Spin-Off And Divestiture Watch: Sonde Resources

| About: Sonde Resources (SOQ)

It appears that Sonde Resources (NYSEMKT:SOQ) is positioned to do the following over the next 6 months.

1) Sell its producing assets. Sonde is currently producing 2,000 boepd, ~30% oil. I spoke with management, they estimate 1P value of ~$70mm and think they can sell for $100-150mm because of oil development upside at Michichi and Drumheller. I think $100mm could be achievable, which is in line with the recently released 2P reserve value.

2) Spin off its North Africa subsidiary. Sonde has no current production in North Africa. It announced a farmout deal recently, as discussed in a previous article. Just the cost recovery to SOQ will be $70mm. There is at least $15mm of "carry" value to Sonde in the farmout. I'd add at least another $15mm in value for exploration potential (there are a lot of seismic bright spots and there is a reason their farm-in partner will be spending $45mm+ on exploration). This gets to ~$100m in value. Management has indicated (they said it was in a filing previous) that they will be moving the asset to a Netherlands traded sub. I asked them "will you spin this off" and they said no comment, but that moving it to the sub would be a first step to getting it listed in a foreign market. My bet is London, and it would be possible to get this listed there in a few months - more likely, the company moves it into a sub soon and then makes a formal announcement of a spinoff or listing by the middle of 2013.

3) test its Duvernay and/or oily Montney. This is a crapshoot, and frankly Sonde's current management has an imperfect track record in exploring for unconventional resources. Although they did manage to sell some Duvernay acreage last year for $3,000 per acre. At $1,000 per acre, their current 94,000 acres of Duvernay alone is worth almost as much as the current stock price, independent of North Africa and the production they will likely be selling.

Ascribing no value for #3, considering the current market cap of ~$100mm (and ~$20mm in net cash, but I give them not credit for that since they'll probably spend it), this could be a double in 6 months from the asset sale and spinoff. And if #3 is value neutral, there is huge optionality in the hundreds of thousands of unproven acres SOQ owns in the Duvernay, Montney, Wabumun, etc. And apparently the first Wabumun well was already successful.

So in short, SOQ is a $1.84 stock ($115mm mkt cap, 62mm shares outstanding) about to divest ~$1.75-2.25 per share of assets and spin off $1.75 per share of other assets, and could be left with another ~$1.50 per share of assets and the cash from the divestiture. With some luck, favorable asset markets and good execution, this $1.84 stock could be a $5 stock.

Obviously, there is substantial risk here, as divestitures and the spinoff may not happen, Sonde's unconventional acreage could be unsuccessful, the North Africa deal could not close, etc. Caveat emptor, but for those interested in spinoff and liquidation situations, this could be compelling.

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.

Additional disclosure: I currently own a position in SOQ for myself and my clients and may add to it or sell it at any time.