Interim Management Statement

5th Nov '09 by emptyend

35 comments 7501 reads

A pore pressure study over TGD has confirmed that pressures in the shallower of
the two reservoirs penetrated in the discovery well, whilst sufficient to
maintain porosity and permeability, are not as high as those originally
anticipated. The pressure environment in this supra-volcanic reservoir is
considerably less than that encountered below the volcanics. Therefore, the TGD
appraisal well can be drilled in a more controlled and cost efficient manner
than the discovery well.

That is a very clear marking of the card for those analysts who have been continuning to wrongly witter on about HPHT risks on TGD-2X.

Other comments follow.

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Emptyend

Premium Member

35 comments

emptyend

5th Nov '09

In reply to tournesol (post #13)

I agree entirely that analyst groupthink post credit-crunch has led to them systematically undervaluing the whole sector, especially stocks which have a high exploration content in their portfolio. You can see this bias with amazing clarity if you look at today's Numis note, which reports the problems with CNV production and the potential redemption of the convertible as if they were the most important items in the IMS - and then they more or less ignore the upside of the drilling campaign.

I am also reminded of the situation pre 2003, when one couldn't find any decent analysis of E&Ps for love or money! The current crop of analysts in the FTSE350 space seem to me to be extremely low-grade, even in relation to their predecessors......though perhaps this may owe something to the change in business models for brokers (because high commissions no longer subsidise the provision of "high quality" research).......so "pay peanuts, get monkeys" comes to mind.

The only way to get a decent picture, especially of exploration-oriented E&Ps, seems increasingly to do the analysis oneself! As I commented recently, oil prices are back to where they were at the start of 2008 - and so are the share prices of the majority of larger E&Ps. The ones whose share prices have lagged seem to me to be those who, like SOCO, have a large portion of their total value in exploration - and who are thus not being properly valued by analysts who are overly-focussed on current production and on any imminent* news.

* nb word used in the sense that Sir Lurkalot would recognise ;-)

The outer for all this is of course that the industry doesn't work on such metrics - and it doesn't ignore longer-term upside either......which is why, unless things change radically amongst the analysts, when a deal is done for SOCO Vietnam it seems likely to me to be at a huge premium to the market price of the shares.....and all the analysts will then evince surprise!

;-/

djpreston

5th Nov '09

RBC comment:

CNV underperformance negatively impacts valuation - Sector Perform PT 1600p (from 1650p)

Note however, that their NAV falls (due to the CNv news) from 2063p to 2006p.

Says Soco remains cheap despite the cut to NAV, but in our opinion, the stock lacks momentum.Do not expect organic newsflow to pick up materially until drilling recommences in Vn in late Q1/10 - early Q2/10

Edit

I should also say that they do say that NAV is what theyd see in respect of a corporate deal.

passinthru

5th Nov '09

A dedicated drilling rig for TGD might make complete sense. Even allowing for reduced blood pressure drilling conditions there are still unknown factors to take into consideration. Soco has brought on-board a specialist for this next well/wells and if I was that man I might be tendering for a dedicated rig that will meet some of those unknown factors. Be nice to think that said rig that will have capabilities to undertake a thorough testing campaign based on expectations better understood by that specialist :-)

passinthru

emptyend

5th Nov '09

In reply to passinthru (post #18)

Yes indeed - a specialist has been on the case for 6 months or so. Your comments make perfect sense to me.

djpreston

5th Nov '09

Well I havent seen any more notes but a fair summary is that no one seems to love us.

My reaction to that is "Great". Expectations are low, there seems to be no real allowance for any explo within what I would call short term (less than a year and definitely 6 months or so) and yet their price targets are all in excess of the current price (with the notable exception of Citi, whose note looks a joke to be honest.

If that is the case and consensus opinion is so low, then SIA seems to be the perfect contrarian play. Contrast that with other "lower risk" (as I would define SIA) mid caps. I dont see anything like the potential for a pick up from current levels to 2000p say (in TLW, CNE, DNX tc on an equivalent basis).

The prevailing mood of basically ignoring explo puts, as others have said far more eloquently, the analysts out of step with industry. Therein lies the hidden value for the PI's to exploit IMO.

