2012 Interims

24th Jul '12 by emptyend

72 comments 30795 reads

The results are due on 22nd August, FYI.

I've started this thread to centralise comment on expectations and the eventual outcomes.

These might be the most pivotal results in the company's history, though IMO much hangs on whether they include a reserves update with or before the results. They certainly COULD make such an update IMO....but whether they will do so may be a slightly different question, depending on the expected future path of proving up reserves (and perhaps on whether a sale of the Vietnam assets is actually in the offing).

Another matter which surely WILL be addressed at these interims is the prospect of some form of dividend.

I remain of the view that a deal to monetise Vietnam is closer than many seem to expect though, with the emergence (at the AGM) of the connectivity potential at TGT , there is a credible case for delay. I'm also of the view that the price tag on VN will have increased since the AGM, with the start-up of H4 (as indicated by the buy-out of the Vietnam minority, IMO).

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Emptyend

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72 comments

loglorry

23rd Aug '12

Have you ever imagined what your priorities might be when you get to be 69 or even 65?

Probably listening to you tell us all that a sale of Soco Vn is just around the corner :-)

Just kidding I know it will happen at some point in all probability and I'm happy with the way things are headed. Just a bit frustrated at the speed of progress as I think most of us are.

emptyend

31st Aug '12

I notice one or two comments elsewhere (such as this) claiming that SOCO International (LON:SIA) haven't made clear what their strategy is.

Complete nonsense.

Not only have they been publishing their strategy with extreme clarity for over 10 years in three bullet points ( ....Recognising opportunity....Capturing potential....Realising value) on the opening pages of every single annual report and on the website, they have been repeating the message regularly for those who somehow appear to fear that all the cash from production will be frittered away on new ventures and empire-building....which is a view that defies all logic and the evidence:

as Isaac has indelicately pointed out elsewhere, the leading executives are now in their mid to late 60s
CAPEX budgets (excluding TGT development) have remained modest - only $80mn this year, mostly on planned explo wells in Africa
management have repeatedly indicated (at the AGM and subsequently) their keen interest in returning cash to shareholders......

....though whether that will be via a sale of assets or the whole company or just via a special distribution of some form around year end remains (understandably) moot, as it depends on matters such as whether there are buyers around who will match management's views on value.

We'll just have to wait and see exactly what happens when the revised reserves numbers are in.....but, make no mistake, the cash will be coming back to shareholders one way or another.

swiper

31st Aug '12

Agreed but Cagle was also quoted very recently as saying "the company doesn’t plan to sell its cash- generating project in Vietnam" and then there is the mystery middle east area highlighted as a "new venture focus" on slide 15 of the interims presentation.
So not as crystal clear as they could be perhaps.

emptyend

31st Aug '12

Agreed but Cagle was also quoted very recently

Misquoted, I suspect.....or completely omitting the context!

The certainly aren't "planning to sell" until they have established what price they think they should sell at - and that won't be completely clear until the reserves report is in. Of course that doesn't preclude the possibility that someone comes along with an acceptable idea on price.

Re the Middle East area that is of course an area of interest - but they have a total capex budget of $25mn (included in the $80mn above) for "new ventures" - so it isn't going to make any sort of dent in the cashflow from VN.

It is frankly as clear as it can be without formally putting themselves up for sale and completely abandoning the idea of new ventures - and they aren't quite in the position to do that yet....though it might only be a matter of a few weeks* until they are (if they should choose to).

*waiting only on the preliminary reserves assessment and the CNV production splitting test

WeeEck

31st Aug '12

If you were selling your car this would not be your ideal advert :
For sale, Ford Cortina, some mileage left on the clock, a bit finance to be cleared, needs some work (currently in progress). Must sell as owner due to retire shortly and no longer interested. Any offer welcome.

passinthru

31st Aug '12

If it was a Mk11 1600E with Lotus engine I and many others would pay a huge premium. Sometimes it pays to check below the bonnet.

passinthru

emptyend

31st Aug '12

Very good metaphors from both. :-)

The key of course is that nobody is quite sure what is below the bonnet, in part because the vehicle is pootling along at 50-55.....perhaps it can do 90-100 and has a massive fuel tank that allows it to keep going at that rate for many years? Still, we'll find out soon - its going round the test track and having its performance examined by the RAC.......

