21 September 2023

SOUND ENERGY PLC

("Sound Energy", "Sound" or the "Company" and together with subsidiaries the ''Group'')

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 30 JUNE 2023

Sound Energy, the transition energy company, announces its unaudited half-year report for the six months ended 30 June 2023.

HIGHLIGHTS

Development of the Moroccan Tendrara Production Concession

·      Phase 1 Micro LNG (''mLNG'') project (''Phase 1'')

o  Site preparation activities completed by March 2023

o  Completed mLNG tank foundations by May 2023

o  Currently, extensive activity taking place offsite with our contractor and its sub-contractors designing and constructing plant equipment for delivery to site late 2023, early 2024

o  Design, planning and procurement of equipment of workover of the wells TE-6 and TE-7 progressing with rigless activities planned for later 2023and rig activities scheduled for early 2024.

o  Phase 1 LNG delivery scheduled to commence in 2024

·      Phase 2 Gas (pipeline) development (''Phase 2'')

o  Receipt of binding conditioned term sheet in June 2023, for project financing from exclusive lead arranger, Attijariwafa Bank, Morocco's largest bank

Corporate

·      In June 2023 entered into an exclusivity period and non-binding term sheet with Calvalley Petroleum (Cyprus) Limited for a partial divestment of a net 40% working interest in the Tendrara Production Concession and the Grand Tendrara exploration permit

·      In May 2023 the Company entered into a full and final settlement of its tax disputes with the Moroccan tax authorities and received court papers in June 2023 confirming the withdrawal of the cases between the Company and Moroccan tax authority

·      We have expressed our condolences to all those affected by the Morocco Earthquake of 8th September, and we have offered and given our support in country and continue to do so. As previously announced to the market at the time, our Sidi Moktar well assets are located some 100 kilometres to the northwest of the earthquake epicentre within our Sidi Moktar Onshore exploration permits, these have not been impacted by the earthquake in any way. Our operations and site development work at Tendrara Concession, Anoual and Grand Tendrara exploration permits some 600 kilometres away are unaffected.

Financial

·      Drawdown of £2.5 million of up to £4.0 million senior unsecured convertible bond instrument in June 2023

·      Full and final settlement of its tax disputes with the Moroccan tax authorities - phased payment schedule of approximately US$2.5 million as a full and final settlement against a claim of approximately US$24.0 million

·      As at 31 August 2023, the Group had unaudited cash and short-term deposits of approximately £4.0 million (£1.4 million held as collateral for a bank guarantee against licence commitments)

·      Post period end receipt of Tendrara Concession receivable of approximately £2.3 million

Graham Lyon, Executive Chairman said:

''I am grateful for continued support of all our shareholders and can say that the first half of 2023 saw significant advances preparing the Company for revenue generation.  Significantly, we have laid out a funding plan for Phase 2; have made steady progress on Phase 1 with mLNG tank construction and tank site preparation, well preparation and design engineering;  have identified a potential partner to enter the Tendrara area to work alongside us; removed the tax claim overhang; brought in new bridge funding and collected the receivables. All in all, a busy first half of the year.

There is much to do in closing and completing on these various initiatives and in positioning the Company for production and for further growth. As our key project in Morocco is considered of strategic importance in the country all efforts must be placed in ensuring a safe and efficient execution of our business plan within the resources available.

I would like to thank the Ministries in Morocco and ONHYM our state partner for their continued co-operation and increased support.''

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

Enquiries:

The information contained within this announcement is deemed by the Company to constitute inside information pursuant to Article 7 of EU Regulation 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 as amended.  Upon the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

STATEMENT FROM THE EXECUTIVE CHAIRMAN

Continuing to execute on our strategy to deliver revenue generation

Our strategy of the phased development of the Tendrara gas discovery is well defined and whilst the economic and geo-political environment continued to present challenges, the Company continues to make progress towards revenue generation.

Phase 1 Tendrara Micro LNG Project (mLNG) 

Post the completion of site preparation in March 2023, the Company finalised the main civil works including the mLNG tank foundations by May 2023. Additionally, activities such as well head inspection and servicing tool fabrication, flowlines concept selection, engineering and owners engineering support have been ongoing and are well advanced.

