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.


Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
23 thumbs up
6 thumbs down
Share this post with friends



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)
418.5p
Change
2.6  0.6%
P/E (fwd)
10.7
Yield (fwd)
4.2
Mkt Cap (£m)
1,380



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


1284 Posts on this Thread show/hide all

emptyend 18th Jun '09 1 of 1284
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

| Link | Share
marben100 18th Jun '09 2 of 1284
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

| Link | Share
sirlurkalot 18th Jun '09 3 of 1284
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.

| Link | Share

What's your view on this thread? to Comment Now

 
 
You are feeling neutral

Use the £ sign in front of a ticker to turn £VOD into Vodafone PLC

You can track all @StockoChat comments via Twitter




Stock Picking Tutorial Centre


Related Content
DRC  Congo K
DRC - Congo (K)
SOCO International 26th May '09

Incidental stuff
Incidental stuff
SOCO International 21st May '09

Analysts reports
Analysts reports
SOCO International 6th Aug '09




Stock Picking Simplified

Stockopedia takes your stock picking to the next level with cutting edge Stock Reports & Screening tools.


Get started
or Take a Tour to find out more.