Meanwhile, back in the paddock, there are probably a few interested competitors, waiting to see what it can do and perhaps let their own scrutineers have a look. But those of us seated in the grandstand at the far end of the pits can only watch and wait to see what sort of vehicle emerges - and which sponsor's logo is on the side.

;-)

flyinghorse

31st Aug '12

I do think the lack of an independant audit of reserves is a big risk (Turnbull) that all shareholders carry and manifests its self in the current share price.

It also makes defending a sale position difficult against a interested 3rd party. (your view vs theirs with no 3rd party independance)
An Independant audit should state what proven and probable (1P/2P) are considered to be there based on the data presented.
The independant audit will determine whether you have a grossly over valued modified standard cortina,a 1600E with lotus engine,or a authenticated genuine Lotus cortina with racing pedigree....all worth differing sums.
By definition reserves have a 90% chance or being produced in the 1P case and 50% in the 2P case. (See /read PRMS regulations)
The current published internal or management (ie unaudited) view is we have as of Dec2011 71.3 mmbbl 1P and 130.3mmbbl 2P (ie includes 1P+2P)
Contingent or prospective resources are not even mentioned.
Resources under PRMS can sit in contingent for many reasons (ie getting gov approval).

If I decline 13,000bbls/day out exponentially at 15% for 20 years I get 32mmbbls production.

So a CPR/audited report untill issued may be lower,same or greater than the unauited view upon which value is based.

On realising value the company state the following in the 2011 annual report:
"Realising value"
By locking in returns, regardless of
the phase of the project life cycle,
once the Company’s capability to
add value begins to diminish.
To find out how this works in
practice see page 11
FH

emptyend

31st Aug '12

I do think the lack of an independant audit of reserves is a big risk (Turnbull) that all shareholders carry and manifests its self in the current share price.

...erm.

One of us is being thick here.

They've had at least a couple of independent assessments done in the past - certainly in 2008 for the RAR and possibly since then. Those were done prior to a whole bunch of work including seismic reprocessing, loads of wells and the start-up of production. The results from the wells drilled since 2008 were at or ahead of expectations (with only one small and partial exception).

In other words, it is crystal clear that an updated independent reserves assessment will (if properly done) come in with bigger numbers than are currently booked. So I really can't see what you mean by "big risk" - and neither can I see why you think this is in some way embedded in the current share price.

An Independant audit should state what proven and probable (1P/2P) are considered to be there based on the data presented...By definition reserves have a 90% chance or being produced in the 1P case and 50% in the 2P case. (See /read PRMS regulations)

Yes - everybody knows that. That is how they came to declare 1P and 2P numbers in the first place!

IMO there are two possible explanations for the word "unaudited" in the AR. Either:

a) to make it clear that the numbers are nothing to do with the auditors of the financial accounts (Deloittes) or

b) to make it clear that the exact numbers haven't been checked as at year-end.

I have always understood that "unaudited" relates to the former - ie they are unchecked by the named auditors for the report and accounts. HOWEVER, that does NOT mean that they are "unchecked".....indeed there isn't a listed oil company anywhere on the planet that simply makes up numbers willy-nilly and puts them in the AR. Whenever any listed oil company changes the numbers for its reserves (other than merely deducting the amount that has been produced during the year) it does so based upon an independent opinion provided by one or more third parties.

The current published internal or management (ie unaudited) view is we have as of Dec2011 71.3 mmbbl 1P and 130.3mmbbl 2P (ie includes 1P+2P)
Contingent or prospective resources are not even mentioned.
Resources under PRMS can sit in contingent for many reasons

There is a simple answer to that - which is that previous consultants have only ever been asked to produce estimates of 1P and 2P......and never Possible (3P), or Prospective or Contingent Resources (unlike many other companies who have done far less drilling and have got no production - where prospective or contingent numbers are often all they have got!)

Incidentally - I suspect that the forthcoming review will be (much) more comprehensive in that regard.

If I decline 13,000bbls/day out exponentially at 15% for 20 years I get 32mmbbls production.

Garbage in, garbage out. The company are guiding to 18-20,000 boepd production for the rest of the year (55,000*0.305+CNV H1 c2,000+ CNV add liquids) - and it is well known and accepted that there is additional capacity above and beyond that (to probably 90-110,000 bopd gross, including CNV).

