FlagstaffTV: Catherine Mcqueen talks to Majid Shafiq, CEO of Sound Energy

[00:00:01][music] >> Hello and welcome to Flagstaff TV. Today we are joined by Majid Chafiq, the CEO of Sound Energy. Majid, thank you so much for joining us today.

[00:00:13]>> Thank you.

[00:00:14]>> Majid, please can you start by telling us what are the key takeaways that investors can get from the webinar that you held last week?

[00:00:22]>> Um well, firstly, I'd just like to start by saying that we had our GM today um and very pleased to say that the shareholders voted the resolution through this morning and an RNS has been issued. So, I'm very pleased with that.

[00:00:34]Um but I think it's in answer to your question, I think it's just really important to understand why we did the transaction. So, um four things I think are worth mentioning. Firstly, the debt.

[00:00:46]Um and the balance our balance sheet, Sound Energy's balance sheet was way over leveraged. Total debt was about 60 million uh dollars. Uh we were paying annual interest of almost 2 million dollars per year um with no revenue.

[00:01:02]Um and we also, as part of that debt, we have a Eurobond outstanding which is due at the end of 2027 totaling around about 34 million dollars if you include the uh accrued interest. Um and we had basically no way to repay that. Uh so, we'd be faced with a a refinancing at the end of 2027.

[00:01:24]Possibly a a very difficult one. So, we've been restructured a number of times. So, with this transaction, we had an opportunity to repay all of that debt including the Eurobond debt um around about 57% of that liability. So, paying 20 million dollars for something that's around about 34 million dollars. So, a good deal.

[00:01:43]Um as I mentioned, we have no revenue.

[00:01:45]So, we're having to bridge finance um partly because our project in Morocco was delayed so long. Um we're having to bridge finance to keep the company going. Um and it's difficult to raise that finance and as recent equity and debt issues have shown in terms of the pricing.

[00:02:01]And the debt has also meant that when we're in discussions with M&A counterparties, we're looking at potential deals, they're all concerned about Sound's ability to raise finance, raise debt, and fulfill its commitments. So, it's made it really difficult for us to have decent conversations with counterparties. So, debt has been the major problem for the company. Secondly, that you know, that's been exacerbated by the project delays that we've had.

[00:02:26]So, the phase one project in Morocco, the microalgae project, that was originally due to be on stream in 2024.

[00:02:35]By the time it comes on stream later this year, it'll be almost 3 years from when it was supposed to come on. And obviously, that makes it really difficult for a company to continue operating properly if you're not getting revenues when you expect to get them.

[00:02:47]And for phase So, phase one itself was relatively small in terms of its cash flows. It would have um covered our G&A essentially. The real value in in the turn dryer project was in phase two.

[00:02:59]But for phase two, again, there's been delays. We were supposed to have an FID by now. There's no FID.

[00:03:05]Um and the commencement of that project is significantly uncertain. So, the project delays combined with the debt has made it really difficult for the company to operate. And then we've also, you know, third problem we've had significant cost increases for all um both um phase one and phase two.

[00:03:22]And finally, what this deal allows us to do, it allows us to accelerate. So, it allows us to solve the debt problem, and it also allows us to accelerate value.

[00:03:29]So, what we're receiving for the transaction is $57 million.

[00:03:32]The phase one value is around about $10 million. So, the 57 is almost six times the value of phase one. So, we're clearly getting some value from phase two for this transaction. And as I said, phase two, we don't even have line of sight to an FID for that yet. Um So, yeah, I mean, that's why we needed to do the transaction. And I think in that context, this transaction is a very good one.

[00:03:55]>> Looking at the transaction, how will this strengthen the company going forward?

[00:04:01]>> So, um >> [clears throat] >> Well, it essentially creates a strong and more credible platform for growth.

[00:04:08]Um as I've mentioned, firstly, we we're going to end up with a strong balance sheet. We'll be debt-free. Uh we're estimating that the cash post completion will be about $11 million with paying off everything, so no more financial liabilities. And that $11 million can obviously help fund or part fund growth.

[00:04:27]Uh secondly, um having a clean balance sheet improves our access to the uh both the debt and the equity capital markets and lowers our cost of capital. I mean, at the moment, we're seen to be very high risk, uh which means that any finance we raise comes at a very high cost as shown by the recent equity issue that we did. We did that at 37% discount to where we're trading. And we also did a a debt financing um as part of that bridging, and that cost as everybody knows 20% per quarter. So, you know, the company as it currently stands has very limited access to the the capital markets. And when we do have access, it's very, very expensive. So, that's going to solve that problem. And uh obviously going forward, we're going to be a lot a lot more conservative with the leverage that we put on the balance sheet. And uh thirdly, we'll just become a much more credible counterpart before M&A. So, you know, at the moment, um people on the other side of deals, they don't believe we can finance the acquisition because of the state of the balance sheet and how much debt we already have. Um they understand we've got constrained access to the capital markets. And that's been really limiting in our ability to do deals. And you know, we've we've been interested in doing deals in all the last 6 months, but um we've not been able to because of that issue, not been taken seriously.

[00:05:47]So, we're we're this will solve that issue and that really needs to be solved.

[00:05:51]>> Looking at growth, how do you hope to achieve this?

[00:05:55]>> Um in a number of ways. So, um firstly, I think, you know, it's worth mentioning that we've got a small team here, um but it's very experienced. Um virtually everybody is technical engineers, geologists, um even the finance people have an engineering background, which really helps um when you're looking to decide what types of deals to do and how to finance them.

