Operational Update & Placing 20 Jan 2010

20th Jan '10 by marben100

37 comments 7572 reads

A thread to discuss the operational update, placing & conference call of 20th January 2010

Some initial discussion can be found here: http://www.stockopedia.com/forum/view/29921/valuation-sentiment-and-sp-direction?comment=110#110

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About the Author

Marben100

Premium Member

I am a full-time private investor... with a little trading on the side (generally small-scale arbitrage in specialist niches). Previously, I spent 24 years in the IT industry, 13 of those running my own IT services firm. I invested as a "hobby" for 20 years before turning it into a full-time occupation in 2004. I really enjoy the "research" side of investing, finding out about varied businesses and industries and learning what makes them tick. Since going "full-time" I have learnt an awful lot from some very erudite investors & professionals who are kind enough to share their expertise in electronc forums such as this. I can now count a number of them as my friends, having had the opportunity to meet them in the real world, as well as this virtual one! I try to pay back the debt I owe by sharing what I've learnt and I always value constructive criticism to correct my errors and misapprehensions! I am a Director of ShareSoc, the UK organisation for individual shareholders. See below for details. more »

37 comments

emptyend

20th Jan '10

In reply to lowersharpnose (post #16)

Indeed. Interesting, also, to see that despite the placing SOCO has been outperforming the rest of the peer group again today. Down 1%, with the market also down about 1% and much of the FTSE350 O&G peer group off by 2-3%, is about what I would have expected (even though I'm still struggling to understand why a larger placing discount was required)

kenobi

20th Jan '10

Am I right in thinking that dilution should have cost shareholders about £1.25 per share?
I think you have forgotten to take account of the cash raised by the placing.
db

>> yes but we hold the shares because we believe they could be worth more that 14.10, by the end of the year if not before,
so while the share price has held up quiet well, it's diluted the upside, and I guess that's the issue.
though whether the keeping a bigger piece of the african pie makes up for this we will see.

All in all, the bond has been a debacle, we've had money sitting in the bank which has been paid for at 4.5%,
given away potential upside if they stay in, and had to dilute the current holders because they bond holders might
want their money back this year. I wonder how many million the bond has cost over these years ?

perhaps it would have been different if things had gone as planned, if tgd had been a big success,
and the money had been used towards development, the the share price might be above par,
and the bonds would be converted rather than cashed in.

All in all, I think I might have been better off in the bond.

I suspect though that a lot of the bond won't cash in, as it's a good way of keeping exposure to
the exciting drilling campaign this year without risking capital, so if all goes well, we will have this
dilution, followed by further dilution from converting bonds (which if we had known, would not
have required the first dilution),

perhaps it means they can tailor expo, depending on how many bonds are redeemed ?

If only TGD eh ?

oh well, looking forward to the next AGM, will this be the 4th AGM where the talk will
be largely about TGD? I missed the last one but the previous two were very much about its
potential.

Lets hope it comes good and rewards patient holders in the end

G

emptyend

20th Jan '10

In reply to kenobi (post #19)

All in all, the bond has been a debacle, we've had money sitting in the bank which has been paid for at 4.5%, given away potential upside if they stay in, and had to dilute the current holders because they bond holders might want their money back this year. I wonder how many million the bond has cost over these years ?

perhaps it would have been different if things had gone as planned, if tgd had been a big success,
and the money had been used towards development, the the share price might be above par,
and the bonds would be converted rather than cashed in.

All in all, I think I might have been better off in the bond.

I don't think those comments are at all correct. "Debacle" is certainly the wrong word and the availability of the cash enabled management to extract a decent price for Yemen. If I had been advising the company, though, I would certainly have advised them to do a convertible WITHOUT a put (if it was possible at the time), even if they would have had to pay another 1%pa to do so. The reasons for that are now completely obvious - by conceding an option over the company's balance sheet they have allowed uncertainty over the put to effectively force dilution. But it wasn't the principle of the convertible that was at fault - it was the important detail of the put (which is the sort of option that bankers/underwriters love to get their hands on and therefore something that companies should never concede - even though most/all convertibles done in that period did indeed have a put). If the convertible hadn't had a put, then much of the financing uncertainty of 2009 would have been avoided - because the convert-holders would have been locked in until 2012.

Of course the flipside of having had the put is not only having a lower coupon, but also having a higher conversion price - and I've little doubt that the latter point was very important to SOCO, as they were reluctant in 2007 to get diluted below £21. Had TGD produced a clear result or if the oil price had stayed up then that would still have looked a smart deal. But, as it turned out, they would have done better by simply issuing straight equity with the shares at about £16.......

....but that is as maybe. We all make much better decisions in hindsight (including you, Kenobi, with your comments about being better off in the bond). If we'd only known that TGD would be such a problematic well and that oil prices would plummet from $140, we'd all be miwwionaires, Rodders.

kenobi

20th Jan '10

well ee,

I don't disagree with anything you've said, except I would question how much better price they really got for yemen,
which of course has to be offset against the other costs.