Efficient Markets my posterior.....

emptyend

5th Nov '09

In reply to marben100 (post #14)

I guess Soco will do some analyst/institutional presentations on the back of this IMS, where I'd hope they would explain the drilling campaigns and targets in more detail?

In fact I believe that there will be no more analyst meetings in the near future. Instead the focus seems likely to shift to telling the story to US investors via the upcoming roadshow. If the London-based analyst community continue to do such a pathetic job of interpreting what they are being told then why bother briefing them? Much better, I think, to concentrate on people who can think about the assets with open minds......and leave those who are silly enough to rely on poor analysis to provide them with the stock at cheap levels!

I've no doubt at all that the analysts will come to change their minds between now and February - perhaps because enough fresh demand has enough price impact to make their present published opinions untenable!

lowersharpnose

5th Nov '09

A quick question:

The initial drill stem test (DST) on the VIM-4 well was successful and preparations are underway to conduct a second DST in a shallower section of the reservoir.

I assumed it meant successful in the sense of meaningful commercial flow rates.

Could it just mean successful in the narrow technical sense that all the equipment worked and we got useful information from the hole?

lsn

hywel

5th Nov '09

In reply to lowersharpnose (post #22)

Could it just mean successful in the narrow technical sense that all the equipment worked and we got useful information from the hole?

You mean the Tom Cross version of success? :-)

oilretire

5th Nov '09

Thai news article relating to the IMS information.

http://www.thanhniennews.com/business/?catid=2&newsid=53500

Is this mis-reporting or a hint at future fund raising?

"We’re fully funded, but we might look for more headroom,” Chief Financial Officer Roger Cagle said in a phone interview, adding it has benefited from falling exploration costs. “In terms of rig rates, they’ve come off considerably” with costs in West Africa down as much as 50 percent, he said.

flyinghorse

5th Nov '09

In reply to post #22

I also wondered about the words "successful" in the DST context, and concluded that Lundin is the operator and has said there will be a 2009 update on the 11th Nov a partner would be best placed to work with the operator.

DST's do take time to drain the reservoir to get meaningfull material balance data and hence volumetric and other inflow performance data(Skin PI etc) so I am hopefull that its so far so good.

Flyinghorse

flyinghorse

5th Nov '09

I forgot to add to the above, given they will test a second zone you would have seen oil/gas on the openhole logs, and would not waste time testing if it was poor/dubious so this is positive.

Also it would be usual to wait for both zone's to be tested prior to releasing information, esspecially if likley commercial.

Looking forward to the 11th :)

emptyend

5th Nov '09

In reply to oilretire (post #24)

Is this mis-reporting or a hint at future fund raising?

"We’re fully funded, but we might look for more headroom,.....

IMO it is simply a repetition of the point made in the post-interims briefing to analysts, which disclosed that they had obtained in-principle agreement (I forget the precise wording) for a bank loan. However, they plainly haven't yet decided whether they actually need to do this. I imagine, amongst other things, the decision whether to take the loan will depend on whether they farm down Nganzi or not (if they do then costs will be lower) and it may also depend on a fresh assessment of the risks of the convertible being put back to them......

.......on that latter score, I suspect that they may well be working on three wells (two VN, one DRC) at the time the put date arrives - so it would be a very risk averse fund manager IMO who would exercise the put! I'll be surprised if more than 20% of the bonds get put back.

emptyend

5th Nov '09

Just to help out a few confused posters (and analysts) that have forgotten things that were made plain at the AGM.....

the capex budget for 2009 is $80mn......and it is still $80mn in 2010 - though total spend will be much higher as PV will by then be a paying partner on 16-1.

....which is why they are unlikely to have much problem with the convertible put, given cash generation at current oil prices (unless perhaps they sole risk Nganzi).

Furthermore whilst today's IMS says:

Production net to the Company's working interest averaged 6,792 barrels of oil equivalent per day ("BOEPD") over the first nine months of the year

....the company's entitlements, however, should be rather greater, as we are in the cost recovery phase of production.....thus boosting cashflow (though not profits).

