So what’s Soco Vietnam worth excluding TGD?

Monday, Oct 18 2010 by
29
So whats Soco Vietnam worth excluding TGD

I know I’ve made the odd comment about $15 and $20 a barrel on the TGD thread for SOCO International (LON:SIA) but that was largely from the gut without too much thought, hence a bit more application now… Firstly, AFAIA, nobody has ever put a figure on how much the Lizeroux 20% minority interest should be discounted for their carried interest. This is obviously important since Soco include Lizeroux’s entitlements in their booked reserves. Personally, I think Soco should be estimating what these amount to in the Annual Report notes.

It’s impossible to be accurate but I’ll suggest Lizeroux’s holding should be reduced to around 12.5% going forward to first production at TGT. In round figures, I’m thinking 20% of say $500m invested over 10 years, the bulk in more recent times, charged at 9% interest is likely to run up a bill currently of say $150m…bearing in mind of course that a certain amount of carried interest bills will have already been paid back from CNV production. Unless anyone else believes these figures are shaky, I think 12.5% forms a pretty solid basis. So, SV’s booked reserves need discounting by 12.5%. We also need to account for gas reserves being worth less than oil. As at 31 Dec 2009 booked Vietnam reserves were 124mmboe. My split on that is CNV 24 oil + 8 gas, plus TGT 92 oil. Total 116mmbls + 8mmboe

For the year end December 2010 booked reserves, I’d estimate an added 10 mmbbls for TGT making a total 126mmbbls + 8mmboe. Ok, that might look conservative but I’ve seen it all before where people get too excited on upgrades that don‘t materialise. One also has to bear in mind that potential downgrades on CNV (quite possible - even likely given production rates to date vs. production licence period) won’t be apparent in the overall Vietnam reserves declaration. So, knocking off the 12.5% Lizeroux component we get y/end 2010 110mmbbls + 7mmboe. At $15/bbl and $5/boe, 358m shares out fully diluted(incl conv) equates to 295p/sh.

This exercise is meant to seek a rock solid core valuation when contemplating a sale of Vietnam assets in the market without any consideration for TGD or additional reserves which may or may not result from TGT production history in future. Apart from the level of reserves, the $/bbl price is obviously key. What will a buyer pay? Clearly, the Viet assets are of strategic importance, so you’d expect a keen price but they’re not so large as to attract over the top bids imo. When RC says (according to Unwise’s post) the NAV of Viet barrels is $20 based on $75 oil, that doesn’t mean a buyer will base his purchase at $75. Indeed, when Soco sold Yemen, the oil price was in the $90s yet the sale was apparently based on $70. It could be that attitudes to future oil prices have changed since then and $75 now might be accepted in M&A circles but we can’t know that until it manifests itself in a transaction. Clearly $20/bbl rather than the $15/bbl example above would yield 395p/sh and higher TGT barrels a good bit more but that’s in the lap of the gods at this point in time!

Make of all that what you will but, if nothing else, it will hopefully be useful to establish Lizeroux’s holding being worth 12.5% after consideration of their carried interest.

Disclosure of Interest: The Author holds shares in SOCO International (LON:SIA). 


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SOCO International plc is an international oil and gas exploration and production company. The Company has oil and gas interests in Vietnam, which includes Block 9-2 and Block 16-1; Republic of Congo (Brazzaville), which includes Marine XI Block and Marine XIV Block, the Democratic Republic of Congo (Kinshasa), consists of Nganzi block and Block V and Angola, which include Cabinda Onshore North Block. The Company's operations are located in South East Asia and Africa. It holds its interests in the Republic of Congo (Brazzaville), through its 85%-owned subsidiary, SOCO Exploration and Production Congo SA (SOCO EPC). It holds its interests in the Democratic Republic of Congo (Kinshasa) through its 85%-owned subsidiary SOCO Exploration and Production DRC Sprl. The Company’s net entitlement volumes were approximately 15,500 barrels of oil equivalent per day. more »

Share Price (Full)
323.9p
Change
4.4  1.4%
P/E (fwd)
8.1
Yield (fwd)
5.4
Mkt Cap (£m)
1,061



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181 Comments on this Article show/hide all

bugsmunny 18th Oct '10 2 of 181

A very useful calculation, Davjo. Thank you.