[00:06:17]Um but really we've been fire fighting.

[00:06:19]I've been fire fighting. I've been here just over six six six or seven months and I've just been fire fighting these financial issues ever since I've been here and I was and and has has has the team. So, the team once we complete this deal will be free to focus on growth, which is really important, focused on on adding value through that growth.

[00:06:37]Um secondly, we have an existing business in Morocco. So, although we're selling essentially our EMP assets, we do have a solar power business in the form of Teira, which is a joint venture with Gaia, which is a Moroccan solar power developer.

[00:06:50]That has real near-term growth potential.

[00:06:53]Um And there's there's growing demand for renewable power in Morocco. That's demanded by the government. They've got uh you know, plans to significantly increase the amount of the the percentage of power that's generated in Morocco from renewable sources.

[00:07:09]Um and they've deregulated the medium voltage sector, which has allowed a small company like us to come in and try and take advantage of that. Morocco's one of the best places in the world in terms of uh irradiation, um sunny in other words, for long periods of time.

[00:07:25]Um and we are looking to develop with Gaia through this joint venture 250 to 300 MW um what's a medium voltage power um in maybe 10 to 12 projects. We're also looking at 100 to 200 MW um what's of um high voltage projects in one to two projects um, developments. We've already submitted four applications for access to the grid.

[00:07:52]Um, and you know, the beauty of solar it's very different to oil and gas. Obviously the returns are lower. The returns for these projects are relatively high for infrastructure projects um, because of the amount of um, usage you get out of the solar plant because of the amount of uh, sunshine. Um, and costs are very low. All the all the um, material comes from China. There's an established a supply chain for solar power developments in Morocco. We're looking at IRRs of in the range of 10 to 15% which is very good for infrastructure types projects. Um, they can also be debt financed. Um, so more than 80% of the project is financed with debt.

[00:08:32]Um, at low cost and that's all financed with um, through Moroccan banks. And the other big difference with EMP assets is that once you get to construction start, you're looking at 6 to 12 months uh, to first sales because the projects are obviously a lot more a lot less complicated sorry than than oil and gas projects. So, we have that established business in solar and we're looking to grow organically through that.

[00:08:56]We also have this joint venture High Morocco again. It's a joint venture uh, with another company G-Tech. G-Tech provides the data and and the advanced geo-science platform uh, for analysis.

[00:09:08]And [clears throat] this is essentially looking at hydrogen and helium um, deposits in Morocco. It will be structured as a typical exploration venture where um, initially it'll be desktop studies with the information and analysis that G-Tech can do. And then um, we'll once we've acquired acreage obviously we'll be looking to do those studies.

[00:09:29]And then any more expensive um, a more expensive program which would involve acquisition of data such as seismic. We would be looking to farm that out.

[00:09:38]Um and then uh so those are the existing businesses we've got and then we're also looking at at growing, as I've said, through M&A, which is a going to be a very important part of our platform. So, that will be E&P assets and renewable assets. Um geography-wise in the Mediterranean rim makes sense, but generally throughout Africa where we can see good projects, we will be opportunistic. And you know, the characteristics that we want to see, essentially we're looking at cash flowing assets. Um they need to be accretive, so we'll be looking to buy uh good metrics. Typically, we look at cash flow multiples. Um they will be, as I say, on production, uh generating cash flow. Uh we want them to be operated so we can control them and be in control of our own destiny. If it's a new country entry, obviously we're looking for scalable growth. Um an initial acquisition might be a small one, it might not, depending on on how it can be financed, but we want to see a um a market where we can grow that business to a significant uh level. Um and they need to be financeable and if they're production assets, normally they are, depending on on the various aspects of of of the of the opportunity. Uh but we want them to be financeable primarily with debt.

[00:10:48]Um and we've already evaluated a number of deals. As I've said, we we we couldn't really advance with them because of the state of our balance sheet.

[00:10:56]But the plan is so essentially, you know, for growth is to fix the balance sheet, which we will do by doing this transaction, and then quickly to grow um organically with Solarbe in Morocco, and then outside with a focus on M&A.

[00:11:09]>> Majid, finally for today, is there anything else that you would like to share with us?

[00:11:13]>> Um well, I I I think the the important thing is that um although we're selling our E&P business, we do still have a business, um which is an established Moroccan renewable platform. And I I I I know we can we're characterized as a cash shell at the moment, but once we move that a bit further forward, I'm reasonably confident that that we won't be that Uh so we've got this established Moroccan business. We have a very very good presence and a good reputation in Morocco.

[00:11:38]Um and we've solved the balance sheet problem which which is going to give us financial flexibility, reduces financing risks.

[00:11:45]It positions Sound as a credible counterparty. Um and so essentially we're able to function properly as a company when talking to other participants in in various sectors which you weren't able to do before and credibility to do those deals. And um you know, I'm hoping that very quickly that the investors will hopefully be able to hear some positive news, some good news from us about our growth initiatives both within Morocco and uh outside Morocco. I guess the last thing is we've got an AGM coming up um next Monday. So looking forward hopefully to seeing some shareholders at the AGM next week.

[00:12:23]>> Thank you, thank you very much for your time today.

[00:12:25]>> Thank you.

[00:12:26]>> And thank you for watching Black Star TV.

[00:12:34]>> [music]