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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)
420.8p
Change
-6.9  -1.6%
P/E (fwd)
10.6
Yield (fwd)
4.1
Mkt Cap (£m)
1,420



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


1289 Posts on this Thread show/hide all

emptyend 18th Jun '09 1 of 1289
17

OK - I'll go first then.

Sentiment:

 ....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......  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?

I'd say that sentiment is about as weak as it could be, and that your view is very widely shared in the market. That doesn't necessarily mean that it will be proven correct - and indeed IF there should be some developments then the fact that sentiment has been weak probably means that many people are quite underweight at this point.....and positive news (or rumour) could spark a disproportionately large rally. I have no way of knowing whether the market will be "excited" enough by news but:

a) The HPHT seismic reprocessing should be completed by the September interims and seems likely (based on the AGM presentation mood music, the hiring of a world-class HPHT expert and the 120m of net pay found last year) to show a real chance of there being a 1-1.5bn bbl oil/condensate fan structure overlaying a similarly sized gas/condensate structure under the volcanics (perhaps part in basement). See http://www.stockopedia.com/forum/view/29425/hpht-appraisal-area?comment=4#4

b) There is material upside in the first Marine XI well on S1 - and it will be a quick well, once spudded. See http://www.stockopedia.com/forum/view/29284/soco-post-agm-reports-and-predictions

c) Looking ahead to next year and the Nganzi programme, they will decide by October whether to drill the whole 300mn bbl upside without farming down. See http://www.stockopedia.com/forum/view/29284/soco-post-agm-reports-and-predictions?comment=12#12

d) TGT development plan should be finally approved and production forecasts are likely to confirm plateau production of c 30,000bopd net to SOCO (more like 50,000 boepd effectively, during the cost recovery phase)

Whether any of this makes any impact on either the market or the potential bidders is, of course, impossible to say. It should do - but nobody knows whether it will. Nevertheless, I'd be very surprised if the combination of news doesn't lead to SOCO outperforming the peer group iin the remainder of the year

Valuation:

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?

I've seen the same report. The unrisked explo/appraisal upside shown in Fig 5.3 totals £28.11 per share (additional to the 1370p core). Risked upside is shown as 569p. This includes NOTHING for the deep gas plays in the HPHT area (which are likely to be in the 1 to 2bn boe range, when E South is added in to the TGD lower Oligocene (where a net 70m of pay was logged in TGD-1X) and the basement below TGD). It also implies that the TGD/fan area that is expected to be oil-bearing is in the order of 760mn bbls gross....whereas it is clear from the AGM that the actual outcome (post seismic reprocessing AND drilling) might be as much as double that.....

....so the point is this: VN .....in particular the HPHT area....is CENTRAL to valuation. And the fact that the potential upside there is now (pending seismic confirmation) thought to be VERY much more valuable than it was at this time last year (because they now think there is an oil bearing fan that could be 1-1.5bn bbls recoverable, additional to the original expectation of a 1-1.5bn boe gas play) is one of the key reasons why the expected deal has failed to happen - because buyers, not unreasonably, want more evidence that the current interpretation is correct. So.....

....returning to the valuation question this indeed poses a problem. Assuming no material changes in oil prices or other Cazenove/JPM assumptions it seems to me possible that the REAL maximum upside potential (including the full fan and the deep gas) could be in the £40-50 a share range (given that another 750mn bbls in the fan would be c £10 a share)....to which one would add the 1370p core. We'll probably have some confirmation of the upside scope this autumn [which may well lead to reassessments by analysts IMO!] - but it won't actually begin to be properly proven until TGD-2X is drilled in mid 2010......though of course there is the possibility of 425mn of gross upside(perhaps 300mn net if they drill Nganzi alone) being confirmed in Africa in the meantime.

My view on this is pretty simple: If they were to sell in VN BEFORE they drill the TGD appraisal, it is likely they would want £25+ per share for the VN assets. This is £11+ of core (according to Caz's fig 5.1) and the balance being explo upside (Caz's total for the three VN line items in fig 5.3 is 1996p - to which, as I say, can probably be added the deep gas play and the full size of the fan). If they sell AFTER drilling TGD-2X, thus derisking the fan, they would want something over £35 per share [given my comments above about a potential £40-50 upside and £11 of core].

So I see VN as either £25 sometime between now and next May or £35 sometime in the year from mid-2010 to mid-2011.

The value of "the rump stake" in the rest will of course depend heavily on drilling, given that four important wells will be drilled in the next year with up to about 350mn bbls of net upside between them. Caz put a risked value on the rump of about £3 per share, but success at all the wells listed in fig 5.3 would (on their figures) raise the value to about £9 per share....

