Small-cap oil and gas firm Sound Oil (LSE: SOU) and temporary power provider APR Energy (LSE: APR) both fell by 20% or more when the stock market opened this morning.
What’s gone wrong at each of these firms and what does it mean for shareholders?
Sound Oil
Shares in Italy-focused Sound Oil fell by as much as 20% when markets opened this morning, after the firm said that it has decided to abandon the second appraisal well drilled at its Nervesa discovery.
Sound said that, despite stimulation and reperforation operations on the lower section of the target reservoir, it had “been unable to secure a stabilised flow rate”. With “no material gas shows in the upper section of the target reservoir”, Sound had decided to abandon the well.
This is bad news but not a total surprise, in my view. Last week, Sound warned that the lower section of the well appeared to be “of relatively low permeability”.
The good news is that the first appraisal well drilled at the Nervesa discovery is expected to become a producer. The company plans to start the construction of production facilities shortly.
Sound is also progressing towards drilling an exploration well on the potentially exciting Badile prospect, which has a mid-case prospective resource of 178 billion cubic feet of gas.
However, today’s news was significant enough to persuade the company to delay the acceptance deadline for its current open offer, through which it is trying to raise €5m from shareholders.
APR Energy
Shares in temporary power provider APR Energy fell to a low of 146p in January, but have recovered strongly since then, rising by 170% to a high of 400p in March.
It now seems that investors priced in a recovery far too quickly. APR shares fell by around 30% this morning, after the firm said that 2015 profits would be “significantly below market expectations”.
The firm also warned that it could breach its financial covenants later this year and said its chief operating officer, Brian Rich, had left the business with immediate effect for “personal reasons”.
APR says that today’s profit warning is the result of new contract negotiations being delayed and higher-than-expected demobilisation costs in Libya.
It was the Libya fiasco that caused APR shares to start sliding last year, after the firm’s contracts were not renewed, following months of delays and unpaid bills.
What’s the outlook now?
Even before today’s announcement, analysts were forecasting a full-year loss of about 23p per share for APR in 2015. The firm was also expected to report 38% drop in revenue, highlighting the impact of the loss of its Libya business.
In my view, todays’ profit warning suggests that a return to profitability will be a big challenge for APR. I suspect the firm’s net debt of $546m could become a costly headache. Ultimately, it’s very difficult to value shares in a business with possible debt problems and loss-making operations.
If you want exposure to this sector, I believe Aggreko is a more attractive alternative. I’d avoid APR until the firm’s outlook becomes clearer.