in Q415.
Exhibit 9: Laura onshore to offshore well

Exhibit 10: Laura, Inverted fault block

Source: Sound Oil

Source: Sound Oil

Laura appraisal; drilling from onshore assists permitting

An environmental impact assessment to drill Laura was obtained back in 2009. However, this
permission was subsequently revoked in the wake of the Macondo disaster, after which offshore
drilling was banned in Italy within 5 miles of the coastline.
In 2012, Sound applied for a research permit for the onshore area in front of the D-150 lease; the
environmental impact assessment (EIA) to drill Laura via an extended reach well (ERW) from this
onshore location is currently under evaluation. Given the horizontal distance the well has to cover,
the planned appraisal well will feature a horizontal displacement of 4.5km and is estimated by
Sound to cost 17.5m; this ERW has been confirmed as feasible in two studies carried out for
Sound Oil by Schlumberger and Halliburton.

Exploration prospects: Badile has outsized potential

Badile is the largest exploration prospect in the companys portfolio. The target, located in the Po
Valley just south of Milan, is estimated by ERCE, in its 2013 CPR commissioned by Sound, to
contain 106bscf gas and 12mmbbls of condensate. Sound Oil has applied for a permit to drill an
exploration well at Badile and is planning to spud that well by the end of 2014, subject to the
permitting process. Sound estimates the Badile exploration well will cost 22.6m to drill.
In terms of funding this well, Sound initiated a process to farm down part of its interest in Badile, in
February 2014, in return for carried costs in the well. The group has received an offer, though is
continuing the process in expectation of better terms. Farm out negotiations are expected to close

Sound Oil | 27 June 2014

in the near term, and we would not expect the group to proceed with drilling Badile without a partner
in place to share costs.
Exhibit 11: Badile prospect depth map

Exhibit 12: Badile prospect, onshore Italy

Source: Sound Oil

Source: Sound Oil

The Badile structure is a three-way fault dip closure, identified from 2D and 3D seismic data and
bounded to the west by a north-south trending fault. The target reservoir is the Upper Triassic
Conchodon Dolomite, productive in both the nearby Villafortuna-Trecate and Malossa fields. The
play is fed by two major Triassic source rocks, with the Villafortuna-Trecate containing gas and 43
API oil, while Malossa contains gas and condensate. It is believed Badile shares its source rock
with Malossa and hence it is assumed to contain gas condensate.
Based on the 2013 CPR, the Conchodon Dolomite could exhibit poor primary reservoir quality;
however, productivity should be enhanced by the presence of fractures. Based on experience from
the analogous Malossa field, the company believes that a vertical well should encounter sufficient
fractures to achieve commercial productivity. The key risks in Badile are thought to be source rock
maturity and successful migration, with reservoir productivity considered a secondary risk. The
combination of these risks drives a 22% geological chance of success (GCoS) for this prospect.
In the event of a successful discovery at Badile, Sound Oil plans to drill a further appraisal well in
2016 followed by two development wells with a view to first production in 2019. The mid-case field
development scenario for Badile, as per the CPR, assumes a production rate of 12mmscf/d per well
with a field plateau rate of 48mmscf/d. The CPR assigns a recovery factor to Badile of 45%, which
is based on a similar level of recovery having been achieved at Malossa.

Zibido exploration prospect, under Badiles wing

The Zibido prospect sits to the north-west of Badile in the same block. As with Badile, Zibido will
target the Conchodon but will also drill into the Middle Triassic, Dolomia San Giorgio. The Zibido
prospect is structurally similar to the adjacent Gaggiano oil field. However, Zibido is considered to
have an equal chance of containing oil or gas but does carry a large resource potential of 130bscf,
gas case, or 15.5mmbbl in the oil case. The risk associated with fault closure is higher in Zibido
than in Badile; this is reflected in the lower GCoS for Zibido of 18%. This relatively low GCoS
means the company intends to drill Zibido contingent on a successful well at Badile.

