A thread to discuss the operational update, placing & conference call of 20th January 2010
Some initial discussion can be found here: http://www.stockopedia.com/forum/view/29921/valuation-sentiment-and-sp-direction?comment=110#110
I am a full-time private investor... with a little trading on the side (generally small-scale arbitrage in specialist niches). Previously, I spent 24 years in the IT industry, 13 of those running my own IT services firm. I invested as a "hobby" for 20 years before turning it into a full-time occupation in 2004. I really enjoy the "research" side of investing, finding out about varied businesses and industries and learning what makes them tick. Since going "full-time" I have learnt an awful lot from some very erudite investors & professionals who are kind enough to share their expertise in electronc forums such as this. I can now count a number of them as my friends, having had the opportunity to meet them in the real world, as well as this virtual one! I try to pay back the debt I owe by sharing what I've learnt and I always value constructive criticism to correct my errors and misapprehensions! I am a Director of ShareSoc, the UK organisation for individual shareholders. See below for details. more »
Mark - like I said on the other thread; I've posted notes from the conf call on the other place - feel free (for those that access that site!) to bring them across for discussion here (my blackberry's not up to the task!)
Cheers
K
Some notes from the conference call:
Cheers,
Mark
Thanks Kirkie, here's a link to Kirkie's notes: http://boards.fool.co.uk/Message.asp?mid=11811153
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Brief scribbles from conference call (much is in the RNSs):
Vietnam and West Africa potentially transformational... drilling post monsoon Q1/Q2 this year.
Nganzi - 3 prospects > 200m barrels mean recoverable - weather induced start post rainy season, expected July / August, to complete in Q3.
Congo - not as large a programme prospects wise - about trying to generate operating cashflow to suport high impact exploration.
TGT - new appraisal wells (July / Aug) based on depth migrated seismic - shows that previous wells weren't on the expected crests, so potential reserve upside if they go according to hopes. ON schedule for first oil Mid 2011; long lead items being ordered. Production hoped to go to 100k BOPD 24 months after first oil.
Q: Cazenove - TGT potential upside? TGD - timing of well and intentions re higher impact?
A: TGD: spud end May / June, 60 day well. Only 1 well planned. 1 year for appraisal period, so must prove commerciality in 12 months. TGT: only booked our share of 250m barrels of 2P. Guided market to 300-500m barrels. New seismic has increased size epectations. "Very confident we're moving upwards in that range'.
Q: Morgan Stanley - no change in reserves in Vietnam - what's being carried in terms of reserves in CNV? Risk of revision? Offshore Congo - secured rig? Prospect size? (100m each, or in total?)
A: CNV - all about pressure maintenance. 2009 - pinching back to maintain pressure. Frac connectivity not sufficient to maintain; hence further well. "Not less blood, just poorer flow rate". Reserves unchanged (our share of 150m). Offshore Congo - 50m each prospect, so 100m total. Not retained a rig for this; have financial flexibility, plenty of jack-up rigs available there.
Q: Nomura - TGD - will you sidetrack to the fan, or target that through second well? Nganzi - pre drill estimates? TGT - cap ex estimates for 1st phase (2010/2011)?
A: TGD - go for the 'slam dunk' - over 90% probability of success; not fan. Not planned to sidetract across fault (which has no seal); second well next year more likely with significant sidetrack. Nganzi - first oil well onshore DRC. Not dissimilar to Uganda Heritage). 100km pipeline needed (was that them or Uganda?). confident of 'kitchen' and structures; don't yet know if there's a reservoir there. Different geology in all 3. Migration also unknown. 20% CoS from technical guys. RC thinks that's high, he would prefer 10% CoS. TGT - 185m budget; 100m in 2010. Includes fabrication of 1st platform; 4 appraisal wells in H1 fault block. 2nd phase similar, hanging more steel, so perhaps a little more.
Q: Nganzi - looking to farm or keep? A: Both! (chuckle) - 2 major players in that part of the world interested, but they don't like our terms. Lot of sentiment in boardroom to drill this thing ourselves. Risk reward great - 60m Cap Ex vs 3 x 200m prospects. We would probably farm down if they meet terms; would keep >40%, and operate.
Q: RBS - capex - why gone up so much from interims last year? Finance - debt unattractive vs equity; why? (analyst clearly hasn't read the last few presentations!)
