Valuation, sentiment, and SP direction

Wednesday, Jun 17 2009 by
17

Detailed discussion of Soco's assets should take place on other threads, but this thread is to discuss the latest valuations both by ourselves and analysts, sentiment (ie will the shares go nowhere because there's not much upcoming news) and likely moves in the share price in the next six months.  How should the shares be valued?  How reasonable is it that any drilling without a firm commitment further than several months away is ignored by the market?

I haven't seen many recent analysts' reports on Soco, but I have one from Cazenove with a core NAV of 1370p and no doubt considerable explo NAV on top of that.  I imagine that's approximately concensus, but maybe with crude rising again these concensus NAV figures will start to rise.  Has anyone any other recent broker estimates?

My view, as stated elsewhere, remains that in the absence of much to get the market excited the shares will wander aimlessly for the rest of 2009.  I've previously guessed that if crude were $65 at Christmas 09, then Soco's SP would be somewhere near £13 then, and I'm still very happy with that guess.  What does anyone else think?

Of course unexpected bids and other events may overtake this, but these sort of events may happen to any company, and perhaps Soco (where management seem unlikely to accept bids since they believe there is considerable value not recognised by the market) is one of the less likely companies to be affected by the unexpected.  The key new news for Soco might be (a) a bid (IMO unlikely), (b) some sort of presentation by management of the drilling data they claim to have that demonstrates a significant strike has been made at E, currently ignored by the mkt, or (c) possibly hitting oil off the Congo.

 

Moderation note: posts will only be deleted from this thread by the site admins or by agreement from at least three of sirlurkalot, emptyend, djpreston and doverbeach.  If three of this list agree to delete a post, the names of those three and the reason for deletion will be noted in a post on this thread so everything's completely transparent.


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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)
420p
Change
7.4  1.8%
P/E (fwd)
10.8
Yield (fwd)
4.1
Mkt Cap (£m)
1,394



  Is SOCO International fundamentally strong or weak? Find out More »


1284 Posts on this Thread show/hide all

emptyend 14th Jan 1265 of 1284
2

Following yesterday's presentation at Macquarie's annual E&P conference, I see that SOCO International (LON:SIA) will also be presenting at Credit Suisse's event on 21st Jan.

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tournesol 14th Jan 1266 of 1284
1

In reply to emptyend, post #1265

After previous MacQ conferences, Soco has posted the presentation onto its web site, so presumably we'll get to see this one shortly.

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emptyend 14th Jan 1267 of 1284

In reply to tournesol, post #1266

That would have been my expectation too - but, given that 24 hours has now passed, it seems not.

I have the impression that they are doing de minimus PR this side of the results.

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emptyend 15th Jan 1268 of 1284
4

In reply to emptyend, post #1265

Following yesterday's presentation at Macquarie's annual E&P conference, I see that SOCO International (LON:SIA) will also be presenting at Credit Suisse's event on 21st Jan.

....and also that Roger Cagle will be the sole focus of RBC's "Investor Lunch" series of meetings on 12th February...... so perhaps they are less reticent on PR than I supposed. It would be interesting to hear from anyone who attends in due course.

RBC's current NAV estimate is 545p incidentally. And their latest cashflow estimate for 2014 is 82 cents a share - which, at a payout ratio of 50%, implies a 2014 distribution of 25p per share - though neither seem to have been updated recently. I imagine that may change next month after the 12th.

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snodgrasse 17th Jan 1269 of 1284

There is much speculation in the press at the moment about an imminent decline in the oil price. A price of $60-$80 per barrel for 2014 and beyond seems to be a consensus. Here's one example from many:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10575292/Coming-oil-glut-may-push-global-economy-into-deflation.html

If true - and it seems highly plausible - how is this likely to affect any takeover price? My ignorance of how these things are calculated is total.