Worth noting also the previous comments about the potential to save money in the capex budget (steel costs etc) - which again the analysts seem to have forgotten about.

davjo

5th Nov '09

A pore pressure study over TGD has confirmed that pressures in the shallower of the two reservoirs penetrated in the discovery well, whilst sufficient to maintain porosity and permeability, are not as high as those originally anticipated.

I'm a bit bemused by this. IIRC, there was a question of porosity/permeability being viable around the time the JV manager was fired and SOCO said something like, this was because TGD-2X was in a poor location. I'm wondering whether reservoir deliverability is perhaps compromised to some extent by lower pressure than "originally anticipated"? I know one could argue that the message was directed at doubting analysts re cost efficient drilling but would SOCO really bother? I somehow doubt it!

emptyend

6th Nov '09

In reply to davjo (post #29)

I'm wondering whether reservoir deliverability is perhaps compromised to some extent by lower pressure than "originally anticipated"? I know one could argue that the message was directed at doubting analysts re cost efficient drilling but would SOCO really bother? I somehow doubt it!

No - you've got my suggestion slightly wrong! I wasn't suggesting for a moment that they would bother suggesting that the well would be lower cost . The crucial point here is that the well should be much lower RISK , because the pressure is pretty normal (thanks to the volcanics providing a seal above the HPHT section!). At the same time, despite the lower (ie fairly normal) pressure environment, they are also confident that the well in this section will flow.

There is no doubt whatsoever in my mind that this wording was directed at the substantial group of analysts who have persistently failed to take this message on board. For example, Morgan Stanley's note of 8th September wrongly said:

post the Viodo step-out, there is a pause in activity until 2Q/3Q 2010 when drilling of the 100mb HPHT structure on TGD is expected to take place followed by drilling on TGT. In 2Q 2010, exploration on Marine XIV (Congo) should drill for 50mb of upside whilst the bulk of exploration upside is expected to come in 3Q10

....and it is now completely clear that the 100mb target is NOT HPHT.....and that drilling will start at least three months earlier than MS assumed......and that TGT and TGD will be drilling at the same time (and Nganzi will also be earlier than MS had assumed).....

..whilst in August, Credit Suisse had been noting that:

423p of the total 12-month potential upside of 616p/sh to our NAV is attributable to further appraisal of the E discovery, which is a tough high pressure / high temperature area.

...and, as a result, the upside was being risked at 15%. However, very little of the upside in their figures relates to the fan channel above the volcanics (only the first 100mb)....which is significant because they risked the 100mb block at 50% (greatly above that of many analysts who have continued to confuse the two sections, above and below the volcanics).

As you'll appreciate, these differences are absolutely critical to the analysis of SOCO. Those who attended the AGM will remember me questioning Ed Story about the potential of the section ABOVE the volcanics (ie the part of the prospect that SOCO yesterday indicated was pressured relatively normally - and which CS have risked at 50%!)......

....following which I started this thread, which I would urge people to read again (and reactivate with any comments!). However, to repeat the most important section of it, once again, for the benefit of those reading this thread:

There will be an appraisal well drilled in Q2 2010, which is currently being planned by an HPHT world expert, specifically hired-in for the purpose. There are at least three faults in the structure, indicated by the "backslash"-type lines (see slide 12 of the AGM presentation http://www.socointernational.co.uk/?entityType=Document&id=74 ). The bit to be drilled by an appraisal well in Q2 2010 is the bit to the far left of the structure shown on slide 12, which is the bit that was previously drilled and tested in early July last year (DST2) and which recovered oil to the surface. This section, above the volcanics, had 50m of net pay [another 40m of net pay had been covered by DST1 and there was a further 30m of net oligocene pay below DST1 that wasn't tested at all] .....so the expectation is, very clearly, that drilling this well into the 50m of net pay above the volcanics is going to give around 100mn bbls recoverable oil/condensate just within that fault block - and then there are thought to be two other fault blocks and a big fan left to be tested.....which would be substantially derisked by the first well (coupled with the currently-ongoing seismic reinterpretation). If the same interpretation holds this autumn (after the reprocessing is finished) and the next well comes in and confirms a flowing reservoir, then we could be looking at a large "Buzzard field"........though perhaps 2-3 times the size of Buzzard. This well in Q2 2010 is likely to be very important, despite "only" targetting 100mn bbls of recoverables......Quoting Ed at the AGM: "If the first well comes in it will severely derisk the rest of the channel" ....and there might be 10-15 times as much in the rest of the structure.