A: 185m due to drilling and development in vietnam. 100m TGT; 25m TGD well (16-1 no govt participation yet) - increased wells in Africa, and TGT (hence why the increase from 110 in last year's interims to 185). 1st oil targetted 1 July 2011.
Financing - 1st time they've been back to market (ever?) - didn't take decision lightly.. Banks are open, but price is dear. Unique situation - $250m of convertibles that could be put back to us. Binary decision. We have different situation - 2 years ago; bond was at 40% discount; bunch of equity holders now hold both (D&E). No incentive for equity holder to convert, so conversion rate no more than 70%? Planned for 100% conversion rate. Reserve based lending facilities skewed towards proved rather than 2P. Accessing finance for an event that may or may not occur. True cost of debt around 8% if drawn; but if not, then an astronomical cost. Discussions re warrants; but didn't want to go there.
Q: Vietnam - TGT - if drill this year; clarity to upside on reserves or need production history? TGD - if going for slam dunk; will you go for development or wait for deep?
A: TGD - wouldn't wait for deeper pay off, but wouldn't rush production. Easy to hook up to current lines. Want to see upside from step-out well; if deep exists, production plan would need to change. (i.e. hedging bets - but leaning towards latter). TGT - don't need production history; can upgrade based on appraisal. Final upgrade would bepend on production recovery factors.
Q: Mark Bentley - TGT - so far only talked about appraisal - when development? A: they are really both.
Q: Oriel: Nganzi - rig contracted? A: No, not yet. Didn't want to overcommit until financial flexibility achieved. There are rigs there; initial discussions with Chinese co's in situ up north re potential cost. Q: Access roads? A: not yet - monsoon, but will be done as soon as they can. From North, roads exist to within a few miles of first location.
RBC: A: production guidance - CNV 2010? A: 6400 bopd 2009; comfortable giving similar guidance for 2010. could change +ly - additional drilling (small explo), injection drilling Q4. A: Capex 185m assumes farm down of Nganzi interest. Class V estimate 50-60m for 3 wells in Nganzi - 'one step away from wild ass guess' (speaking to Chinese?
Investec AM: Q: big picture - what is end game for vietnam? prove up and sell, or develop? A: We are explorers; haven't changed. Good at exploring (>60% success ratio) and finding reserves. Prepared to become more of a production co if that's dictated by conditions beyond our control. Everything for sale at right price. Don't do data rooms or solicit bids. A: Are there co's looking over your shoulder? A: never stopped. Forced to make an announcement 2 years ago - HK reporter got hold of info. Drilling is so near - it demystifies 90% of portfolio. Buyers dominated by NOCs. They'll pay squat for Explo or upside. International OC's - want earlier involvement.
[Didn't get questioner] Q: Timing on phase 2 TGT? Day rate for FPSO? Facility updates required in order to target upside? A: day rate - can't give. around $200,000 per day? [Anthony - 220k per day?] need to check; still moving, will get back. TGT Phase 2 - 18-24 months after first phase. Harder planning than phase 1. If phase 2 involves increased reserves, need to rethink strategy - might need production platform. Then; interaction with TGD. Most likely plan for that is to feed into most southern plan on TGT field. Development plan is for 100k bopd - if not big enough, then good problem!
BoA: Q: [missed qu]; Nganzi - security in North Cabinda? A: TGD - don't expect surprises on rig.. (50 - 55m cost). Overdesigned well in tech peoples well, purposely, can't risk tech failure. Bigger rig, additional casing string. TGT - 'pretty simple drilling', rigs plentily available, not expecting nasty surprises. Cost on TGT, phase 2 development - steel mill only allower pre-order for 1 platform. If steel prices rebound, cost could grow.
Nganzi - re African Nations Cup shooting; can impact general situation. So far, no impact on our operations. Looking at bringing rig in from North, overland from DRC? Over Sea?
Odey AM: debt financing: new convertible? A: Did consider, terms of existing convert prohibit, so would need to exchange. Advisors - would need to include some cash, and sweetning of terms (yield - existing 4.5; +100bps). Ratchet re change in control - close to prevailing share price - probability of major change in control even pretty significacnt in next 12 - 18 months - so dilution could be at v low price. Hence didn't want. Analyst didnt agree re pricing; will follow up off-line.