So now, after all this ee, you are agreeing that the current share price of 335p is underpinned by a core value of around 300p.


Fairly sobering stuff really after all these years.

 

It looks like it could turn out to be a pretty disappointing investment for many who were not in from the early days or didn't take some profits along the way.

B

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emptyend 18th Oct '10 3 of 181
7

In reply to bugsmunny, post #2

So now, after all this ee, you are agreeing that the current share price of 335p is underpinned by a core value of around 300p.

No - not at all! Please don't misrepresent what I've said!

I've just said that I think it is well underpinned - and, as it happens, my own view is rather closer to RBC's which is:

The net impact of today’s news is negative, reducing our NAV to 518p/share from 569p/share. However, in our opinion, the success at TGT has raised the safety net (core NAV) for shareholders above 400p/share and drilling in the DRC continues to expose them to significant upside potential.......
TGT-H1-2P encountered the reservoir section approximately 10m higher than the pre-drill prognosis, which “strongly supports” the reprocessed pre-stack depth migration work that indicated the oil accumulation extends to the east. Further drilling is required to fully define TGT, but we expect this result to lead to a reserves upgrade. We previously suggested that a reserve upgrade from 250mmbbls to 350mmbbls gross would shift 60-70p/share from ‘risked upside’ to ‘core NAV’, pushing it to over 400p/share......
In the DRC, the KNY-1 exploration well is targeting a 200mmbbl prospect ...... In the coming weeks, management may announce plans for a third well in the DRC, targeting a new play type. We currently include no value for a third well within our NAV.

....but I see no point in entering into a detailed debate on valuations at this juncture, given the extent of guesswork that this would require...and the fact that it wouldn't change my overall view one iota.

ee

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davjo 18th Oct '10 4 of 181
5

In reply to emptyend, post #1

Morning ee

Thanks for your excellent response :-)

Worthwhile discussion point - though of course one that is rather tricky to be sure about

Absolutely! Shining a little light on the Lizeroux holding should help though since AFAIA none of the analysts properly account for this at all. They appear to either ignore the holding completely or lop off the whole 20%.

Re Yemen, they ALSO paid something for 3P upside - so if one was looking purely at 2P then the price per barrel would actually have been higher

Yes indeed....although Yemen reserves were pretty transparent relative to say CNV. Much clearer for the larger TGT of course but when it comes to y/end reserves, I wonder whether they'll take a cautious view of the fault blocks to the south until such time they actually drill development wells there? We'll see.


Agree the discount factor for future barrels is a very valid point. In rough terms, 1% reduction in the rate seems to equate to $1+ per barrel, so could be significant depending on the stature of the buyer. As you rightly note, the list of potential suitors will likely include such oilcos.


As to CNV gas, as you say, the unknowns don't help....the biggest of which being the amount of condensate. This could bump the $/boe higher than I suggested but there again it's only a modest proportion of overall reserves.


In sum, I'm very comfortable that the share price is well-underpinned without all the explo.....and, in many ways, that is all I need to know.

Wouldn't argue with that really. All I was trying to guage was a rock bottom from which the only way was up...disregarding economic collapse!

 

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emptyend 18th Oct '10 5 of 181
3

In reply to davjo, post #4

Wouldn't argue with that really. All I was trying to guage was a rock bottom from which the only way was up...

Yup - could see that!  ;-)

Much clearer for the larger TGT of course but when it comes to y/end reserves, I wonder whether they'll take a cautious view of the fault blocks to the south until such time they actually drill development wells there? We'll see.

I would think they will be more cautious - not least because that would be phase 2 production rather than phase 1. Nevertheless the difference between PSDM and PSTM 2P reserves looks to me to be very substantial in the southern fault blocks (more than doubling?) ........and I would guess that the TGT-H1-2P having come in above prognosis indicates that for the H1 fault block the 2P area can now be expanded somewhat towards the 3P boundary.

All guesswork though - especially if a negotiating situation develops.  ;-)

ee

ps....AIUI the original thought that TGT may be up to 500mn bbls recoverable was based more on recoverability expectations rather than OOIP. The expansion of the OOIP potential is a more recent development. I wonder whether there will be a year-end reserves statement updating their views on the potential of TGT - and if so, and the volumetrics suggest a significant uplift to OOIP, perhaps both near-term 2P reserves and ultimate potential recoverables may yet give an upside surprise?