As it turned out, we've had all this money on the balance sheet, which the management have been keen to remind us of on
several occasions, but when we've really needed it, it's not been certain to be available.

So I'm not saying that I knew better, or that I would have done anything differently,
I'm saying that with hindsight its been nothing short of a debacle,
and now we've got the uncertainty of how many bonds will be cashed in, and how much money we will need
but have diluted the shares by 10% to cover ourselves, because no doubt we would have got an even worse deal
after the bond issue was resolved. (although at least we would have visibility then).

Regarding the bonds, I would certainly have split my holding between shares and bonds, but for the high (for me )
minimum chunk 100k as I recall.

If it had all worked out fine, I'd be the first to say well done to the management for timing this so perfectly,
as it didn't I think I'm entitled to say, it's turned out pear shaped.

but as you say EE if we knew all that we'd all be millionaires

cheers K

emptyend

20th Jan '10

In reply to kenobi (post #21)

Hi kenobi,

Just one last point on this. As I've noted, I WOULD have certainly tried at (almost) all costs not to give the put. However, what the issue today comes down to is a risk management call...... should they take the view that not much of the convert will be put or that they'd be able to fund it by offloading Thailand (which I personally probably would have done) or should they go "safety first" and raise cash to give them the option of flexibility of the "worst case" put scenario happens and it all comes back?

They went safety first.....just as they went safety first when the issued the convertible.

By all means criticise the giving of the put in hindsight, because it has turned out to be pretty costly. But it isn't difficult to see how it might have turned out better.

marben100

20th Jan '10

In reply to kenobi (post #21)

As it turned out,

That's the key phrase, isn't it? Such comments are rather easy with the benefit of hindsight. Personally, I find Soco's approach to cash management, including today's placing, highly prudent and I would be less inclined ot invest in the company if management were not so prudent.

If the converts are NOT actually put in May, it will be easy to critise the company for making an unnecessary placing - but I'd rather suffer the modest dilution and not have the company under pressure to find the cash to complete its explo & development programme. It is important if Soco farms down that it does so on ITS terms and not on terms that are forced on it due to financial circumstance.

Regards,

Mark

kenobi

20th Jan '10

EE / Marben,

I just raised the point, which no one here has as yet as far as I can see, that as it turned out,
it's not worked out so well. As I have said if it had worked out better, I'd have said that too,
and congratulated the management for dealing with it so well. As it happens, not too good.

I agree with EE that I'd have rather sold thailand for example, but I'm sure we both agree that
not at any price. And perhaps, not needing the cash will mean that they will be able to secure a
better deal on thailand.

Does the company have the option to force buy back the bonds or is it soley in the control of the
bond holders ?

The other point that no one has mentioned is that perhaps share price performance would have been worse
over the last 12 months without the comfort blanket of the bond money.

My real point is that with all the costs, it has turned out to be little more than a comfort blanket,
as they haven't even dipped into it. I'm not party to the other deals on offer at the time,
so it's difficult to know how the other deals would have compared given the way things have worked out,

Personally SOCO and their management have done well for me over the years, and hope they will do again
in the future. That doesn't mean I cannot be critical when things don't work out. (just as I'm critical
of my own investment when I could have done better).

cheers K

gibson330

20th Jan '10

It’s my view that Kenobi makes a number of valid points.

This ‘put’ has been overhanging proceedings like a Sword of Damocles effectively depriving management of control of their own liquidity and operational forward planning. The terms of the May 2006 Convertible also contained a broadly based ‘negative pledge’ restraining management from granting any security – effectively ruling out loan finance. With the ‘going concern’ and auditors report coming up imminently, they had to act now because of the contingent nature of the ‘put’. There is no doubt that it has been costly.

As early as March 2005 it was strongly rumoured that the Yemen disposal was just a matter of time – see this particularly pertinent post by davjo on TMF: http://boards.fool.co.uk/Message.asp?mid=9167108

Sure, the costs of 2007 Vietnam drilling had to be covered but if management had any inkling that they might be receiving anything like $465million in April 2008 from Yemen, then, it’s my view the Convertible was the wrong instrument, on the wrong terms at the wrong price.

The convertible does contain a ‘call option’ termed here a ‘Redemption at the Option of the Issuer’. Time will tell if there’s any mileage in this option.
Here’s a link to the original Convertible Prospectus:
http://www.rns-pdf.londonstockexchange.com/rns/8429c_-2006-5-11.pdf

kinkell

20th Jan '10

gibson 330/Kenobi

I cannot recall adverse comment by PIs when convertible was issued. IIRC most if not all commentators were commending the management on timing, rate and conversion terms of the issue.

fuiseog

20th Jan '10

I'm very happy with the way the company manages risk. With a significant holding (for me) and a very high likelyhood of serious added value as the plans get implemented over the next 12 months, todays placing sidelines 'The Sword of Democles' of the puts and underpins the programme.

emptyend

20th Jan '10

Piece in the FT tomorrow:

Roger Cagle, chief financial officer, said the company was targeting 700m barrels of new reserves for this year – nearly seven times the company’s existing reserves – and hoped that the drilling programme would clarify the value of Soco’s assets for investors. Soco said it planned to spend $185m on capital expenditure this year.

