Italy-focused exploration and production company Sound Oil (SOU:AIM) is up 7.6% to 19.4p as it takes the final step towards commencing production from its Nervesa gas field.

The positive news is accompanied by a bullish initiation note from independent broker FinnCap. Analyst Dougie Youngson starts with a ‘buy’ recommendation and 23p price target. He notes that the company’s assets in Italy and Morocco benefit from strong market fundamentals and that any new domestic gas production coming on stream benefits from favourable economics and the opportunity for strong cash flow growth.’

The price target is derived from a discounted cash flow calculation based on current and forecast production as well as current net cash of £21.2 million.

Sound oil - July 16 2015

Today’s update confirms the award of the Casa Tonetto production concession – which encompasses Nervesa – from the Italian authorities. This is the last stage in the permitting process and work is expected to begin on production facilities in the near-term as well as a gas sales agreement secured ahead of first commercial output later in 2015.

The big prize in Italy is the Badile prospect in the Po Valley which is estimated to contain 178 billion cubic feet of gas. A partner is being sought ahead of drilling an exploration well at an estimated cost of €22.6 million.

The company entered Morocco by securing a position in the Tendrara onshore licence in June and says it will drill a first well (for a projected £6 million) in the fourth quarter. Notably Fastnet Oil & Gas (FAST:AIM) chose not to take up an option on the same asset in January after failing to secure a farm-in partner.

Issue Date: 16 Jul 2015