Sonde Resources (NYSEMKT:SOQ) announced a material agreement December 5th after the market closed and the stock went up 17% December 6th. However, this 17% move represents only a fraction of the economic impact on the company. Based on the below numbers, SOQ could have been up 70%+, leaving substantial upside potential in the stock price.
Some rough numbers - Sonde had a $60 million market cap yesterday, $25 million in net cash, a $45 million liability to Joint Oil, $77 million in proved reserves, a large oil discovery in Tunisia/Libya and over 100,000 undeveloped unconventional oil acres of indeterminate value. The news was that the liability was postponed until 2015, potentially clearing the way for it to be lifted and for the Tunisia/Libya discovery to be monetized.
Two different calculations illustrate the potential for a large movement in response to the news. The first is simple - the stock was at ~$1 December 5th and was at $1.70 shortly prior to the announcement that the liability would be incurred in August of this year. The reversal of this bad news that sent the stock down below $1 could be expected to send the stock back up to $1.70 or higher.
The second calculation is that the stock on December 5th had a $60 million market cap, which could be explained by giving the company full credit for its cash and proved reserves ($102 million) and subtracting the $45 million liability - getting you to $57 million, very close to the $60 million market cap. The market was apparently giving SOQ virtually zero credit for its other assets. Eliminating the $45 million liability from that calculation leaves a value of $102 million, or ~$1.70/share.
The stock did not trade up to $1.70 - it only traded up to $1.16. What is intriguing about this is that one could make the argument that it should have gone up even higher than $1.70 - the $1.70 asset calculation assumed zero value for other assets, which was probably based on the assumption that the company could be insolvent, and which may not be the case if the liability is lifted. Alternatively, when the stock was trading at $1.70, perhaps some risk of the liability being incurred was already priced into the stock, so with the liability being postponed and potentially lifted, it would seem like the stock could trade higher than it was before.
Ultimately, the market is not rational in the short term, so perhaps over time the stock will recover to $1.70. There may be other drivers for a more limited stock price reaction, such as high G&A and poor recent operational results (management is very highly compensated, particularly in consideration of operational results they have admitted are disappointing on recent conference calls). These factors are mitigated by an impressive board and shareholder roster, including the Riddell family. The Riddells control multi-billion dollar oil companies such as Trilogy Energy (OTCPK:TETZF) and Paramount Resources (OTCPK:PRMRF), and have created significant value for investors in their companies.
SOQ is a small-cap stock and so it is considered more risky than other stock investments. It may be more volatile and may have more issues finding financing for its growth. Caveat Emptor.
Disclosure: I am long SOQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.