More Good News For Sonde Resources - Farmout To Unlock Substantial Value

Dec.31.12 | About: Sonde Resources (SOQ)

Sonde Resources (NYSEMKT:SOQ) announced on Friday December 28th that it had farmed out its North African oil field. In doing so, Sonde relieved itself of a $45 million obligation that had threatened the company with insolvency. This came on the back of news a few weeks ago, which was discussed in this article.

Of particular note, in the article "More to Come for Sonde Resources", the back of the envelope math discussed indicated a $1.70 per share sum of the parts value for the company, given its situation at the time. Remarkably (and likely one of the only times this will happen in my career), SOQ actually traded to $1.70 on Friday.

I spoke with the CEO of Sonde, Jack Schanck, on Friday to get more color on the announcement. Based on the announcement and my conversation with the CEO, the deal has the following impact on Sonde: Sonde will likely recover the $70 million it invested in the North Africa asset, via a 20% share of the revenue generated from production from the field, which is expected to come online by 2015. This is worth a little more than $1 per share, and there is potential upside if significant additional reserves are discovered and brought online - Sonde will own 33% after cost recovery.

Additionally, now that Sonde is being relieved of its drilling obligation, it seems appropriate to factor in an additional element into its sum-of-the-parts. Sonde holds 100,000 net acres prospective for unconventional development of Montney, Duvernay, and/or other oil resource plays. It is hard to assess the precise value of this acreage, but considering the recent farm-out of Duvernay acreage by Encana (NYSE:ECA) to Petro-china for over $9,000 per acre, it would seem that assigning $500/acre for Sonde's acreage would be sufficiently conservative. At that value, Sonde's acreage would be worth $50 million, or just under $1/share.

Updating Sonde's sum of the parts value, Sonde could now be worth ~$3.70 per share (versus a previous $1.70 value before the farm-out). After trading up 28% on Friday, it seems possible that Sonde could narrow the gap between the current trading price of $1.70 and the sum of the parts value of $3.70 sooner than later. SOQ has been one of the best performing energy stocks in the past month, outperforming favorites like dividend-payer Linn Energy (LINE), rapidly growing Magnum Hunter (MHR) and resource player Halcon Resources (NYSE:HK).

SOQ is a small-cap stock and so it is considered more risky than other stock investments. It may be more volatile and may be dependent on asset sales to realize value. 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.