Furthermore, SOCO have been saying that there are 500+mn bbls gross recoverable at TGT for as long as I can remember. Any company that had been guiding the market too high would be mad to continue doing so, even as they :

a)commission an updated independent reserves assessment and

b) buy out the minority holder in those assets rather than letting him bear his share of the "risk"

Certainly they will need to ensure that production capacity is upgraded to produce the reserves available within the licence period....but the starting point is with the reserves (both OOIP and expected recoverability factors) - not with the H1 production number.

flyinghorse

31st Aug '12

EE,
Thanks for your comments. I am perhaps being more cautious and not assuming endorsement and uplift of stated numbers via independant report, and till I see the ink on the paper it bothers me.

If the previous independant assesment you refer to exists that underpins managements stated 2011 AR numbers then the risk is not big,but I have yet to see evidence of that despite looking.

For example of how to avoid ambiguity -look at how Tullow report reserves in their AR(foot notes):
http://www.tullowoil.com/files/reports/ar2011/index.asp?pageid=111

I do hope the independant reserves numbers come in at or greater than currently stated.

FH

Spurticus

31st Aug '12

ee,
Is there any certainty that a 'formal' reserves report is in progress? (And that the results will be released?)
I appreciate they will be revising figures internally, based on on-going testing and further drilling results, but you seem to have expectations that this will be released in the next ...~6 months?
(I ask because I don't believe the interims had any mention, and I haven't seen anything in the public domain to confirm this...just one or two reported comments from the AGM.)

emptyend

31st Aug '12

Is there any certainty that a 'formal' reserves report is in progress? (And that the results will be released?)

Yes and yes. As I pointed out in my comments above, the interims made no mention. However, there is certainly one being done - as one would expect, given the production start-up of both H1 and H4. They publish their prelims in February and, though they have rarely commented on reserves in the prelims, I'd say that if they were then in possession of a report that was materially different from booked numbers, then they would be obliged to say so. Such an obligation may in fact arise well before then, IMO - but it depends on timings and on the consultants.

Re flyinghorse's measured comments:

I am perhaps being more cautious and not assuming endorsement and uplift of stated numbers via independant report, and till I see the ink on the paper it bothers me.

Fair enough - but the evidence clearly points one way.

If the previous independant assesment you refer to exists that underpins managements stated 2011 AR numbers then the risk is not big,but I have yet to see evidence of that despite looking.

I'd merely make the point that VN reserves haven't been changed since the 2008 AR....and, at the minimum, the RAR done in early 2008 (and submitted to the VN Government for approval) would most certainly have required independent assessment.

For example of how to avoid ambiguity -look at how Tullow report reserves in their AR(foot notes):
http://www.tullowoil.com/files/reports/ar2011/index.asp?pageid=111

Yes - on the face of it they seem clear (though the definitions and assumptions aren't provided and the appropriate regulatory framework for the independent report isn't disclosed). I also note the word "unaudited" at the top!! ;-) Premier Oil (LON:PMO) is a much better example IMO, see page 42 here.

I'm often amused to see Tullow held up as an example of best practice in these areas. IIRC they have been in the habit of quoting P10 pre-drill expectations when the market standard is to use PMean numbers.

fuiseog

31st Aug '12

I can't be a*sed to try to find them on the SIA web site but you'll find the table of reserves on P98 of the annual report. As I mentioned over on the other place, it's a document that's well worth reading.

At the AGM, during the formal Q&A session after the presentation ES mentioned that we can expect a reserves update "in the fall". In a later informal discussion he said september. It certainly did not occur to me to question whether this update would be anything other than formal and external.

emptyend

31st Aug '12

At the AGM, during the formal Q&A session after the presentation ES mentioned that we can expect a reserves update "in the fall". In a later informal discussion he said september. It certainly did not occur to me to question whether this update would be anything other than formal and external.

True - though subsequent follow-ups have led me to think that they may be a little later than that.

These things can often be iterative too, if it becomes clear that something hasn't been taken properly into account. Basically the final document needs to be something that the client thinks is worth paying for whilst remaining something that the independent person can sign off on. This is different to (for example) analysts reports on companies, which a company may not get to see in draft at all and often has little opportunity to correct errors of understanding or query matters of interpretation. IMO it would be rare for a first draft of an independent reserves report to be published immediately - though it is true to say that the company is only weeks away from having a good understanding of where the independent experts are coming from - and where they are likely to end up. It is also a "developing situation" with data continuing to come in as various bits of TGT are tested in a production setting.

