REG - Sound Energy PLC - Issue of Convertible Bonds and Issue of Warrants

Sound EnergyAnnouncement

13/06/2023 07:00

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RNS Number : 5289C  Sound Energy PLC  13 June 2023

The information contained within this announcement is deemed to constitute
inside information as stipulated under the Market Abuse Regulation ("MAR")
(EU) No. 596/2014, as incorporated into UK law by the European Union
(Withdrawal) Act 2018. Upon the publication of this announcement, this inside
information is now considered to be in the public domain.

 

13 June 2023

 

Sound Energy plc

("Sound Energy" or the "Company")

 

Corporate Update

and

Issue of Convertible Bonds and Issue of Warrants

 

 

Sound Energy (AIM: SOU), the transition energy company, is pleased to provide
a corporate update in relation to the entry into exclusivity for the partial
divestment of the Tendrara Exploitation Concession and the Grand Tendrara
Exploration Permit, and a financing of up to £4.0 million by way of a fixed
price, senior unsecured convertible bond instrument.

 

Key Highlights

·   Binding 45 day period of exclusivity and non-binding term sheet entered
into with Calvalley Petroleum (Cyprus) Limited ("Calvalley") for a partial
divestment of a 40% working interest in the Tendrara Exploitation Concession
and the Grand Tendrara Exploration Permit which will see, subject to agreement
of definitive transaction documentation:

o Funding of the first US$48 million of Sound Energy and Calvalley's Phase 2
equity funded development costs by Calvalley, subject to final investment
decision

o Funding of 100% of the TE-4 Horst well costs by Calvalley up to a cap of
US$7 million

o Funding of 40% share of Phase 1 costs, including back costs net to Calvalley
of approximately US$8 million (through to July 2023)

o Advancement to Sound Energy of additional Phase 1 and Phase 2 costs, if
necessary and at the Company's election, repayable out of future revenue

 

·   Up to £4.0 million funding through the issue of senior unsecured
convertible loan notes to provide the Company with liquidity ahead of receipt
of outstanding receivables and/or receipt of Phase 1 back costs from
Calvalley, if a partial divestment is ultimately completed.

 

Partner and Potential Partial Divestment Update

 

The Company announced on 9 August 2022 that it had initiated a formal farm-out
process to identify a partner for the Tendrara Production Concession and the
surrounding Grand Tendrara and Anoual exploration permits. The Company is
pleased to announce that it has now entered into exclusivity for a period of
45 days ("Exclusivity") on the basis of an otherwise non-binding term sheet
("Term Sheet") with Calvalley, an associated company of Octavia Energy
Corporation Limited ("Octavia").

 

Whilst the terms of the Term Sheet, outside of Exclusivity, are non-binding
and subject to, inter alia, agreement of definitive transaction documentation
between the parties, if a transaction is concluded, the terms of the Term
Sheet would provide Sound Energy, together with the envisaged project debt
financing and under current cost estimates, with the required funds to achieve
first gas under its Phase 2 development plan whilst also funding the costs of
drilling the TE-4 Horst well, with an estimated exploration potential of 273
Bcf gross Pmean GIIP.

 

TE-4 was tested in 2006 but did not flow gas to the surface. Mechanical
stimulation has proven to be a key technology to commercially unlock the
potential of the TAGI gas reservoir in the TE-5 Horst gas accumulation and,
accordingly, the Company believes this offers potential to unlock
commerciality at the TE-4 Horst, which sits adjacent to the TE-5 Horst and
could be tied-in in the future for further development of the area.

 

 Target name      Unrisked Volume Potential               Chance of Success

                  Gas Initially-in-Place (Bcf)
                                                Gros
                                                s
                                                (100
                                                %)
                                                basi
                                                s
                  Low       Best      High      Mean
 TE-4 Horst Well  153       260       408       273       36%

 

 

Calvalley was previously listed on the Toronto Stock Exchange and was taken
private in 2016. Today, Octavia and its associated companies operate Block S-1
and Block 9 in Yemen with gross production of approximately 6,200 bopd (3,100
bopd net). Calvalley is backed by a consortium of private investors who draw
on a strong financial capability from many successful businesses across many
sectors in the Middle East, Africa, and Asia.