Sound Oil | 27 June 2014

Italian rationale: Pipes in place, stable pricing, low tax

Sound Oils asset concentration in Italy is a material benefit to the company in our view. As a
developed economy and mature hydrocarbon province, the region offers a low-risk position from
which to build a material upstream portfolio. In addition, natural gas prices in Italy consistently track
above those in Europe, driven by the lack of domestic production. In an effort to increase this level
of output the region offers an attractive, stable fiscal regime for explorers, with an extensive,
pipeline network in place to speed the development of any discoveries.
However, despite these benefits, the pace of permitting field development activity within Italy does
carry a reputation as somewhat pedestrian. On this issue, we highlight the groups considerable
success in alleviating this risk, first in acquiring a portfolio of assets pre-engaged in the permitting
process and secondly in hiring long-term ENI employees Leonardo Spicci and Luca Madeddu,
whose local knowledge and experience have undoubtedly accelerated the pace of permitting
activity for Sound.

Cornerstone investor and farm-in partner introduced

Sound successfully introduced two institutional funds to the company in 2014: Niche Group, as
farm-in partner on the Nervesa field, and Continental Investment Partners, as cornerstone investor
and provider of debt. To Niche Group, Sound farmed out 27.5% of the Carita licence, containing the
Nervesa field. In exchange Niche is paying 100% of the costs associated with the second Nervesa
appraisal well, estimated at 5m. The deal is expected to close by end July 2014.
In Sounds second deal of April, Continental Investment Partners (CIP), an Italian private wealth
manager, agreed the injection of 14m of new capital to the company. The 14m injection is
comprised of a 7m equity issue (87.5m shares at 8p share) to CIP, and a 7m loan provided by
CIP to be drawn by the company in two tranches, 1.5m and 5.5m. Both loans carry an 8%
coupon, a 5% fee and are repayable within three years in cash. Subsequent to the closing of this
deal CIP will hold 21% of Sounds shares and have one seat on the board.

Management
James Parsons (CEO): appointed CEO in October 2012, James has 20 years experience, mostly
working for Shell, in the fields of strategy, management, finance and corporate development in the
energy industry. James is a qualified accountant and has a BA Honours in business economics.
Luca Madeddu (managing director, Italy): Luca has over 24 years experience gained with ENI.
Luca holds a degree in geology from Milan University, and has been a Member of the Society of
Petroleum Engineers (SPE) since 1995. He has extensive experience in hydrocarbon production,
field development and petroleum engineering.
Leonardo Spicci (technical manager and Badile project director, Italy): Leonardo has 24 years
experience with ENI, with extensive experience of working in Italy. Prior to joining Sound Oil in 2013
he was the district manager for all northern Italian assets at ENI. Leonardo has a BSc in geological
science and is a Member of the Society of Petroleum Engineers.

Valuation: Success at Badile worth a potential 41p

We value Sound Oil using an asset-by-asset NAV derived from detailed DCF modelling. Our
valuation includes an assessment of producing assets, fields under appraisal and exploration
prospects. We apply a risking factor to the resultant field NPV values to take account of geological,

Sound Oil | 27 June 2014

technical and commercial uncertainties, in addition to any required dilution the company may
experience due to the funding requirements of field development.
Regarding commodity pricing, for natural gas we have assumed $11/mcf escalated at 2.5% a year
as our long-term gas price scenario. This may seem relatively high, but Italy as a region
experiences consistently higher gas prices than the rest of Europe, due mainly to location and the
lack of domestic supply.
Our analysis suggests a core NAV for Sound of 1.3p, comprised of 1.6p in cash, two-year SG&A
expenses of 1.0p, and 0.6p in value attributable to producing asset Rapagnano.
Beyond this, we suggest a further 12p in value attributable to the companys fully funded assets
under appraisal, Nervesa and Santa Maria Goretti. These assets were astutely acquired by Sound
as prior ENI discoveries with proven hydrocarbon potential; hence we have discounted the
estimated value of these assets with a lower level of geologic and commercial risk. As the company
carries funds to drill Santa Maria Goretti and is 100% free carried in its upcoming appraisal well at
Nervesa, we include both assets in our core NAV+ funded appraisal category, valued at 13.3p.
Exhibit 13: Valuation summary
Asset
Net (debt)/cash
SG&A
Production
Rapagnano
Core NAV
Appraisal/development:
Nervesa SA-1
Nervesa Cascina Daga
S. Maria Goretti
Appraisal assets (funded)
Core NAV + funded appraisal

