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)
329.4p
Change
1.9  0.6%
P/E (fwd)
8.3
Yield (fwd)
5.3
Mkt Cap (£m)
1,087



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


1312 Posts on this Thread show/hide all

highgate55 20th Jul '12 893 of 1312
2

ee - being a simple chemical engineer ( or maybe just simple) it didn't occur to me that both taking holiday at the same time might be odd .

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emptyend 20th Jul '12 894 of 1312
4

In reply to highgate55, post #893

being a simple chemical engineer ( or maybe just simple) it didn't occur to me that both taking holiday at the same time might be odd .

Fair point. Perhaps I'm too devious ;-)

Having the two key execs on holiday, and the Chairman away too, seems to me to be the corporate equivalent of the Mary Celeste .....

Still, perhaps they are amongst the minority of over-60s who pick school holiday periods for their vacations and then choose to return to experience London in the grip of the Olympics ;-)

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kenobi 20th Jul '12 895 of 1312
1

In reply to highgate55, post #891

highgate,

I wondered did you get any idea how they have raised production to 51k ? have they opened up any more zones in the phase 1 or is this adding capacity solely from phase 2 ? and any idea how many zones there are in the phase 2 wells and how many are currently open ?

thanks very much for your feedback, very enlightening,

K

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tichie 20th Jul '12 896 of 1312
1

Hello from a lurker to these boards.

I would be grateful to recieve the views of those more closely alligned with Soco's affairs then I might be to the the following extract taken from todays company announcement:

".......... Completion is expected to occur shortly and in any event by 23 August 2012."

Now why specifically mention 23 August? Could it be that it is a condition precedent within the Heads of Agreement outlining the buy back of the shares that the transaction is completed by this date. Such an arrangement would allow Soco (should they wish) to announce a first interim dividend at the time of release of the six monthly accounts and trading statement in the knowledge (assuming the transaction has been completed) that they would not have to make a distribution to lizeroux.

All views appreciated as I may just be reading too much into this!

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highgate55 20th Jul '12 897 of 1312

In reply to kenobi, post #895

Kenobi,

Sorry but I don't know the answer to your questions.

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davjo 20th Jul '12 898 of 1312
12

From the way Antony talked about developing drillling plans for 2013 and even 2014 one could conclude that an early sale was unlikely

Agree ee's comment that one would expect all such planning to continue without any regard at all to any corporate action. However, it is interesting to look at 2013 drilling plans in relation to the TGT north/south connectivity issue reported at the AGM. That presentation on P.9 indicated wells targeting H2S-H3-H4S-H5. If you turn to P.27 of the 2011 Results Presentation you'll see all the prognosed hydrocarbon columns in each of the fault blocks. It's noticeable from the graphic that any communication between H1 and H4 is evident only via a thin interval in the upper BH 5.2. This is very clear in H3. Seems to me that drilling H3 in 2013 could be very important in establishing the presence or otherwise of flowing oil in that fault block at the lower BH 5.2 interval. Why else would they drill H3? I'd have thought connectivity has driven their reasoning to drill. Similarly H4S only shows piddling quantities of oil but is also targeted for 2013 drilling...presumably for the same reasons.

It strikes me that the connectivity issue is potentially opening up a lot more prospectivity and the JV is bringing forward drilling to test this potential. As noted previously, drilling of the 200mmbbl OIP H5 has also been brought forward to 2013. So the 2013 drilling campaign could be transformational in terms of reserves build. What CoS though? My feeling is that Soco wouldn't sell in the near term unless a buyer was prepared to pay a premium to their CoS estimate. An early SV sale is still possible but I'd guess that Soco will prefer to see the results of what I see as the all important 2013 drilling campaign first.

All supposition of course ;-)

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emptyend 21st Jul '12 899 of 1312
2

In reply to tichie, post #896

".......... Completion is expected to occur shortly and in any event by 23 August 2012."

Now why specifically mention 23 August?...... . Such an arrangement would allow Soco (should they wish) to announce a first interim dividend at the time of release of the six monthly accounts and trading statement in the knowledge (assuming the transaction has been completed) that they would not have to make a distribution to lizeroux.

Yes I'd expect the reasoning to be something along those lines. The notice for the EGM suggested completion around the end of July though, and I'd still expect that to be the case.

 

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emptyend 21st Jul '12 900 of 1312
4

In reply to davjo, post #898

It strikes me that the connectivity issue is potentially opening up a lot more prospectivity and the JV is bringing forward drilling to test this potential. As noted previously, drilling of the 200mmbbl OIP H5 has also been brought forward to 2013. So the 2013 drilling campaign could be transformational in terms of reserves build.