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unwise2 18th Oct '10 6 of 181
7


Hi Davjo

When RC says (according to Unwise’s post) the NAV of Viet barrels is $20 based on $75 oil.

Just to be clear I got that information directly from RC.

EE,

The expansion of the OOIP potential is a more recent development

RC did mention the possibility that TGT could end up over 500mn bbls, I believe the plan is to drill 7/8 wells before they release the rig next year,which would provide a much better idea of OIP.

 

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emptyend 18th Oct '10 7 of 181
2

The expansion of the OOIP potential is a more recent development

RC did mention the possibility that TGT could end up over 500mn bbls, I believe the plan is to drill 7/8 wells before they release the rig next year,which would provide a much better idea of OIP.

All makes sense - thanks for the clarification!  Since the 500mn pre-dates the new seismic, though, I wonder whether anyone has managed to get any guesstimates in relation to the new "2P" and "3P" areas shown in the recent presentation????? ....because, as things stand, the 2P that has actually been booked relates only to the smaller areas indicated from the earlier PSTM seismic!

ee

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davjo 20th Oct '10 8 of 181
7

Just for clarity re my comment about the minority shareholder :-

a certain amount of carried interest bills will have already been paid back from CNV production.

I’m advised by the Company that in fact nothing to date has been paid back. Furthermore, it is anticipated that the carry pay-back will take in excess of 5 years to clear before the minority shareholder benefits from any cash flow.

This doesn’t change my view on valuation but reassures as to what I see as a rock solid base.

 

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jonnyt 26th Oct '10 9 of 181
4

I think all the calculations on here are invalid.

Using pure DCF is fine if the distribution of return is constant. It isn't.

Given the substantial costs to be recovered from early production this skews the DCF calculations in such a way that the asset is certainly worth a lot more that some ascribe.

i.e. 1/6 of the total acquisition cost may be recovered within 12 months.

JonnyT

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lowersharpnose 26th Oct '10 10 of 181

I hit the thumbs down by mistake, yet again, sorry.

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TomKe 26th Oct '10 11 of 181
5

I played tennis at the weekend with a senior bunny at another oil company in the region (lost 2-6, 6-1, 4-6).

He made a couple of obervations and looked a bit smug when I oberved his companies share price had appeciated nicely.
1. He said he could not remember seeing an RNS as stark as the one Soco issued re: TGD. His assumption was that TGD was dead.
2. He said Analysts tend to assume that switching to turn assets into Production is zero risk. It isn't. A useful point as Soco are about to do this.
3. He also observed that Soco cannot be flavour of the month with the Vietnamese Govt.
Regards
TomKe

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Isaac 26th Oct '10 12 of 181
6

He also observed that Soco cannot be flavour of the month with the Vietnamese Govt.

Great. So does that mean we won't get an extension for TGD, Management may fall out with Vietnam.Gov and sell up?

Then I can take out some of my hard earned from the stock market and spend it!

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davjo 26th Oct '10 13 of 181
6

In reply to jonnyt, post #9

Given the substantial costs to be recovered from early production this skews the DCF calculations in such a way that the asset is certainly worth a lot more that some ascribe.


i.e. 1/6 of the total acquisition cost may be recovered within 12 months.

I agree with the principle but I'm not sure the impact is quite as significant as you suggest, in 2P $/bbl terms anyway. My DCF model already starts off with a cost pool which is recovered over time. As to the minority's cost carry, I've tried to accommodate for that as shown at the top of the page. Regarding PV's 41% explo carry(shared with PTTEP), I haven't accounted for that but guess it's a bit less than the minority's carry* before interest, say $150m? So in $/bbl terms $1?


Re speed of recoverable costs, 'cost oil' is limited to 35% of gross revenues minus the sliding royalty payable (about 8% at 55k bpd I think), effectively 32%. A quick calc at $75 oil and gross 20mmbbls produced in year one, I get post tax, undiscounted cashflow net to Soco of $280m. However, I think Soco have claim over PV's portion of 'cost oil' to recover their carry which would add $90m (plus $60m in year two based on above), so :-


$280m + $90m = $370m x 6 = $2220m which is about $18/bbl for current booked reserves.