Country

Working interest
%
100%
100%

CoS
%
100%
100%

Gross
mmboe

Net
mmboe

NPV/boe Risked value

$/boe
$m
11.2
(6.5)

Italy

100%

100%

0.2

0.2

23.3

Italy
Italy
Italy

72.5%
72.5%
100%

100%
75%
70%

0.5
1.7
3.0

0.4
1.3
3.0

29.7
34.4
15.9

Risked
p/share
1.6
(1.0)

Unrisked
p/share
1.6
(1.0)

4.4
9.10

0.6
1.3

0.6
1.3

10.6
32.6
38.9
82.1
91.2

1.6
4.8
5.7
12.0
13.3

1.6
6.4
8.2
16.1
17.4

Source: Edison Investment Research

Over and above this 13.3p, we value the groups sizeable yet unfunded exploration and appraisal
prospects, Badile, Zibido and Laura, as worth an additional 19p. Though we highlight, given the
companys success in raising capital to date, we would expect to see these assets fully funded
within the near term, most likely by means of a material farm-down of Sounds 100% working
interest in all three assets. In deriving our upside valuation for Badile, Zibido and Laura in Exhibit
14, we assume all three assets achieve funding on a 2 for 1 farm out basis, with well costs fully
carried.
Exhibit 14: Exploration & appraisal assets (unfunded)
Asset

Country Status

Laura
Badile
Zibido
Total

Italy
Italy
Italy

Appraisal
Exploration
Exploration

Working
interest
%
50%
50%
50%

CoS

GCOS

Gross

%
70%

mmboe
4.9
29.8
16.0

22%*
18%*

Net NPV/boe
mmboe
2.5
14.9
8.0

$/boe
22.1
18.9
20.5

Risked
value
$m
37.9
62.1
29.5

Risked Unrisked
p/share
5.6
9.1
4.3
19.0

p/share
7.9
41.3
24.0
73.3

Source: Edison Investment Research. Note: *Risking based on GCOS only; further risking would take place if
Sound were to develop these assets.

Combining our 13.3p core NAV + funded appraisal with our 19p unfunded exploration and
appraisal prospects suggests material upside from the current share price for Sound. Though we
highlight a successful outcome at exploration prospect Badile could alone be worth an additional
41p to the shares.

Sound Oil | 27 June 2014

Sensitivities
Shifting regulation Italian environmental policy remains transient
The permitting process for oil and gas drilling in Italy remains an environmentally sensitive process.
As an example, in response to the Macondo disaster in 2010, the Italian government enacted a
decree banning offshore drilling within five miles of the coast. Hence as a general theme, delays to
permitting represent a significant risk to the companys expected pace of drilling activity.

Inherent exploration risk Badile outsized vs existing assets

Apart from the inherent exploration risks carried by all E&P companies, it should be noted that
Sounds exploration prospect Badile is outsized relative to its other assets. As such, the outcome of
exploration at Badile is likely to have a material impact on the shares.

Italian gas prices outperforming Northern Europe

Despite expectations that Italian gas prices could come under pressure in the long term, as Europe
moves away from expensive oil indexed contracts towards spot market pricing, we see little
evidence of this in Italy, and view Sound as insulated from this pressure as a low-cost producer.