I think the central issue here is just how conclusive the production data can be in establishing communication and the size of reserves. It is impossible to know from the outside. Obviously undrilled blocks such as H5 would need to be drilled before being proved - but that is probably only 25-27mn bbls or so in net recoverables (200*0.305*0.45), and would warrant some sort of reasonable risked value right now in any case.

It seems to me that connectivity can fully derisk large parts of H3 without the need to drill it (though ultimately one would drill it for production efficiency).

What CoS though? My feeling is that Soco wouldn't sell in the near term unless a buyer was prepared to pay a premium to their CoS estimate. An early SV sale is still possible but I'd guess that Soco will prefer to see the results of what I see as the all important 2013 drilling campaign first.

Aye there's the rub. As I have always said - it only takes ONE buyer to see eye-to-eye with SOCO on valuation....and a deal can be done. Does anyone fall in that category? Tough to know - but I'd think there is enough data available (or available very shortly from H4 production) to get a deal done.

ee

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peterg 21st Jul '12 901 of 1312
5

In reply to emptyend, post #900

I think the central issue here is just how conclusive the production data can be in establishing communication and the size of reserves. It is impossible to know from the outside. Obviously undrilled blocks such as H5 would need to be drilled before being proved - but that is probably only 25-27mn bbls or so in net recoverables (200*0.305*0.45), and would warrant some sort of reasonable risked value right now in any case.

Interesting in the context of this discussion that H5 appraisal got  moved forward from 2015 to 2013 between the prelims presentation and the AGM. A 2015 appraisal would clearly be in the "for the new owner" category, that's not quite so clear cut for 2013. Since I think we can assume that they became aware of the possible communuication, and potentially much larger possible reserves upgrade than originally envisaged, during that period it's not an enourmous leap to think that the additional planned appraisal, and inclusion of H5, for 2013 may reflect a view that those issues are too significant to a valuation to put on the back burner?

Of course, assuming that is correct, 2 conclusions can be drawn, firstly, that they want to be more sure of what they have and probably no sale for another 12-18 months, or secondly, that they can say to potential suitors "if you don't come up with a decent price now you may find yourselves having to pay 50% more next year". 

Peter

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rhomboid1 21st Jul '12 902 of 1312
1

In reply to peterg, post #901

Morning all

There is always the possibility of a Mongolia type deal with a payment for production ultimately achieved as well as an upfront consideration for reserves agreed at completion.

Either way I'll be fascinated to see how the end game plays out..

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emptyend 21st Jul '12 903 of 1312
4

In reply to peterg, post #901

Interesting in the context of this discussion that H5 appraisal got  moved forward from 2015 to 2013 between the prelims presentation and the AGM. A 2015 appraisal would clearly be in the "for the new owner" category, that's not quite so clear cut for 2013.

I agree it isn't quite so clear-cut with 2013, but IMO the move forward was part and parcel of the discussions aligning the partners with the idea of accelerating production. There is no doubt that SOCO have been keen for quite a few months to accelerate the drilling of H5 (at least early 2012). Accordingly I don't see it as connected to the communication issue.

secondly, that they can say to potential suitors "if you don't come up with a decent price now you may find yourselves having to pay 50% more next year".

Quite so. This is one of the main reasons why I expect a move sooner rather than later. There is significant upside potential available from next year's drilling IF someone is prepared to pay a sensible price now. And it only takes one....

ee

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peterg 21st Jul '12 904 of 1312
3

In reply to rhomboid1, post #902

There is always the possibility of a Mongolia type deal with a payment for production ultimately achieved as well as an upfront consideration for reserves agreed at completion.

There is, but that would presumably require the continued existance of an entity capable of receiving any future payment, which would preclude a whole company sale, though not an SVN one.

On that subject, does anyone have any idea what sort of production has been achieved in Mongolia so far? And when the magic 27.8mbbls is likely to be exceeded? The guidance in the AR is a little on the thin side!

Peter

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emptyend 21st Jul '12 905 of 1312
2

On that subject, does anyone have any idea what sort of production has been achieved in Mongolia so far? And when the magic 27.8mbbls is likely to be exceeded? The guidance in the AR is a little on the thin side!

I haven't checked for four years but based on what I was told then I'd be surprised if the hurdle was reached before 2020. So don't hold your breath....