....so, adding to the VN figures, by late 2010 we MIGHT be looking at a value of about £45 a share. What's that worth now? Dunno. The market says it is worth £12 - which seems far too cheap when considering that the shares have (IMO) a reasonable prospect of doubling or more over the next year. Whatever the case, I am very happy indeed to hold.

Other brokers?

Morgan Stanley - 22 May: price target of 1575p, base case NAV 1771p, bull case NAV 2162p [nb this seems to exclude all 2010 drilling]

Tristone - 14 May: price target of 1575p, NAV 1585p

Citi - 13 May:  price target 1300p, NAV 1344p [nb.....Citi were presumably in the "departure lounge" for their broker role by this point!]

Merrill: 11 March: price target 1500p, total NAV 2202p (incl 1554p core) [nb this includes only 201p of risked explo - less than half Caz's figure]

 

"Events, dear boy, events":

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.

I'd agree that an early acceptable bid seems unlikely, though the Chinese are still on the table with their interest. However....it only takes ONE third party (KNOC, PTTEP etc etc) to decide that it is worth paying up at this point - and a deal could quickly be done. With bids out for various other E&Ps any bidder should know that at least they are likely not to be outbid if they can do a deal with SOCO. There is no chance that SOCO would sell in Africa, IMO, so we're just talking a VN bid. A deal will be done at some point - I've indicated above the sort of numbers that I think management will be looking for, assuming analysis and drilling results proceed as expected.....but WHEN it will happen is very much a guessing game, especially in an environment where it is "open season" on E&Ps. The other events are of course a possibility (indeed a probability, IMO, if one adds in Nganzi too).....but whether and when they will impact the market, which has plainly dozed off on the potential for SOCO, is more difficult to say.

 

ee

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marben100 18th Jun '09 2 of 1289
1

Hi SirL,

Wouldn't the result of Congo drilling affect the likely price come December, however? IIRC the first well is expected to spud in August. Not sure whether the run-up to spudding & the spud announcement might cause a bit of a surge.

Obviously, a negative drilling result may affect the SP negatively. Nevertheless, I have not in the past had a core holding in Soco but, following the AGM I have decided to build one. I'll go into the reasons for that more in my overdue AGM writeup/comment!

Whether this is the best place to invest in the O&G sector right now, I do not know but it's one that I feel pretty comfortable with on a long term view. I'd hate to miss the boat if events occur that drive the SP up sharply. Given recent SP relative weakness this seems like a good time to add to a core holding - but I'm keeping firepower back, should the price go lower. If we get below 1100p, I'll almost certainly add some more.

Personally, I might trade around this core holding, adding below 1100p and selling some above 1400p - subject to Soco developments and oil price evolution.

Regards,

Mark

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sirlurkalot 18th Jun '09 3 of 1289
3

Given that the market doesn't have much in the price for the non-flowing E area, it doesn't believe there's a workable field there, so more seismic interpretation seems unlikely to do much for the shares.  It's got to flow before the mkt seems likely to believe there's a workable field, so yes, the next well could be very interesting, but that's 2010.  Why can't the management release the drilling data they claim to have that was going to convince prospective buyers it was an attractive flowing field?

Yes Mark, the Marine XI well might help, but how material is it?

Most of the other matters mentioned seem to be 2010 ones, when things might be exciting, but it's 2009 now.  Trading between £11 and £14 seems fine, but that's all that's goin' on in 2009 IMO.

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marben100 18th Jun '09 4 of 1289
2

In reply to sirlurkalot (post #3)

Yes Mark, the Marine XI well might help, but how material is it?

Good question. Per my AGM notes, two wells are planned. The first is relatively shallow (1200m) and will act as a "commissioning" well for the new rig to be deployed, targetting a pre-salt structure. This will be followed by a 2800m well targetting a sub-salt structure. One of these (and unfortunately my notes aren't good enough to recollect which) will target the rather large prospect, to the left of Marine XI, extending into Marine XIV, shown on slide 15 of the AGM presentation. If I've got it right, this has the name "Lyeki" - which translates as "whale". ISTR some rather large prospective figures being mentioned: perhaps time to visit the Congo thread & see what others have to say...

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emptyend 18th Jun '09 5 of 1289
2

Why can't the management release the drilling data they claim to have that was going to convince prospective buyers it was an attractive flowing field?

Because nobody outside the industry would understand it anyway! But that isn't really the point....the point is that they think there is a big fan structure there, and that the TGD-1X well was drilled right at one extremity of it - and DST-2 was inconclusive as regards flow (despite fluids being returned) thanks to the well problems. It is the new fan interpretation which is unproven (and indeed more or less unnoticed by the market), not the question of whether the (mainly gas) found in DST-1 would flow or not.