Currently, there is extensive activity taking place offsite with our contractor Italfluid Geoenergy S.r.l and its sub-contractors designing and constructing key plant equipment for delivery to site in early 2024. In addition to Italfluid's project scope of work, Sound Energy is to undertake well head and flow line preparation, including workovers of TE-6 and TE-7. Afriquia Gaz S.A is to procure and put in place the LNG transportation trucking, local storage and regasification facilities.  Once on site, the processing and liquefaction equipment will be commissioned and integrated with the wells and trucking systems. Whilst the mLNG storage tank fabric has been manufactured, there has been some supply chain disruption leading to later than planned delivery to site which remains on the critical path. Despite this, the Company remains committed to commencing production in 2024.

Phase 2 Tendrara Processing and Pipeline Project 

Progress continued to be made with the Phase 2 development project in 2023.

Crucially, significant progress has been made regarding Project funding with Attijariwafa Bank, Morocco's largest bank, as exclusive lead arranger of a senior debt financing issuing a binding conditioned term sheet. The bank completed legal and technical due diligence in respect of the proposed financing in March, and in June made a conditioned offer for a maximum financing of MAD 2.365 billion (approximately US$237 million), proposed to be 100% underwritten by the bank, and subject to certain conditions being met such as Governmental approvals, Gas Sales agreement amendments, further engineering and Contractor contracts being in place.

Corporate 

Following the commencement in 2022 of a process to secure participation of a strategic partner, in June the Company entered into a period of exclusivity and non-binding term sheet with Calvalley Petroleum (Cyprus) Limited ("Calvalley") for a partial divestment of a net 40% working interest in the Tendrara Exploitation Concession and the Grand Tendrara Exploration Permit which result in, subject to agreement of definitive transaction documentation:

·      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

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

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

·      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.

Post the period, definitive documents are being negotiated with the aim to conclude the transaction in 2023.

The combination of closing the transactions with Calvalley and Attijariwafa Bank will allow the Company to take the Final Investment decision and begin activities to construct the much-needed pipeline infrastructure at Tendrara.

In June the Company received court papers confirming the withdrawal of cases between the Company and the Moroccan Tax authority for matters with respect to claims against Sound Energy Morocco East and Sound Energy Morocco SARL AU.

In June the Company raised up to £4.0 million by way of a senior unsecured convertible bond instrument. The proceeds 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 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.  Post the period the Company announced a partial conversion of the Convertible Loan Note.

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

Board Changes

In May, Mr Marco Fumagalli announced that he would be stepping down in June as a Non-Executive Director and former Acting Chairman of the company in order to pursue other business opportunities.

In June, Sound appointed Mr Simon Ashby-Rudd to the Board as Independent Non-Executive Director.  Mr Ashby-Rudd is an international energy banking specialist with more than 35 years of experience.

I thank Marco for his contribution over the years and look forward to working with Mr Ashby-Rudd going forward.

Graham Lyon

Chairman (Executive)

OPERATIONS REVIEW

Tendrara Development: Micro LNG

Sound Energy is pursuing the Field Development Plan underpinning the Concession centred around the TE-5 Horst gas discovery.  The development is progressing in two phases. Phase 1, targeting industrial consumers, is intended to prioritise early first cash flows from the Concession via a mLNG production scheme. The planned Phase 2 development provides gas to power via state energy power stations. It is centred around the installation of a 120km gas export pipeline to help fully unlock the gas potential of this region and lower the cost of development for future discoveries. Both phases address different markets in Morocco; the industrial energy user and the state power producer, both of which have strong and growing demand, with Tendrara gas playing an important role in supporting Morocco's strategy to lower carbon emissions.

Progress of the Phase 1 Development Project

This first phase focuses on the existing TE-6 and TE-7 wells of the TE-5 Horst. First gas will be achieved by tying the currently suspended TE-6 and TE-7 gas wells with flowlines connected to the inlet of a skid mounted, combined gas processing and mLNG plant. 