 

Under the Term Sheet, Calvalley would acquire a 40% working interest in the
Tendrara Exploitation Concession and the Grand Tendrara Exploration Permit,
with Sound Energy retaining a 35% working interest and operatorship.
Contingent upon the Phase 2 Final Investment Decision, Calvalley would fund
the first US$48 million of Sound Energy and Calvalley's Phase 2 equity funded
development costs (a US$22.4 million net carry to the Company), being the
Company's estimate of equity funded costs to first gas under Phase 2 after the
expected amounts available under the project debt financing. The Term Sheet
also envisages Calvalley funding the first US$7 million of exploration costs
on the Grand Tendrara Exploration Permit (a US$3.3 million net carry to the
Company), being the estimated costs of drilling the TE-4 Horst well. In
addition, Calvalley will fund its 40% working interest share of all Phase 1
costs to a cap of US$16.4 million (net to the 40% working interest), which
will include payment of its 53.33% share of back costs payable on completion,
comprising approximately US$8 million through to July 2023.

 

In the event Phase 1 costs exceed US$41 million gross (being US$16.4 million
net to the 40% working interest), Calvalley would advance the Company up to
US$11.65 million and Calvalley will be entitled to receive revenues equivalent
to 0.9% above its 40% working interest share of revenue for every US$1 million
of advancement drawn down by the Company (at its sole election) for a period
of five years from first production from Phase 1. Likewise, in the event the
Phase 2 pre-production costs exceed the current estimate, Calvalley would
advance Sound Energy up to US$10 million and Calvalley will be entitled to
receive revenues equivalent to 0.9% above its 40% working interest share of
revenue for every US$1 million of advancement drawn down by Sound Energy (at
its sole election) for a period of two years from first production from Phase
2.

 

During the due diligence period Calvalley will complete its confirmatory due
diligence and the parties will seek to agree binding transaction
documentation.

 

The Company cautions that there can be no assurance that binding transaction
documentation will be entered into in respect of a partial divestment with
Calvalley, or any other party, and further announcements will be made, as
appropriate, in due course.

 

Issue of Convertible Notes and Warrants

 

The Company is also pleased to announce that it has raised up to £4.0 million
by way of a senior unsecured convertible bond instrument (the "Convertible
Notes") with an institutional investor (the "Investor"). The proceeds of the
Convertible Notes will, if fully drawn, provide funds for the Company to
continue to execute its Phase 1 development of the Tendrara Production
Concession and bridge group working capital liquidity ahead of receipt of a
receivable as disclosed in the year end results and / or receipt of Phase 1
back costs from Calvalley if a partial divestment is ultimately completed.

 

The first tranche of the Convertible Notes comprises £2.5 million with a
fixed conversion price of 2.25 pence per ordinary share, a premium of
approximately 28% to the closing price of 1.76 pence per ordinary share on
12(th) June 2023.

 

The second tranche of the Convertible Notes comprises a further £1.5 million,
which can be drawn at Sound Energy's election on 13 December 2023 (being six
months from the first tranche draw down) and can be drawn sooner if mutually
agreed by the Company and the Investor. The second tranche can be drawn
subject to the Company's closing mid-price of its ordinary shares on the
business day immediately preceding the proposed issue date being at least 1.32
pence per ordinary share. The second tranche conversion price will be fixed at
the time of draw down at a 25% premium to the five-day volume weighted average
price ("VWAP") from the business day immediately preceding the second tranche
drawdown date.

 

The term of the Convertible Notes is five years from draw down date, with
interest of 15% per annum, payable bi-annually in cash or capitalised to the
principal, at the Company's election.

 

Subject to the draw down in full of both tranches of the Convertible Notes,
the Company is now funded for its near-term working capital requirements until
year end 2023.

 

Other key terms of the Convertible Notes:

 

·   Issue price and redemption price on maturity: 100% of par value

 

·   Early redemption/change of control: callable in cash by the Company at
any time after draw down or in the event of a change of control of the Company
at 110% of par value together with all unpaid interest. If the Convertible
Notes are redeemed by the Company, the maximum amount of future interest
payable by the Company in respect of any early redemption occurring on or
prior to the second anniversary of the relevant issue date will be 15% of the
Convertible Notes, and in respect of any early redemption occurring after the
second anniversary of the relevant issue date will be 10% of the Convertible
Notes. The Investor shall have two trading days to elect to convert some or
all of outstanding amounts or accept the early redemption. In the event of
default, Convertible Notes will be redeemable immediately at 120% of par value
of outstanding Convertible Notes plus accrued interest.

 

·   Conversion: convertible into Sound Energy ordinary shares at each
tranche's fixed conversion price in whole or in part. Upon conversion,
interest shall be rolled up and paid as if the Convertible Notes were held to
the redemption date (being five years from draw down), with such interest
convertible at the lower of the applicable fixed conversion price and the
average of the five daily VWAP calculations selected by the Investor out of
the 15 trading days prior to the conversion date.

