Valuation, sentiment, and SP direction

Wednesday, Jun 17 2009 by

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.


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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)
-3.3  -0.8%
P/E (fwd)
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Mkt Cap (£m)

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1284 Posts on this Thread show/hide all

emptyend 21st Jul '12 905 of 1284

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 1284

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 ?


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emptyend 21st Jul '12 907 of 1284

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 1284

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!


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peterg 21st Jul '12 909 of 1284

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)



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Rapier 21st Jul '12 910 of 1284

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 1284

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.


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GulfTrader 21st Jul '12 912 of 1284

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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emptyend 21st Jul '12 913 of 1284

In reply to GulfTrader, post #912

My 2p on the questions you raise:

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?

It isn't clear at present. There is certainly possible additions to be had to the east, but I would think the focus would be more on drilling undrilled fault blocks (H5) and any wells that may be desirable re the connectivity thesis.

And are we expecting around 30-50% resource upside in the TGT field medium-term?

I'd say that is an absolute minimum, both in terms of quantum and time. Technically I assume you mean reserves (2P) rather than resources (2C).

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?

Given that they haven't upgraded reserves for 4 years, I think they absolutely will have to say something on the matter in the coming weeks, especially if there is more serious upside in prospect from 2013 drilling. I'd be surprised if the August interims pass without a reserves update.

I’m with the majority on this board and expect once all formalities are satisfied for an eventual valuation of c3-3.5B$

Thats been my range up to now - but IF connectivity can be proven then IMO there could be a further 40-50% additional in prospect. I have no idea at all whether that is likely though, because it depends on the data being obtained currently. This is one reason why I think they will have to make some sort of reserves statement, even if they will have a chunk of 3P that needs further work done.


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loglorry 2nd Aug '12 914 of 1284

Back in May I wrote:-

Well I just bought a few Soco at 286p same reason as last time to add to my core holding. I'll probably get slated for making another quick 10% in a matter of days but again I think it is a decent short term strategy with the buy back in place and the very solid asset backing.

Well I've just sold out of that nice trading position keeping my core position for a bit more than a quick 10%.  I'm still a beleiver but I think the EZ problems will drag on and it could take a long time for Soco to go higher if a deal isn't done that is. 


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kenobi 2nd Aug '12 915 of 1284

In reply to loglorry, post #914

yes log, a good little trade there, I would be wary of reducing at the moment because we can be pretty sure there will be a reserves upgrade in the autumn and ee has speculated perhaps even on the 22nd,aug with the interims, but the way the ez issues are at the moment you may well have bought back by then anyway !

hope your timing is good,


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loglorry 2nd Aug '12 916 of 1284

Still have a good core holding. I watched Draghi today. He was unconvincing. I think they'll get there but it will yake time.

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davjo 2nd Aug '12 917 of 1284

In reply to loglorry, post #914

I've just sold out of that nice trading position keeping my core position for a bit more than a quick 10%

I trust you've accounted for HMRC's section 104 holding rules which came into force during 2008? :-
Shares bought at any other time
If the shares were acquired on any other date a different rule applies. All shares acquired before the day the shares were sold, of the same type in the same company, are pooled to create a single asset. This is called a 'Section 104 Holding'.

Example - a Section 104 holding
You buy 4,000 shares in March 2006 for £5,000.
In September 2007 you buy another 6,000 shares of the same class in the same company for £26,000.
This would give you a Section 104 Holding of 10,000 shares with a cost of £31,000.

You need to take care when trading a share whilst retaining a core holding. You might find yourself crystallising past profits earlier than you'd prefer....assuming the core holding was purchased at much lower price. Hopefully, a SV sale will offer some tax efficient return to shareholders like a loan note alternative etc. Thus, one should consider whether a sideline trading strategy is tax efficient or not. It seems to me that the introduction of the section 104 rules were designed to claw back CGT earlier than previous rules allowed, which somewhat stymies investors engaged in trading strategies. Unsurprisingly, that was a Gordon Brown policy!


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jseth123 2nd Aug '12 918 of 1284

When you talk of a trading holding how does it compare in size to your "core" holding and how much of your portfolio does Soco make up? (% terms obviously - just curious as I don't fancy "trading around the edges" myself - I fear I would probably just get my timing all wrong)

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K Atkins 3rd Aug '12 919 of 1284

If you hold in an ISA or SIPP then Section 104 does not apply, profits are tax free.

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loglorry 3rd Aug '12 920 of 1284

Great post Davjo but trading position held in a spread bet so no tax implications. The core position is not though.

My portfolio is divided up between bank prefs/bonds and O&G + (some others) in a scale of about 75%:25%. The former provide good income which I channel into other investments mostly O&G when I see opportunities that look very cheap. I tend to only use spread bets for short/medium term trades e.g. 1-6months or shorter if price targets are met. I also tend to only use spread bets when there is very good asset backing and even then I tend to barely use much margin depositing almost the entire value of the bet as cash.

Of the O&G portfolio it is split between safe and risky. Simply put safe has proven producing assets and good asset backing whereas risky is more more E than P. Obviously Soco is in the safe category here. Others include coastal, sterling res (not as safe until breagh comes on though). If I see some big sell offs for no particular reason e.g. soco 285p then I tend to take up a bit more via a spread bet and then reduce as it comes back more in-line.

I know my O&G exposure is high but it is a good inflation hedge as I think we are going to see some money printing more and more as time goes by to solve the credit problems of sovs and banks.

I don't regard my bank bonds/prefs as that high risk anymore although I do think Bank of Ireland is more risky that the others I hold which are Natwest and Lloyds based. As each year goes by they are throwing off a lot of cash now and although UK banks are still at risk they don't need to outperform for me to get paid they just have to do well enough and my returns will be very large indeed.

On the risky E&P stuff I hold WZR,SQZ,TRAP,Bowleven and a few others.

I also hold some Trinity mirror, Home retail and Quentin estates.

So far it is a strategy that has worked well for me. Horses for courses and obviously those that bought and held Soco from double digit values have done extremely well but I beleive there is some survivorship bias built into this I'm afraid and it is not easily repeatable.

If/When Soco is bought out I'll probably look for something similar.

Again I think it is right for people to find a strategy which works for them. I've made plenty of mistakes along the way but on the whole I'm doing very well and happy with the way things are setup.

Risk return Soco has very few rivals but that doesn't mean it fits everyone's investment philosophy.


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GulfTrader 11th Aug '12 921 of 1284

Nice little run up over the last couple of weeks. Looking to add another tranche of shares into the fund @ around 320p if the opportunity arises before the interims are out. Markets seem to have stabilised but being in the business for over a decade it would not surprise me if the stock was walked down before the interims to the 305-315p level for the hedgies to position themselves. Should be all very interesting. All imho.

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emptyend 13th Aug '12 922 of 1284

In reply to GulfTrader, post #921


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Fangorn 13th Aug '12 923 of 1284

I'd be quite happy if it was walked down to 305 or so as I'd be picking some more up to add to my nice pile

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peterdm 13th Aug '12 924 of 1284

I've been thinking of adding at current levels, the strong move up signalling some confidence. A drop back to 305 would see some serious take up. Must be getting close to level at which soco and a prospective buyer can agree a price on a reasonable premium.

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