In 2021, the Company entered into a contract with Italfluid Geoenergy S.r.l. (''Italfluid'') for the design, construction, commissioning, operation, and maintenance of the mLNG facilities under a 10-year lease arrangement. The mLNG facilities, which will also treat, and process raw gas produced from the wells prior to liquefaction, is the principal part of the surface facilities required to be built and operated as part of this first phase of development. LNG will be delivered to on-site storage from the outlet of the mLNG facilities whereupon Afriquia Gaz will lift and take title for LNG for transportation, distribution and sale to the Moroccan industrial market.

Groundworks for the construction of the mLNG facility commenced March 2022 following completion of surveying and remediation works to the access road for the facility. The raised foundation platform for the LNG storage tank, and pads for the skid mounted units, including the compressor package, have been completed. The necessary piping and cabling for the firefighting system have been installed along with fencing and lighting towers.  Facilities engineering will continue to progress throughout the year with major vendors and Italfluid has placed purchase orders for the gas processing and liquefaction package which I ready for factor testing now Whilst the mLNG storage tank fabric has been manufactured, there has been some supply chain disruption leading to later than planned delivery. Despite this, the Company remains committed to commencing production in 2024. The Company has also completed preliminary engineering of the wellhead facilities, flowlines and manifold system required to bring the raw gas form the TE-6 and TE-7 wellheads.  This work was completed by Kellogg Brown and Root Ltd alongside the flow assurance work. Inspection and routine maintenance of the wellhead Christmas tree assemblies on TE-6 and TE-7, was successfully completed by Petroleum Equipment Supply Engineering Company Ltd.

The Company engaged Bedrock Drilling Ltd to design, plan and execute the necessary work overs of the TE-6 and TE-7 wells in preparation for turning these appraisal gas wells into long term gas producers.  These works are planned to be undertaken during Q4 2023 and Q1 2024 in preparation for first gas.

The next key steps to progress the project include final design, engineering, procurement and installation of the flowline system and associated well head facility equipment for the gas gathering system to transport the gas from the well heads to the mLNG plant. Additionally, Italfluid continues to progress detailed design, place its remaining purchase orders for equipment packages and bulks, now the site preparation and commence civils foundation works have been completed.

Italfluid, Sound Energy and Afriquia Gaz are working together, to supply LNG to the local industry in 2024 in a safe and efficient manner.

Throughout 2023 and early 2024 the equipment packages are to be completed and tested in the workshops and later be brought from workshops located around the world, delivered to site via the main ports in Morocco and assembled on site.

Progress of the Phase 2 Development Project

On 13 June the Company announced that it has now entered into exclusivity for a period of 45 days on the basis of an otherwise non-binding term sheet with Calvalley, an associated company of Octavia Energy Corporation Limited.  Whilst the exclusivity has expired the Company continues to support the ongoing due diligence by Calvalley. 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 appraisal well, with an estimated unrisked exploration potential of 273 Bcf gross Pmean Gas Initially in Place ('GIIP').

 In June 2023, following a period of due diligence and further discussions between the bank, the Company announced that, on behalf of the Tendrara Production Concession partners, it had received a conditioned offer from Attijariwafa Bank for a maximum financing of MAD 2.365 billion (c.US$237 million), proposed to be 100% underwritten by the bank, subject to the conditions precedent to the conditioned offer being satisfied prior to 30 September 2023.

Eastern Morocco

Eastern Morocco licences

Exploration

Our Eastern Morocco Licences comprising the Concession together with the Anoual and Greater Tendrara exploration permits are positioned in a region containing a potential extension of the established petroleum plays of Algerian Triassic Province and Saharan Hercynian Platform. The presence of the key geological elements of the Algerian Trias Argilo-Gréseux Inférieur or 'TAGI' gas play are already proven within the licence areas with the underlying Palaeozoic, representing a significant upside opportunity to be explored.

These licences cover a surface area of over 23,000 square kilometres, but so far only thirteen wells have been drilled, of which six are either located within or local to the Concession. Exploration drilling beyond the region of the Concession has been limited and the Group maintains a portfolio of features identified from previous operators' studies, plus new targets identified by Sound Energy from the recent geophysical data acquisition, subsequent processing and ongoing interpretation studies. These features are internally classified as either prospects, leads or concepts based upon their level of technical maturity and represent potential future exploration drilling targets.