Trading between £11 and £14 seems fine, but that's all that's goin' on in 2009 IMO.

Yup - know that's your view. You might be right. But then you might not. All I'm saying is that pretty much everyone and his dog who is close to the City is taking exactly the same view.....and I don't think they'll be right.

ee

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emptyend 18th Jun '09 6 of 1289
4

In reply to marben100 (post #4)

Per my AGM notes, two wells are planned. The first is relatively shallow (1200m) and will act as a "commissioning" well for the new rig to be deployed, targetting a pre-salt structure. This will be followed by a 2800m well targetting a sub-salt structure. One of these (and unfortunately my notes aren't good enough to recollect which) will target the rather large prospect, to the left of Marine XI, extending into Marine XIV, shown on slide 15 of the AGM presentation. If I've got it right, this has the name "Lyeki" - which translates as "whale".

The first well is the 100mn bbl prospect Mark......should take a couple of weeks. This might turn out to be bigger, given that a 300mn bbl number was indicated last year. Neither well is targeting the "staddliing" prospect you mention (that will be drilled later in 2010)....the S1 (Lyeki) prospect is the large oval one and the second well is a 1km step-out appraisal well on the Viodo field, which would prove up a further 25mn bbls or so.

rgds

ee

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marben100 18th Jun '09 7 of 1289
2

In reply to emptyend (post #6)

Thanks ee. I see that we don't actually have a Congo (Brazzaville) thread yet. Would be handy to create one. So much to do, so little time. ;0)

Bottom line, though in response to SirL, is that, yes, the Congo wells this year could be material - and may enhance or reduce prospectivity of the licences, depending on what's found. Shame that JonnyT's drilling database (http://www.drillingdatabase.co.uk/company/show/2 ) doesn't seem to be up to date.

We could do with a summary of what's coming up and prospect sizes for Congo.

Some great notes from KoD here: http://www.stockopedia.com/forum/view/29284/soco-post-agm-reports-and-predictions?comment=7#7

Marine XI added since last year – rig contracted and moves in August – on large structure Liekie well (means whale) - then Viodo field – short order back to back – first campaign in Africa and lots more in the next year marine 14 – big structure 2010 extends into this block – so farmed in to that –

My recollection is that the Lieke structure could be very large - but we'll have to wait & see what the drillbit finds. Seems to coincide with your recollection. In the light of their experience with Deep-E and (& market reaction to announcements), Ed & Roger are now being more cautious in their figures & timetables, aiming to underpromise & overdeliver. Let's hope they succeed.

Cheers,

Mark

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marben100 18th Jun '09 8 of 1289
1

In reply to emptyend (post #1)

My view on this is pretty simple: If they were to sell in VN BEFORE they drill the TGD appraisal, it is likely they would want £25+ per share for the VN assets. This is £11+ of core (according to Caz's fig 5.1) and the balance being explo upside (Caz's total for the three VN line items in fig 5.3 is 1996p - to which, as I say, can probably be added the deep gas play and the full size of the fan). If they sell AFTER drilling TGD-2X, thus derisking the fan, they would want something over £35 per share [given my comments above about a potential £40-50 upside and £11 of core].

So I see VN as either £25 sometime between now and next May or £35 sometime in the year from mid-2010 to mid-2011.

Here is where we have a difference of opinion on the likely endgame (though not necessarily on the figures you suggest). The impression I have from the last two AGMs is that Ed & Roger are very optimistic about the structure, for sound reasons, which I share. I also have the impression that they really don't want to undersell this. Whilst I wouldn't rule it out entirely, I just don't think that any industry player will offer enough to satisfy them, until they've drilled the structure properly and satisfied themselves and everyone else with what's really there.

One key point that emerged in a chat I had with Rui before the meeting (and ISTR was confirmed in your & others' conversations after the meeting) is that Roger and Ed have no intention of retiring yet and are happy to continue with Soco for the next 5-7 years, until they've built the value in their African prospects (or been forced to abandon them!). Given a strong balance sheet and growing future revenues, that means that they're under no time pressure to sell VN. If I were in their shoes and was as confident about TGD prospects as they appear to be, I certainly wouldn't want to sell prematurely.

So, my view is that a VN sale before TGD has been satisfactorily drilled is unlikely. It could be more than £35. ;0)

From my investment perspective, the downside risk appears limited (barring a further POO collapse) and the upside, on a 3 year view, substantial. I do not quite have SirL's market timing ablities (but I'm trying to learn/improve :0)).

Regards,

Mark

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