Not a bad guesstimate JT :-)

*I've revised my previous minority guesstimate >$150m

 

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emptyend 26th Oct '10 14 of 181
9

In reply to TomKe, post #11

1. He said he could not remember seeing an RNS as stark as the one Soco issued re: TGD. His assumption was that TGD was dead.
2. He said Analysts tend to assume that switching to turn assets into Production is zero risk. It isn't. A useful point as Soco are about to do this.
3. He also observed that Soco cannot be flavour of the month with the Vietnamese Govt.

If I may comment on those:

1. His memory must surely be playing tricks. At least there was oil present - even if they couldn't recover much of it at this well. Doesn't this read a little bit better than the usual "dry hope" P&As?....

the well encountered significant hydrocarbons in a clastics reservoir sequence at approximately 4,550 metres measured depth and produced both black oil and gas, it flowed at sub-commercial rates

2. That is of course a very good point. There is risk at all stages of the process. Having said that, TGT looks in good shape from the first two development wells - and the difficulty to which he alludes should be worth a premium to someone looking for production growth.

3. It is rarely or never the case that company X has an accurate perspective on company Y's relationship with the government of Z.  Furthermore, it isn't my understanding of the situation. If SOCO have just spent hundreds of millions of dollars trying to prove up oil on 16-1 and are willing to spend a good amount more, why would a carried partner like the government have a problem with that?

NB....oil execs can do "smug" very well when they are riding high themselves.......  ;-)

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jonnyt 26th Oct '10 15 of 181
6

However entitling an RNS 'Vietnam Discovery' only for the well to be a dud doesn't help.

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emptyend 26th Oct '10 16 of 181

In reply to jonnyt, post #15

True - but there are duds and there are DUDS. This was a dud.

Did anyone enquire how much oil/gas they were actually able to recover? If oil can be recovered to the surface then it doesn't seem unreasonable to call it a "discovery" - just as long as one doesn't imply it is going to be commercial.

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peterg 26th Oct '10 17 of 181
3

In reply to jonnyt, post #15

However entitling an RNS 'Vietnam Discovery' only for the well to be a dud doesn't help.

So presumably they should not have released an RNS and waited for testing to complete before releasing anything? I'm sure if they had you would have been telling us all what wonderful news management it was!

Life would be so much easier if we could all see the future, but I expect it wouldn't be half as much fun, and there certainly wouldn't be so many opportunities to make money.

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arkleseizure 27th Oct '10 18 of 181
2

Did anyone enquire how much oil/gas they were actually able to recover? If oil can be recovered to the surface then it doesn't seem unreasonable to call it a "discovery" - just as long as one doesn't imply it is going to be commercial.
Well, that might have been Tom Cross' s attitude, but it would bug me. I am still utterly baffled by the RNS explanation of lack of flow..

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emptyend 27th Oct '10 19 of 181
5

In reply to arkleseizure, post #18

I am still utterly baffled by the RNS explanation of lack of flow..

I don't think you are alone on that point. I anticipate that a more detailed commentary will follow in the "way forward" RNS in the next few weeks. Furthermore the first analyst comment has now emerged (RBC), as they revise their NAV estimate to 497p:

The market reacted badly to this month’s TGD-2 result, and at 327p the stock is trading at a material discount to our 402p/share “core NAV”. Further weakness on today's news should be seen as an(other) opening for investors seeking a “Corporate Change Play”. SOCO has a solid core of assets in Vietnam, including a 30% operated stake in the 250mmbbl+ TGT oilfield, which is scheduled to be brought onstream in H2/11. In our view, SOCO would make a neat bolt-on acquisition.

It seems to me that all the endgame ingredients are now dropping into place.....

ee

 

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Isaac 27th Oct '10 20 of 181
2

It seems to me that all the endgame ingredients are now dropping into place.....

Yep. About time. Can't be bothered with these failures anymore. We need to find a new home for our cash........Sterling anyone? :-)

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tournesol 27th Oct '10 21 of 181
10

In reply to Isaac, post #20

I've said it before, but I'll say it again, I'm utterly and completely baffled by Isaac's comment above.

I've only just read his post on a different thread saying he has just this morning bought Soco shares at 315p

Is is possible to reconcile two such diametrically opposed comments which were made literally only 15 minutes apart?

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