Financials: Capital injection transforms outlook

Continental Investment Partners has agreed a 14m injection to Sound, comprised of a
subscription for 87.5m shares priced at 8p (raising 7m) and a 7m loan to be drawn in two
tranches of 1.5m and 5.5m each. As part of the loan, CIP will receive 67.3m detachable warrants
with an exercise price of 10.4p valid for the three-year period of the underlying loan. Having
completed due diligence and received shareholder approval the deal is expected to be finalised by
mid-July. Of the 87.5m shares issued to CIP, 50% will be locked up for 18 months with the
remaining 50% locked up for a further 12 months.
A fee of 5% applies to the entire 14m injected by CIP, providing the company with net proceeds of
13.3m ($21m). Both tranches of the 7m loan facility carry a coupon of 8% payable quarterly in
arrears. On closure of this deal Continental Investment Partners will hold 21% of the issued share
capital of the company.
On completion of the CIP deal, the existing 1m loan provided to Sound by Simon Davies
(chairman), will convert to a new loan of the same value, carrying a 10% coupon and including the
issue of 9.6m warrants on the same terms as those issued to CIP (10.4p strike, three-year
duration).
In terms of future funding, we highlight the 76.9m warrants issued to both CIP and Simon Davies
(split 67.3m CIP, 9.6m Simon Davies) as a potential source of future capital. The warrants carry an
exercise price of 10.4p, below the current share price, and are valid for the duration of the CIP loan
(three years).

Sound Oil | 27 June 2014

10

Exhibit 15: Financial summary

Dec
PROFIT & LOSS
Revenue
Cost of Sales
Gross Profit
EBITDA
Operating Profit (before amort. and except.)
Intangible Amortisation
Exceptionals
Other
Operating Profit
Net Interest
Forex gains/(losses)
Profit Before Tax (norm)
Profit Before Tax (FRS 3)
Tax
Profit After Tax (norm)
Profit After Tax (FRS 3)
Average Number of Shares Outstanding (m)
EPS - normalised (p)
EPS - normalised and fully diluted (p)
EPS - (IFRS) (p)
Dividend per share (p)
Gross Margin (%)
EBITDA Margin (%)
Operating Margin (before GW and except.) (%)

'000s

2010
IFRS

2011
IFRS

2012
IFRS

2013
IFRS

2014e
IFRS

2015e
IFRS

0
0
0
(1,975)
(1,990)
0
0
0
(1,990)
21

0
0
0
(4,629)
(4,640)
0
0
0
(4,640)
44

(1,969)
(1,969)
0
(1,969)
(1,969)

(4,596)
(4,596)
0
(4,596)
(4,596)

0
0
0
(4,607)
(4,631)
0
0
(174)
(4,805)
1
(174)
(4,630)
(4,804)
0
(4,804)
(4,804)

482
(135)
347
(6,291)
(6,437)
0
0
(304)
(6,741)
(123)
(304)
(6,560)
(6,864)
0
(6,864)
(6,864)

818
(200)
618
(2,550)
(2,632)
0
0
0
(2,632)
0
0
(2,632)
(2,632)
(84)
(2,717)
(2,717)

4,224
(333)
3,891
723
178
0
0
0
178
0
0
178
178
(174)
5
4

242.0
(0.8)
(0.8)
(0.8)
0.0

242.0
(1.9)
(1.9)
(1.9)
0.0

242.0
(2.0)
(2.0)
(2.0)
0.0

287.6
(2.4)
(2.3)
(2.4)
0.0

413.5
(0.7)
(0.4)
(0.7)
0.0

413.5
0.0
0.0
0.0
0.0

N/A
N/A

N/A
N/A

N/A
N/A
N/A

72.0
N/A
N/A

75.5
N/A
N/A

92.1
17.1
N/A

BALANCE SHEET
Fixed Assets
Intangible Assets
Tangible Assets
Investments
Current Assets
Stocks
Debtors
Cash
Other
Current Liabilities
Creditors
Short term borrowings
Long Term Liabilities
Long term borrowings
Other long term liabilities
Net Assets