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kenobi 17th Jan 1270 of 1284
2

I don't presume to estimate how much the take over price might change by, but even the forward looking estimates of lower oil prices will lower the value of the assets in the ground. We have had a few years during which we have become accustomed to $100 oil, many estimates had suggested there was little more oil to find and that it was in hard to come by places or places with political instability. Shale oil seems to be reversing declines in production in the US, and no doubt eventually it will be used elsewhere.
I am guessing that this will mean less unconventional (tar sands etc), will be developed, but even so, it's easy to conclude that supply will increase. Will it increase faster than demand ? depends on the growth of the world economy I guess ? There certainly seems a lot of talk of the US outstripping Saudi in oil production and not needing any imports.
It'll be a shame if after all the work and time taken by the SOCO team, we end up with the same sort of price we could have got a couple of years back because although more oil has been proved up, a lower amount per barrel is achievable.

K

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emptyend 17th Jan 1271 of 1284
8

In reply to snodgrasse, post #1269

If true - and it seems highly plausible - how is this likely to affect any takeover price? My ignorance of how these things are calculated is total.

Leaving aside the question of the oil price outlook (save to say that expectations of a fall in oil prices have been a regular feature over the last 15 years and have been almost perpetually confounded, partly due to rising costs of finding and producing oil and partly due to things like the Saudi Government budgeting for oil prices of around $100), the impact of the current oil price on bid values is surprisingly limited......

.......Way back 4-5-7 years ago, IIRC we were given a figure of around $20 per 2P barrel for Vietnam oil in an M&A scenario. At the time spot oil prices were around $75. Since then we have seen a couple of deals in Vietnam whilst spot oil prices have been a bit higher - but those have still been in the $19-$23 per 2P barrel range (depending which analyst's estimates you use).

The relevant points are these:

  • Every $1 change in the oil prices affects the bottom line by around 40-43c, because there is a 50% tax rate and there are also direct production costs
  • Field life is c. 20+ years....maybe an "average life" of 10-12 years (ie weighted by productio volumes expected). This means it is the 8-12 years forward price expectations which are most important - and not the next 8-12 months.

 

IMO there is a case to be made for thinking that if oil prices were to be expected to remain steady for the next 10-15 years, then M&A pricing would be $25-30 per 2P bbl. But relatively few expect that and even fewer buyers would pay that. OTOH, similar considerations apply to the flipside of the argument.....

....so, in sum, even if the oil price falls significantly in the short term, I don't expect the 2P bbl value in Vietnam to fall below about $18 - and I don't expect it to be much above $24 either, even if oil prices stay up.

HTH

ee

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snodgrasse 17th Jan 1272 of 1284

In reply to emptyend, post #1271

HTH

Yes, it does. Thanks.

I was thinking along the same lines as Kenobi when he said:

It'll be a shame if after all the work and time taken by the SOCO team, we end up with the same sort of price we could have got a couple of years back because although more oil has been proved up, a lower amount per barrel is achievable

But then if you're buying an asset for the long term, then today's price is only a very small factor. Who knows what the value of the stuff will be in 20 years? It could be $300 or $0.

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tournesol 17th Jan 1273 of 1284
6

In reply to snodgrasse, post #1269

...There is much speculation in the press at the moment about an imminent decline in the oil price....

No there isn't.

....A price of $60-$80 per barrel for 2014 and beyond seems to be a consensus....

No it doesn't.

There is a famous aphorism to the effect that the plural of anecdote is not evidence.

Incidentally are you Lazy Lycosa when you post on TMF? Just asking because a similar post was made there a few minutes ago citing a newspaper article that is over a year old to support the thesis of an imminent price fall. It actually shows that bearish comment recurs and is then proved werong time after time after time.

Predicting that the price of oil will fall is like predicting rain. Do it long enough and you'll be right. But that does not make it insightful.

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emptyend 17th Jan 1274 of 1284
11

In reply to kenobi, post #1270

Shale oil seems to be reversing declines in production in the US, and no doubt eventually it will be used elsewhere.
I am guessing that this will mean less unconventional (tar sands etc), will be developed, but even so, it's easy to conclude that supply will increase.