 

·   Other conversion terms: any conversion notice must be for minimum of
£250,000. No more than 20% of the initial principal of the Convertible Notes
may be converted in any given calendar month. If the Company's five-day VWAP
exceeds 3.00 pence per ordinary share in any given month, the conversion limit
will be increased for the relevant month to 50% of each draw down amount. If
the Company's five-day VWAP exceeds 3.50 pence per ordinary share in any given
month, the conversion limit will be removed for the relevant month.

 

·   Second tranche draw down condition: the Company must maintain available
share issuance authority headroom and disapplication of pre-emption rights to
cover 150% of any draw down amount divided by the VWAP on the day immediately
preceding a draw down.

 

·   Warrants: 33,333,333 warrants to subscribe for new ordinary shares in
the Company at an exercise price of 2.25 pence per ordinary share with a term
of three years. If the second tranche is drawn down, additional warrants over
such number of new ordinary shares as represents 30% of the par value of
tranche 2 Convertible Notes drawn down, with an exercise price at the
conversion price of the tranche 2 Convertible Notes and a term of three years.

 

 

Commenting, Graham Lyon (Executive Chairman) said:

 

"We are very pleased to have entered into exclusivity and a term sheet with
Calvalley, who have operations in the Middle East and are supported by a very
large conglomerate. The envisaged arrangement would fund the further
development of Tendrara Concession and the drilling of a well on the nearby
TE-4 Horst. The companies will now work towards signing definitive transaction
documentation which upon completion will enable the parties together to
jointly progress to the Final Investment Decision.

 

I am also pleased that we have raised financing for the Company using a fixed
price convertible debt facility, convertible at a premium to the prevailing
share price, which provides the Company with additional resources with which
to continue to execute its Phase 1 development and to progress the Phase 2
development."

 

Fee Shares and Warrant Issuance

In connection with the issue of the Convertible Notes, the Company has agreed
to issue 11,404,221 new ordinary shares in lieu of cash fees ("Fee Shares") to
the Investor and Gneiss Energy Limited ("Gneiss"), the Company's financial
adviser, at an effective issue price of 1.76 pence per new ordinary share (the
"Fee Shares") and warrants over a total of 40,476,190 new ordinary shares in
total to the Investor and Gneiss, exercisable at 2.25 pence per ordinary share
for a period of three years.

Admission and Total Voting Rights

Application has been made for admission of the Fee Shares to trading on AIM,
and it is expected that admission will occur on or around 19(th) June 2023
("Admission"). The Fee Shares will rank pari passu with the Company's existing
ordinary shares.

On Admission, the total issued share capital of the Company will consist of
1,860,106,895 ordinary shares. The Company does not hold any ordinary shares
in treasury. Therefore, the total number of voting rights in the Company is
1,860,106,895 and this figure may be used by shareholders in the Company as
the denominator for the calculations by which they will determine if they are
required to notify their interest in, or a change in their interest in, the
share capital of the Company under the FCA's Disclosure Guidance and
Transparency Rules.

 

For further information visit www.soundenergyplc.com follow on twitter
@soundenergyplc

or
contact:

 Flagstaff Strategic and Investor Communications  sound@flagstaffcomms.com (mailto:sound@flagstaffcomms.com)

 Tim Thompson                                     Tel: +44 (0)20 129 1474

 Mark Edwards

 Alison Allfrey

 Sound Energy                                     chairman@soundenergyplc.com (mailto:chairman@soundenergyplc.com)

 Graham Lyon, Executive Chairman

 Cenkos Securities - Nominated Adviser            Tel: +44 (0)20 7397 8900

 Ben Jeynes

 Peter Lynch

 SP Angel Corporate Finance LLP - Broker          Tel: +44 (0)7789 865 095

 Richard Hail

 Gneiss Energy Limited - Financial Adviser        Tel: +44 (0)20 3983 9263

 Jon Fitzpatrick

 Paul Weidman

 Doug Rycroft

 

The information contained in this announcement has been reviewed by Sound
Energy's Vice President, Geoscience, Dr John Argent, who is a Chartered
Geologist, a Fellow of the Geological Society of London and a Member of the
Petroleum Exploration Society of Great Britain, with 25 years of experience in
petroleum geology and management and who is the qualified person as defined in
the guidance note for mining, oil and gas companies issued by the London Stock
Exchange in respect of AIM companies.

Gas Initially-in-Place (GIIP) is the total quantity of gaseous petroleum that
is estimated to exist originally in naturally occurring reservoirs, as of a
given date.

 

 

 

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