Goldman, Q: step out and explo in Thailand? A: 3D seismic needed, program planned this year. Money in budget for bit of explo and development. Not in same league as Vietnam and Africa.
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That's it - probably not much new, but perhaps some. Presentation on the website apparently as well. Would be interested in others thoughts - I'm off to dip my fingers in hot water and get a coffee!
Cheers
K
...and, to keep things in one place, these were my earlier comments on the conf call Q&A:
The takeaways for me are:
a) TGD well thought to have up to a 90% CoS (though "nothing is ever that certain"). If it succeeds and they think the fan interpretation holds up then there will be a "big step out" well early next year or perhaps late this year. This would obviously target the deep section of the fan as interpreted.
b) The Nganzi prospects are independent of each other with different play types. Farm out isn't yet a certainty and they would retain at least 40% (and operatorship) if they did so. "There is a strong view in parts of the boardroom" that they should drill Nganzi without farming down [ie.....this confirms everything I heard at the AGM last year!]. They have had two major players very interested in the prospects but hesitating over the terms required. They are plainly very relaxed whether someone steps up to the plate or not - risking looks to be around 20% (good for a wildcat) with the main risk being reservoir ....they are very happy the structures are there.
c) TGT has 250mn booked to date. They are now moving guidance up towards the top end of the 300-500 range, thanks to the new interpretation. All four (five?) TGT development wells will be on the H1 block. Phase 2 production may exceed FPSO capacity if TGT drilling is especially successful.....and success at TGD may lead to reworking the whole plan.
d) The key to the sale of VN (as ever) will be when someone steps up to the plate prepared to pay what they think it is worth. The NOCs are reluctant to pay for upside potential and so focus on proved reserves but the international companies generally prefer to get in earlier because they think they have better development skills. I read this as flagging a likely sale later this year to an international major....but it is anyone's guess. SOCO made the point that interest in the assets has never stopped since their RNS in Oct 2008.
I thought the Q&A was quite revealing in showing how surprised analysts were by some of the elements (eg how come you are now planning $185mn capex? Answer - we're now drilling three Nganzi wells rather than one!)
.............
And I would add to the above:
e) Very interesting discussion on bank finance and the alternative of doing another convertible. Several questioners in the conf call seemed to work for outfits who had been caught out by being too greedy with their ideas on that front!! Bank finance wasn't preferred because it would have been reserves-based (on proved) and would have been too complex - some banks also asked for warrants, which plainly got right up the noses of the board!!! Similarly, Odey asked why not do a new convertible - and the answer to that was essentially that there would be timing issues because they can't have two converts out at once, under the terms of the first, and so would needed to have induce existing holders to swap....which would have cost more money (perhaps a 5.5% coupon) AND, much more importantly, they would have had to reset the rachet in relation to the exchange terms in a credit event scenario - which would have meant (in the light of such an event being "highly likely" in the next 12-18 months) dilution anyway at a very low price. Tragically for them, several of the bankers/funds on the call didn't seem to understand these issues and would seem to have gambled that the company could simply be rolled over....and lost! :-)
ee
Just for the record, I'll guess that the clearing price for the placing is going to be a tad over 1450p (versus 1420 something in the market at present). Pure guess* mind...... ;-)
*ie based on nothing that I haven't already put on these boards.
I caught most of the conference call and was left with the following overriding thoughts.
i) the driling over this year will 'demistify' the asset base to allow a deal to be done on the sale of Vietnam and possibly the whole company, though Africa will need more drilling I feel;
ii) SIA will most likely go it alone on Nganzi:
iii) though not without risks the downside looks limited and the upside looks very promising indeed and if there is a better risk reward/reward play out there in E&P land tell me about it; and
iv) these guys aren't hanging about, they can see the exit, be it one, two or three years down the track and are executinng their strategy to get there.
I like it;-)
In reply to emptyend (post #5)
Just for the record, I'll guess that the clearing price for the placing is going to be a tad over 1450p (versus 1420 something in the market at present). Pure guess* mind...... ;-)
Not a million miles from me at 1425-1450p and very well bid at that.
The placing will be very attractive (hence the bookbuild route) for those instos who want to take a decent position but have been unable to do so in the market due to the relatively tight market in the shares (as shown in the presentation). Obviously this has been in the works for some time - thining back to the roadshows done recently. I would imagine that there will be some instos whose interest has been awakened by what they heard.