I'd completely disagree with all of that, save for  agreeing that the USA has had a short-term production boost. One of the reasons that recovery costs have been rising is because shale activity is hoovering up drilling resources, raising production costs across the sector. Note, in particular, today's disappointing results from Shell - and consider this article from the FT of a few months ago which is headlined 

US shale is a surprisingly unprofitable miracle

I've put that in great big bold letters, because to listen to the popular press...and to the UK Government.....and to BBC's Question Time last night....you would think that shale fracking is some sort of magic bullet for all our energy problems. And it most definitely isn't!

The clue as to why it isn't lies in the FT article I refer to above:

That a company with the technical ability and cash of Shell would find production from fracked shale had not “play(ed) out as planned” should give pause to the investors and commentators who have become believers in the shale miracle.

Mr Voser commendably took responsibility for a $2.1bn writedown on the value of the company’s US shale assets...

Mr Voser told the FT: “[Shale well] decline rates are very high, so after 18 months your production drops very sharply, which means you have a business model of constant investment.”

That is demanding enough for a highly diversified investment grade company such as Shell; if your company is junk-rated, it is much harder.

Once again, I have emboldened and enlarged the key point here!

Whilst shale is in its very early stages, it looks like a miracle. New wells are drilled and fracked at a furious pace and this activity leads to very rapid production increases. BUT the flipside of that is that the very rapid production falls are just around the corner, as the former Shell CEO indicated. Whilst new wells are drilled and fracked fast enough to outpace the impact of production declines, everything looks hunky dory......but when that production curve rolls over and declines????.....boy, is it going to have an impact - especially on the USA where the psychology seems very much focused on shale as the guarantee of cheap gas prices!

So I am in complete agreement with the conclusion of the FT article:

Beyond next year, though, there is a steep wall of capital demands for new pipelines, reversals of existing pipelines, export terminals, nearby chemical plants, and gas-fired power plants.
 

What really surprised the industry was the continuing supply of new capital from lenders and return-short investors. This interrupted what would have been a typical oil and gas drilling cutback phase.

In other words, yes, there is a big Marcellus effect, but it may turn out to have been superhyped by quantitative easing. 

...and I am completely and utterly relaxed about the price outlook in the context of SOCO International (LON:SIA) 's likely forthcoming deal in Vietnam.

As for the tar sands point mentioned by kenobi, the environmental lobby is queuing up to object to developments - and in any case they are completely uneconomic if oil prices were to fall significantly. The reserves that SOCO International (LON:SIA) is sitting on in Vietnam are some of the lowest cost reserves anywhere in the free world (ie outside the Middle East) and for that reason they will be highly sought-after, even if there happens to be a very short-term dip in oil prices.

ee

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tacheman 19th Jan 1275 of 1284
3

The MacQuarie presentation is now up on the Soco site.

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tournesol 19th Jan 1276 of 1284
7

In reply to tacheman, post #1275

Thanks Tacheman

The Macquarie presentation is a strong performance from a self evidently relaxed and confident management team.

Not a massive amount that strikes me as new, but one or two things caught my eye (there is an old joke about that.....)

1) TGT development drilling will continue for another 4-6 years

2) Partners have agreed to drill CNV 7P well to access undrilled fractures and increase production

3) Uganda Block V activities suspended because of M23 insurgency

4) 2nd stage capacity test of TGT FPSO pending

5) acquisition of new ready-to-drill high potential exploration prospect is expected

6) annual return to shareholders will target a MINIMUM of 50% of FCF

T

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emptyend 19th Jan 1277 of 1284
7

In reply to tournesol, post #1276

The Macquarie presentation is a strong performance from a self evidently relaxed and confident management team.

Not a massive amount that strikes me as new, but one or two things caught my eye (there is an old joke about that.....)

Yes - and mine.