Just to spell this out in other words......there could be 1-1.5bn of recoverable black oil and condensate in the ("normally"-pressured!) fan - and the fan will be drilled in Q2. As passinthru noted yesterday, it would make a great deal of sense for there to be a dedicated rig for the TGD drilling, so that (if this interpretation still holds after the detailed reprocessing - and after the first well) they can "simply" go along the fan drilling all the fault blocks (and then perhaps have another go at the gas/condensate sections below the volcanics)....and then, if they've got 1bn+ bbls of oil (gross recoverable) above the volcanics, I'd expect the market finally and very belatedly to recognise exactly what the potential in this area really is!

lowersharpnose

11th Nov '09

In reply to flyinghorse (post #25)

Lundin's report today has nothing new on Viodo

http://www.lundin-petroleum.com/Press/pr_corp_11-11-09_e.pdf

Congo (Brazzaville)

The Liyeke Marine-1 exploration well in Block Marine XI (WI 18.75%) was completed in the third quarter of 2009.
The well targeting the post-salt Sendji prospect encountered a heavy oil column which would not flow. An
appraisal well on the Viodo discovery (VIM-4) is currently ongoing. The initial drill stem test (DST) on the VIM-4
well was successful and preparations are underway to conduct a second DST in a shallower section of the
reservoir.

emptyend

11th Nov '09

In reply to lowersharpnose (post #31)

I wouldn't have expected Lundin to say anything. The partners have clearly decided to wait for an assessment of all the data and to look at it in the round. I remain hopeful (following the "successful" DST-1) that they will then be able to indicate that the well suggests that the structure is rather larger than some have supposed and to announce that the find is not only to be developed (with "not much mystery time", Ed) but that the next drilling programme will include the big step-out well that they shied away from this time.

Mark Simpson

11th Nov '09

So assuming the seismic on slide 12 of the AGM presentation is approximately correct, we have the fault blocks and fan located in between TGD-1X and TGT-1X. Now the sediment transportation goes from right to left and TGD-1X drilled the left-most fault block and recovered live oil & condensate to the surface.

Does this mean that since the oil migrated as far as the left-most TGD-1X fault block, the subsequent fault blocks and fan will have at some time been filled with significant quantities of black oil & condensate?

If so then am I right in thinking the remaining risks on these wells are resevoir seal (is the oil still there) and resevoir quality (will the oil flow to the surface) and not oil source?

Thanks,

Danger

emptyend

11th Nov '09

In reply to dangersimpson (post #33)

I'll have to leave the bulk of that to someone who knows what they are talking about re geological details!!

However, I think you are broadly right re the risks. See the comments from myself and KoD here and the comments in the thread header above re reservoir quality......and the thread header here.

Might be worth you or someone else asking directly about the composition of the risking in the well(s) planned for the fan?

cheers

SW10Chap

11th Nov '09

In reply to dangersimpson (post #33)

Does this mean that since the oil migrated as far as the left-most TGD-1X fault block, the subsequent fault blocks and fan will have at some time been filled with significant quantities of black oil & condensate?

It's a complex-looking model and I wouldn't want to make that assumption based on what I've seen as publicly-available information.

If so then am I right in thinking the remaining risks on these wells are resevoir seal (is the oil still there) and resevoir quality (will the oil flow to the surface) and not oil source?

There may be a question of seal, the interesting thing about reservoir quality is that porosity and permeability are likely to increase as you move to the "right": as a river deposits sediments it's the coarser material that gets deposited upstream whilst the fines continue to be carried for longer and are deposited downstream.

Of course, we're looking at another 2D model of a 3D world, so the other question is at what point has this x-section of the fan been taken? Is it somewhere across the middle of, or more towards the base of the fan? Is the fan thickening towards us, or away from us? How does its lateral extent change as it moves towards us or away from us?

SW10

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Interim Management Statement

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Emptyend

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