12,112
11,479
12
621
7,515

28,248
26,302
1,278
668
7,793

15,399
14,546
853
0
9,721

20,976
19,500
1,476
0
2,705

21,681
20,209
1,473
0
13,094

38,539
35,871
2,668
0
2,162

2,940
4,484
91
(284)
(284)
0
(1,628)
0
(1,628)
17,715

1,388
6,286
119
(2,233)
(2,233)
0
(3,942)
0
(3,942)
29,866

2,774
6,909
38
(801)
(719)
(82)
(2,805)
0
(2,805)
21,514

1,978
543
184
(3,026)
(2,797)
(229)
(5,338)
(1,947)
(3,391)
15,317

1,978
10,932
184
(3,026)
(2,797)
(229)
(10,391)
(7,000)
(3,391)
21,359

1,978
0
184
(3,026)
(2,797)
(229)
(16,164)
(11,373)
(4,791)
21,511

CASH FLOW
Operating Cash Flow
Net Interest
Tax
Capex
Acquisitions/disposals
Financing
Dividends
Net Cash Flow
Opening net debt/(cash)
HP finance leases initiated
Other
Closing net debt/(cash)

(2,662)
0
0
(3,580)
0
104
0
(6,138)
0
0
1,654
4,484

(2,965)
0
0
(6,505)
0
11,272
0
1,802
(4,484)
0
0
(6,286)

(4,316)
0
0
(3,993)
2,515
6,417
0
623
(6,286)
0
(82)
(6,827)

(2,636)
0
0
(7,188)
0
1,794
0
(8,030)
(6,827)
0
(430)
1,633

(2,487)
0
0
(788)
0
8,611
0
5,336
1,633
0
0
(3,703)

697
0
0
(17,403)
0
1,400
0
(15,306)
(3,703)
0
0
11,602

Source: Company accounts, Edison Investment Research. Note: Assumes successful completion of 87.5m share issue to Continental
Investment Partners.

Sound Oil | 27 June 2014

11

Contact details

Revenue by geography

Riverbridge House
Guildford Road
Leatherhead
Surrey
KT22 9AD
United Kingdom
+44 (0)1372 365725
www.soundoil.co.uk

100%
Italy

CAGR metrics

Profitability metrics

EPS 2011-15e
EPS 2013-15e
EBITDA 2011-15e
EBITDA 2013-15e
Sales 2011-15e
Sales 2013-15e

N/A
N/A
N/A
N/A
N/A
N/A

Balance sheet metrics

ROCE 14e
Avg ROCE 2011-15e
ROE 14e
Gross margin 14e
Operating margin 14e
Gr mgn / Op mgn 14e

N/A
N/A
N/A
N/A
N/A
N/A

Gearing 14e
Interest cover 14e
CA/CL 14e
Stock days 14e
Debtor days 14e
Creditor days 14e

Sensitivities evaluation
N/A
N/A
N/A
N/A
N/A
N/A

Litigation/regulatory
Pensions
Currency
Stock overhang
Interest rates
Oil/commodity prices

Management team
CEO: James Parsons
Appointed CEO in October 2012, James has 20 years experience, mostly
working for Shell, in the fields of strategy, management, finance and corporate
development in the energy industry. James is a qualified accountant and has a
BA Honours in business economics.
Managing Director, Italy: Luca Madeddu
Luca has over 24 years experience gained with ENI. He holds a degree in
geology from Milan University, and has been a Member of the Society of
Petroleum Engineers (SPE) since 1995. Luca has extensive experience in
hydrocarbon production, field development and petroleum engineering.

Chairman: Simon Davies

Simon was appointed as chairman of Sound Oil in June 2014, and has over 30
years experience of investment management. He is also currently chairman of
the JP Morgan Overseas Investment Trust plc, a non-executive director of
Grainger plc, and a director of a number of subsidiaries of Old Mutual Wealth
Management Limited.
Leonardo Spicci, Technical Manager & Badile Project Director
Leonardo Spicci (technical manager and Badile project director, Italy): Leonardo
has 24 years experience with ENI, with extensive experience of working in Italy.
Prior to joining Sound Oil in 2013 he was the district manager for all northern
Italian assets at ENI. Leonardo has a BSc in geological science and is a Member
of the Society of Petroleum Engineers

Principal shareholders

(%)

Continental Investment Partners

Hargreaves Lansdown
Halifax Share Dealing
Barclays PLC
Toronto-Dominion Bank
Shareprice
HSBC Investments

21.00
13.78
13.34
12.18
11.83
7.84
5.8

Companies named in this report

ENI, Consul Energy

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12