But the main thing that I notice is the whole thrust of the presentation. I am reminded of the prior comments about Yemen being a "plumbing job" - especially when I look at the relationship between proven and possible/potential in slide 8 ;-) 

Vietnam is clearly in the departure lounge, ready and waiting for take-off. Mostly just waiting for the last bits of luggage to turn up (principally the RPS reserves report and the H5 development plan)

I also note:

  1. The cogent investment case presented in slides 3-5
  2. Details on Litchendjili on slide 13 show drilling planned for mid-year and 50-60mmboe upside in our block. Remember that ENI have already put the field on production in their block.
  3. Slide 15 giving details of MPS target and plan...drilling in about 12 months targeting 100-300mn boe (in which SOCO International (LON:SIA) would have a 60% WI)

 

2014 should be a very rewarding year, IMO.

ee

 

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Asagi 19th Jan 1278 of 1284

reported as "Currently drilling the second well of the two well programme, Dinge 20-7 well" in Cabinda.

That puts me right, who was thinking that both wells had been drilled but no results made public on either.

I'd like this to work for SOCO as it would demonstrate some success outside Vietnam.

Asagi (long SIA)

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emptyend 19th Jan 1279 of 1284
2

reported as "Currently drilling the second well of the two well programme, Dinge 20-7 well" in Cabinda.

That puts me right, who was thinking that both wells had been drilled but no results made public on either.

IIRC the timeline suggests that, even with Sonangol inefficiencies, 20-7 can't be far off completion. So the question will then be: what can be announced for both 20-6 and 20-7? We know that 20-6 was worth some testing.

I'd like this to work for SOCO as it would demonstrate some success outside Vietnam.

I'd prefer to see a success made of MPS - assuming we still own it by the time of drilling. Ideally I'd prefer everything to succeed but really Cabinda (17%) is a sideshow at this point.

 

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flyinghorse 19th Jan 1280 of 1284
2

I also picked up (my interpretation) :
Preference for oil over gas (slide 5) that would also exclude gas from many farm ins.

TGT H4S would appear to be crying out for a well,but nothing I can see in 2014 plan

FH

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emptyend 19th Jan 1281 of 1284
2

In reply to flyinghorse, post #1280

I also picked up (my interpretation) :
Preference for oil over gas (slide 5) that would also exclude gas from many farm ins.

My understanding is that this preference is mainly expressed in having a higher threshold size and in requiring a clear channel to market. In other words, there will be no blue sky LNG or sub-scale gas......and you are right that this certainly excludes many situations

TGT H4S would appear to be crying out for a well,but nothing I can see in 2014 plan

It may be the case that wells to develop H4S would be drilled from a platform installed for H5. So, until that is agreed, there won't be a firm plan to drill H4S. I would also note that is there should happen to be connectivity from H5 (as I think there is) then that implies that some sections of H4S are connected to H5. If that is the case, you may find that the analysis of the H5 well tests cause some degree of upgrading of the H4S "possibles" without further drilling. The answer to that point lies with RPS at present...

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ExTownie 19th Jan 1282 of 1284
1

Do we have an idea when any change to the reserves would be announced? I had end of Q1 in my mind, not sure why, or would this be an AGM item?

Thanks

ET

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emptyend 19th Jan 1283 of 1284
8

In reply to ExTownie, post #1282

Normally (ie for the last 15 years...except last year) updates on reserves have been made with the (printed) annual report.

My understanding this time round is that the RPS report conclusions will emerge with the prelims - or perhaps before?  Last year the RPS report conclusions were made public in mid-February as part of an Operations Update that included comments on CNV and Cabinda. Perhaps a similar thing will happen this year?

In sum, my expectation is that the reserves update will come out sometime in the next 6-8 weeks.....most likely (IMO) after a board meeting sometime in February.  FWIW

rgds

ee

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ExTownie 19th Jan 1284 of 1284
1

In reply to emptyend, post #1283

Thanks ee

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