flyinghorse

31st Aug '12

In reply to Fuiesog I have the AR data -it was independant data I was looking for /CPR. EE Tullow was the first one that came to hand I did find this however that explains a lot and assuming its still current practice gives a good feeling of assurance & states why they are "unaudited"

http://boards.fool.co.uk/reserves-internal-controls-etc-7102651.aspx?sort=whole

emptyend

31st Aug '12

I did find this however that explains a lot and assuming its still current practice gives a good feeling of assurance & states why they are "unaudited"

http://boards.fool.co.uk/reserves-internal-controls-etc-7102651.aspx?sort=whole

Perhaps not surprisingly, I'd forgotten that exchange from 10 years ago even though I commented on it at the time! It is a good and comprehensive explanation - and rather tighter and more accurate than the one I offered earlier.

Oddly, I am compelled to pick out one point ....which was one of the points that I picked out 10 years ago:

The United Kingdom Listing Authority (UKLA) requires an independent "competent persons" report only in those cases where a company is involved in a "Class 1" transaction, essentially a material transaction

.......very much "be prepared" IMO...... ;-)

fuiseog

31st Aug '12

True - though subsequent follow-ups have led me to think that they may be a little later than that.

At the time ES made that assertion I felt he was being ambitious (and I know nothing about oil), what with the dynamics of TGT 2 starting, and the bearing that further drawings over time could contribute to estimation of the reserves, all limited by the constraint and uncertainty from the FPSO capacity.

So if we don't get a reserves update in September I won't be disappointed. If we do I'll be delighted. And if we don't I'll rattle ES's cage a little with an email to remind him of what he told us.

uncommon13

1st Sep '12

I'll also be interested to see what analysts have to say after the 10.00 conference call tomorrow........ ;-)

Looking at the columns New Target Price or Notes in the table below for SOCO International (LON:SIA) since the interims on the 22nd Aug, it seems like nothing much has changed here:
http://sharedealing.nandp.co.uk/broker-views/SIA/SOCO-International-news

Date	Broker	Rec.	Price	Old target price	New target price	Notes
28 Aug	Credit Suisse	Underperform	336.80	352.00	345.00	Reiterates
23 Aug	Singer Capital Markets	Buy	336.80	350.00	370.00	Retains
23 Aug	JP Morgan Cazenove	Overweight	336.80	420.00	-	Reiterates
23 Aug	Citigroup	Buy	336.80	405.00	423.00	Retains
23 Aug	UBS	Neutral	336.80	315.00	335.00	Retains
23 Aug	HSBC	Underweight	336.80	260.00	265.00	Retains
22 Aug	Numis	Hold	336.80	-	357.00	Downgrades
22 Aug	Oriel Securities	Hold	336.80	-	-	Retains
22 Aug	N+1 Brewin	Buy	336.80	429.00	429.00	Retains
22 Aug	Singer Capital Markets	Buy	336.80	390.00	-	Under Review

I'm guessing some of the analysts might be using the acquisition value of the outstanding 20% non-controlling interest in SOCO Vietnam Ltd for their target price calculations even though davjo's excellent post on this acquisition covers the reasons why this is a futile calculation.

After the reserves update and sorting out CNV separation, I guess the word imminent can be used again conservatively in one's vocabulary :) I do hope Soco take an approach like Cove Energy (LON:COV) and annouce SOCO Vietnam or itself up for formal sale instead of waiting around for a bid to materialise which would meet management/significant shareholder expectations...it gets the ball rolling, an open bidding war if one emerges, etc.

COV's RNS regarding the formal sale announcement:
http://www.investegate.co.uk/Article.aspx?id=201201050700140248V

...As such the Directors have unanimously agreed that a sale of the Company may be appropriate at this time. The Directors have decided to conduct a formal sale process for the entire issued and to be issued share capital of the Company, running alongside other strategic options outlined in the press release on 13 December 2011, including a transaction involving the sale of the Rovuma Area 1 Interest, in line with the Company's stated strategy.

The Takeover Panel has granted a dispensation from the requirements of Rules 2.4(a), 2.4(b) and 2.6(a) of the Takeover Code (the "Code") such that any interested party participating in the formal sale process will not be required to be publicly identified as a result of this announcement (subject to note 3 to Rule 2.2 of the Code) and will not be subject to the 28 day deadline referred to in Rule 2.6(a), for so long as it is participating in the formal sale process. Interested parties should note Rule 21.2 of the Code, which will prohibit any form of inducement fee or other offer-related arrangement, and that the Company has not requested any dispensation from this prohibition under Note 2 of Rule 21.2 at this stage.