In reply to djpreston (post #7)
More particularly I'd say that the instos will realise that this is a "buy now whilst stocks last" situation - they'd have to work like stink to build a decent stake if they miss the placing, so I'd be expecting a high proportion of non-comp interest (ie simply taking the price that is fixed, rather than putting in limit orders). If (according to Citi's note post conf call) there is really £20 of upside potential to the price, then you don't want to be missing out on it for the sake of 20p here or there (IMO).
ee
Alphaville Markets Live commentary on the placing (FWLIW): http://ftalphaville.ft.com/blog/2010/01/20/130186/markets-live-166/
NHRightNHa few other thingsNHthe Soco placingNHgoing wellNHprobably a small discountNHto the current priceSoco International (SIA:LSE): Last: 1,429, down 38 (-2.59%), High: 1,440, Low: 1,410, Volume: 514.59kNHand I have a bit of comment on the £100m placingNHfrom THE SECTOR WATCHERNHSoco released an operational update this morning and announced it is raising around £100m by issuing 7.2m new shares. The proceeds will be used to fund its 2010 capex ($185m) which was previously funded but we must keep in mind that SIA may have to pay back some of its nominal $250m of convertible debentures this May. The CB holders have an option to be paid back in May 2010 at par. Looking at the operations, a reprocessing of the 3D seismic on Block 16-1 confirms the general location of an appraisal well on TGD, expected to spud in H1/10. 2009 production from Bualuang and CNV is below expectations at 6,400 boe/d but the high profile upcoming exploration campaign should make up for it (Vietnam, DRC, Congo-Brazzaville). SIA looks good for a mix of lower risk and wildcat drilling in 2010: some strong upside to come in the near term potentially. Definitely worth a look as part of a portfolio approach – particularly if you believe that management will look to reignite the sales process for the SE Asian assets this year.NHand here’s something from EvoNHexplainingNHwhy they are doing itNHThe risk of a possible Bond redemption in May has prompted SOCO to place 7.23m news shares giving rise to a dilution for shareholders of 8.8%. Assuming a placing discount of c.5% we calculate this will see an inflow of c$170m. This, along with a YE09 cash balance US$300m, should enable SOCO to cover all its all its capex commitments in 2010 (US$185m) and possible bond redemption (US$250m).On the back of no news the stock has risen over 11% since the start of the year and, with the key wells to be drilled in 2010 unlikely to produce results before 2H, we think money could be put to better use elsewhere in the sector.11:40AM
...mmm....1410p is surprising. I'd have thought that they wouldn't have needed to give such a discount!
No indication of level of subscription either.
I'm left wondering who the lucky placees were......
ee
The banks are probably upset that the could not force SIA into a far worse funding route.
In reply to emptyend (post #4)
Very good CC I thought.
TGD well thought to have up to a 90% CoS
Very nice too :-) Worth reminding ourselves though that there's only one bullet in the chamber. Failure would almost certainly mean end of mission for that prospect as far as Soco is concerned. Not surprising then that the rig will be over-sized and the well over-engineered, including an extra casing string.
"big step out" well early next year or perhaps late this year.
I guess the actual timing may well be influenced by Vietnamese bureaucracy as much as anything. Note RC mentioned an application process. I daresay a stunning success should be straightforward but anything borderline could be tricky.
The NOCs are reluctant to pay for upside potential and so focus on proved reserves
I thought I heard "squat" mentioned?! He did say they pay a good price for reserves though.
the international companies generally prefer to get in earlier because they think they have better development skills. I read this as flagging a likely sale later this year to an international major
I thought that too..."imminent" could become fashionable again ;-)
Am I right in thinking that dilution should have cost shareholders about £1.25 per share?
If so the SP is holding up remarkably well.
JR
Not been stated that directors took any part in placing so I assume this dilution will mean directors will hold 9.6% less than they did previously, obviously they still hold a massive stake, but perhaps now less than 50%?
In reply to JoeRussell (post #14)
That would be true if the new shares had been given away, but they weren't given away, they were exchanged for 1410p in cash.
Am I right in thinking that dilution should have cost shareholders about £1.25 per share?
I think you have forgotten to take account of the cash raised by the placing.
db