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rhomboid1 21st Jul '12 906 of 1312

Note 18 on p 90 is very clear;

Group disposed of its Mongolia interest to Daqing Oilfield Limited Company. Under the terms of the transaction the Group will receive a subsequent payment amount of up to $52.7 million, once cumulative production reaches 27.8 million barrels of oil, at the rate of 20% of the average monthly posted marker price for Daqing crude multiplied by the aggregate production for that month. The subsequent payment amount is included in non-current assets as a financial asset at fair value through profit or loss. The timescale for the production of crude oil in excess of 27.8 million barrels and the price of Daqing marker crude oil are factors that cannot accurately be predicted. However, based upon the Directors’ current estimates of proven and probable reserves from the Mongolia interests and the development scenarios as discussed with the buyer, the Directors believe that the full subsequent payment amount will be payable. The fair value of the subsequent payment amount was determined using a valuation technique as there is no active market against which direct comparisons can be made (Level 3 as defined in IFRS 7). Assumptions made in calculating the fair value include the factors mentioned above, risked as appropriate, with the resultant cash flows discounted at a commercial risk free interest rate. The fair value of the financial asset at the date of completion of the sale was $31.5 million. As at 31 December 2011 the fair value was $40.6 million
(2010 – $37.4 million) after accounting for the change in fair value (see Note 7).

Which implies they expect it in c. 3 yrs or so ?

Cheers

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emptyend 21st Jul '12 907 of 1312

In reply to rhomboid1, post #906

I don't think you can make that assumption, rhomboid1. Future value of $52.7mn....and Dec 2011 value of $40.6mn are both clear - but the discount rate is "a commercial risk free interest rate"....and that is not a big number at all! Any past closing of the gap (eg between 2008 and 2011) must have largely been due to the collapse in interest rates!

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rhomboid1 21st Jul '12 908 of 1312

Hi ee , fair point I'd assumed c. 6% as a discount rate and it was the tripling from 1.2m in 2010 to 3.2m in 2011 in the booked gain that suggested a timeline of c 3 years.

Incidentally note 3 says

The fair value of the Group’s non-current financial asset (see Note 18) is also dependent on the discount rate used. Management assesses the Group’s sensitivity to changes in interest rates. If interest rates had been 0.5% higher or lower and all other variables held constant, the Group’s profit for the year ended, and its net assets at, 31 December 2011 would decrease or increase by $2.1 million (2010 – $2.7 million).

So that gives no help as to what the expected receipt date is!

Cheers

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peterg 21st Jul '12 909 of 1312
1

In reply to rhomboid1, post #906

Note 18 on p 90 is very clear;

Thanks, John,

I had read that, but come to the conclusion that trying to second guess the discount rate they were using was not likely to give me an worthwhile answer. However, the key point,  the Directors believe that the full subsequent payment amount will be payable., is clearly important, and encouraging.

I'd find 3 years very hard to believe, not least because, even if payments started in 3 years, it would presumably take several/many years for payments to be complete (even if you assume $100bbl at Daqing - which I suspect is very optimistic - it would take about 7 years to complete payments if they produce 100,000bopd)

Peter

 

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Rapier 21st Jul '12 910 of 1312
1

Doesn't that note 3 solve much of the problem?

If a 0.5% change in the discount rate will alter the value of the discounted asset by $2.1m = 5% of 40.6m then the payout's expected in about 10 years time. Well the cash flows will have a 'centre of gravity' about 10 years out.

Having estimated the duration, it appears they're using a discount rate around 2.6%.

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peterg 21st Jul '12 911 of 1312
1

In reply to peterg, post #909

it would take about 7 years to complete payments if they produce 100,000bopd

That, of course, is a load of rubbish.  IF production were 100kbopd and the Daqing price $100 then repayment of the $52.7m would take less than a month (@$2m per day, 20% of the Daqing price).

I very much doubt the Daqing price is over $50, which would slow things down. But also 100kbopd is improbably high, given both the nature of the field (lots of slow flowing wells) and the fact that it is now 7 years after the deal and they haven't yet got to 27.8mbbls (at 100kbopd they would be producing that in less than a year.

Thanks for those calculations Rapier, that looks like a sensible rate, and a plausible time to mean payment.

Peter

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GulfTrader 21st Jul '12 912 of 1312
4

Hi Guys, Im a Fund Manager from the ME. I invest heavily in proven, highly cash generative producers and now SOCO has joined this league, have decided to build a substantial stake in expectation of solid returns in the coming months and year(s)!

Just a quick question, am I correct in saying that the upcoming development drilling is aimed at proving the extension of the field to the East as the reprocessed seismic indicates? And are we expecting around 30-50% resource upside in the TGT field medium-term? From studying the field this is certainly achievable and therefore I’m happy for the ops team to go full steam ahead in 2013 and prove up pure value. In light of this do we still expect a reserves upgrade around September as pointed out by posters post AGM?

I’m with the majority on this board and expect once all formalities are satisfied for an eventual valuation of c3-3.5B$, however long it may take us to get there! Will be interesting to see if it will be months or years!

Good luck all and look forward to reading the excellent insights shared on this board.

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