Whilst the Company has strategically prioritised its gas monetisation strategy through the phased development of the TE-5 Horst (Tendrara Production Concession), the Company has also re-evaluated its extensive exploration portfolio within the Greater Tendrara and Anoual exploration permits surrounding the Concession. By integrating the acquired data and learnings from previous drilling campaigns with acquired and reprocessed seismic datasets, the Company has high graded several potential near term subsalt drilling opportunities within the TAGI gas reservoir, the proven reservoir of the TE-5 Horst gas accumulation.

In August 2022, the Company launched a farm-out process in the underexplored but highly prospective Tendrara Basin in Eastern Morocco. This opportunity provides access to high impact, short term exploration opportunities, in a stable country with very attractive fiscal terms. The Company has high graded three potential near term sub-salt drilling opportunities where, importantly, future discoveries have the potential to be commercialised through the planned infrastructure of Phase 2.  The Company's intention is to seek to secure an ambitious strategic partner for both the ongoing and planned development of the Concession together with exploration and appraisal of the Eastern Morocco exploration permits.

Near term drillable targets include the exploration prospect 'M5' located on the Anoual permits, together with the potential of the structures previously drilled on the Greater Tendrara permits, SBK-1 and TE-4. Both SBK-1 and TE-4, drilled in 2000 and 2006 respectively, encountered gas shows in the TAGI reservoir. SBK-1 flowed gas to surface during testing in 2000 at a peak rate of 4.41 mmscf/d post acidification but was not tested with mechanical stimulation. 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 elsewhere in the basin.

Southern Morocco

Southern Morocco licence

Southern Morocco Exploration

The Sidi Moktar licence is located in the Essaouira Basin, in Southern Morocco. The licence covers a combined area of 4,712 km2. The Group views the Sidi Moktar licences as an exciting opportunity to explore high impact prospectivity within the sub-salt Triassic and Palaeozoic plays in the underexplored Essaouira Basin in the West of Morocco.

The Sidi Moktar permit hosts a variety of proven plays. The licence host 44 vintage wells drilled between the 1950s and the present. Previous exploration has been predominantly focused on the shallower post-salt plays. The licence is adjacent to the ONHYM operated Meskala gas and condensate field. The main reservoirs in the field are Triassic aged sands, directly analogous to the deeper exploration plays in the Sidi Moktar licence. The Meskala field and its associated gas processing facility is linked via a pipeline to a state-owned phosphate plant, which produces fertiliser both for domestic and export markets. This pipeline passes across the Sidi Moktar licence. The discovery of the Meskala field proved the existence of a deeper petroleum system in the basin. Specifically, Meskala provides evidence that Triassic clastic reservoirs are effective, proves the existence of the overlying salt seal and provides support for evidence of charge from deep Palaeozoic source rocks. Based on work undertaken by Sound Energy, the main focus of future exploration activity in the licence is expected to be within this deeper play fairway. The Company believes that the deeper, sub-salt Triassic and Palaeozoic plays may contain significant prospective resources, in excess of any discovered volumes in the shallower stratigraphy.

The Company's evaluation of the exploration potential of Sidi Moktar, following an independent technical review, includes a mapped portfolio of sub-salt, Triassic and Palaeozoic leads in a variety of hydrocarbon trap types. Sound Energy is developing a work programme to mature the licence with specific focus on the deeper, sub-salt plays.  The Company believes additional seismic acquisition and processing is required to mature these leads into drillable exploration prospects.

Preparations for this seismic acquisition campaign have commenced with the completion and approval of an EIA in late 2019.

The Company continues to seek to progress a farm out process for this permit, offering an opportunity to a technically competent partner to acquire a material position in this large tract of prospective acreage.  In parallel, the Company has engaged in dialogue with a number of seismic acquisition and processing contractors for potential services to undertake the survey.

Condensed Interim Consolidated Income Statement

Condensed Interim Consolidated Balance Sheet