The Company is to conduct the formal sale process through its adviser, Standard Chartered Bank, in the following manner. Potential offerors for the entire issued and to be issued share capital of the Company should contact Standard Chartered Bank (contact details as below) without delay. Any interested party will be required to enter into a non-disclosure agreement with the Company on reasonable terms satisfactory to the Board and on the same terms, in all material respects, as the other interested parties, before being permitted to participate in the process. The formal sale process will involve a due diligence phase during which participants will be given access to a data room and management following which interested parties shall be invited to submit their proposals to the Company. The Board shall then discuss certain of these proposals with one or more relevant parties with a view to agreeing an offer with one party which it is able to recommend to shareholders.

The Board reserves the right to alter any aspect of the sale process as outlined above or to terminate it at any time and in such cases will make an announcement as appropriate.

The Board reserves the right to reject any approach or terminate discussions with any interested party or participant at any time. There can be no certainty that any offer will be made for the Company, or even proposed, or as to the level of any proposal or offer that may be made.

emptyend

1st Sep '12

Looking at the columns New Target Price or Notes in the table below for SOCO International (LON:SIA) since the interims on the 22nd Aug, it seems like nothing much has changed here

Quite so. "Theres nothing happening here.....move right along" seems to be the prevailing view. Thats what happens when you gaze in the rear view mirror for too long.... ;-)

I do hope Soco take an approach like Cove Energy (LON:COV) and annouce SOCO Vietnam or itself up for formal sale instead of waiting around for a bid to materialise which would meet management/significant shareholder expectations...it gets the ball rolling, an open bidding war if one emerges, etc.

I'd regard this as very much a backstop position - but one that may well be adopted if no deal is done by year-end.

The reasons I say it is a backstop and not a preferred course of action are:

Unlike Cove, SOCO have had the assets for years and will certainly already know all of the parties who are potentially interested (and are likely to have a preferred shortlist of buyers). There is no "discovery" process to be undertaken, as Cove were forced into due to the rapidity of developments in East Africa.
As things stand (with control of the shareholder register and no open invitation being issued to bidders) SOCO International (LON:SIA) can offer buyers something that very few other companies can - namely certainty of execution. This may very well result in a more competitive price than an open auction.....indeed it is one of the lessons of the Cove Energy (LON:COV) scenario that you cannot force bidders to pay up whatever the cost, when to do so may drive up the price of other assets against them. That is why Shell declined to raise their bid, despite widespread expectations that they would and should continue. Certainty of execution has a value - and a private auction rather than a public one would have fewer costs and lower risks for the losers.

Accordingly, I'd expect a very small number of companies (say 4-5 that have previously shown an interest) to be quietly approached at a time of SOCO's choosing and for a deal to be done (competitively!) behind closed doors. That may very well already be happening for all we know......

ps...it is noteworthy that the N&P table of analysts price targets etc is incomplete. Amongst those absent are the more bullish (more reasoned, IMO) opinions of Merrill Lynch and RBC....

kenobi

1st Sep '12

If they cannot get the price they want there is always the fall back option to float SV on a stock exchange somewhere as a divi type investment.

I don't know what kind of price the management are looking for, but once there is a reserves upgrade, and a bit more clarity to the amount of oil, and the recoverable amount, I can't see there is a lot of mystery there, (except H5 and any other expo upside which we might need to leave as upside), at that point a read accross from the phillip/conoco deal next door would seem to show the kind of return that most here are expecting. In the meantime if there is any expo success in africa, then there is an argument for keeping/selling that seperately and merging it with another African explorer.

All this we've discussed here below. A lot of it depends what potential upside the management can see, and how willing they are to keep pushing towards getting it, rather than putting their feet up and playing elephant polo or whatever takes their fancy.

I wonder if we might be looking at 6 months from TGT 2 start up, (feb/march 2013), or maybe wait for a shot at H5 (now scheduled for later in 2013 I think? )

personally I am rather surprised that despite them bringing on stream TGT2, on budget, ahead of schedule, and production getting upto 55/60k, the price is still languishing around 3.40 or so. But then, what do I know ? (polite answers only),

Perhaps the market will catch up at some point, or perhaps we'll have to wait for an endgame, (or worse case, we've got it wrong, and the market is right - I do hope not!)

K

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2012 Interims

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Emptyend

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