“We are the only company that has not been back to market ever among our peers in the UK exploration and production sector,” he said. “This is one of the largest programmes we have ever embarked on. Our time is here. We don’t need a whole (load) of luck, just a little.”

Quite so......

repobear

20th Jan '10

In reply to emptyend (post #28)

Yes indeed.

As one of the few dissenting voices back in May 2006 I read some of your comments today with interest. I am happy with today's decison because 600m barrels potential recoverable for a $60m three well drilling programme doesn't seem worth sharing directly with the big players until you're ready . If getting a little diluted is the price to pay to share less, or more likely not at all, I am happy with that, not to mention the negotiation power that being financially bullet proof gives the company.

A shrewd move IMHO and I added today at near enough to the placing price:-) Just for the record.

http://boards.fool.co.uk/Message.asp?mid=9959548&sort=username

http://boards.fool.co.uk/Message.asp?mid=9958453&sort=username

I am a tight bastard but if it was my call and my final exit plan was a trade sale I wouldn't be diluting my holding to save a couple of quid on the interest repayment on a bond issue and for a period that could turn out less than a year.

I certainly wouldn't be doing it this side of the results of a company transforming well drilling result, unless I needed the money quickly to do another deal and/or I was less confident that the well would succeeed.

I also wouldn't be pleased with an issue that was 6 times oversubscribed because that alone shows that it was priced too cheaply.

A straightforward bond issue would have been my choice.

kenobi

20th Jan '10

Quite so......
ee

>>absolutely agreed, and I would add that by any measure we're due a bit of luck,
lets just hope that we come out of this year with Vietnam proved up, and some fantastic
discoveries in Africa.

(And I'll be happy for Ed, off playing Elephant Polo or whatever he decides on in his retirement)

emptyend

20th Jan '10

In reply to repobear (post #29)

I also wouldn't be pleased with an issue that was 6 times oversubscribed because that alone shows that it was priced too cheaply.

A straightforward bond issue would have been my choice.

Just on that point, the thread confirms that I investigated the pricing at the time and I was relieved at the time to find that it wasn't in fact "priced too cheaply" (at least not materially), even though it was oversubscribed. One always (rightly) suspects such things though. I'm not sure a straight bond was ever a viable alternative. I'd be pretty certain that it was the idea that they would only get diluted if the shares rose by 42% that swung it in favour of the convert, even if it hasn't worked out like that thanks to the put being much more significant than anyone (including me) had thought at the time (even if I recognised it as a structural defect).

Anyway....moving on from the convertible for now, and back to dj's point about an "application process" what Roger said re TGD was:

we expect to spud the well end of May, beginning of June. It's going to be a 60 day well. In this $185 million CapEx budget for this year, Jessica, we only have one well planned there. The key, of course, is we have one year for the appraisal, the appraisal period is given to us for one year so we have to prove commerciality during this 12 month period by the year end.

So, first of all we have to have a commercial success on the first well, then there's an application process that you have to go through to make sure that you get it granted as a development area, and then you have all the time in the world. So it is possible that we would be drilling a second well on TGD somewhere towards the end of the year, but more than likely it would be following in 2011

As dj noted, one important ingredient will be how clear-cut the TGD result is. Obviously PV would be paying their way as soon as TGD is declared commercial, so budget cycles may also play a role? No reason though that it couldn't be drilled in 2010 if Soco wanted to....

Isaac

20th Jan '10

So no sale of Soco this year then? Glad we got that cleared up early in the year then... :-)

At the end of the day the reality is no one likes to be diluted. But as the management have said in the unlikely event the bondholders excercise their option then they will have excess cash in May. What I am trying to say is the cash is not disappearing to thin air.

As a shareholder I have right to a portion of that cash. As has been pointed out what the management have done is reduced/eliminated the risk of raising cash on lousy terms (some could learn from these people if you know what I am talking about!).

They have never come to the market for cash. I don't think this was an easy decision for them. But it is one which they felt was the best route to go.

After reading the macquarie presentation I very much hoped Soco will drill Nganzi by retaining a HUGE proportion of the licence. What is clear to me from todays news is Soco is being VERY AGGRESIVE and want to prove up as much of their acreage as possible so they can sell up.

Soco have my full support to carry out the drilling without farming down Nganzi.

I am here to make a significant sum of money and I believe Soco is one of the best routes to do that.

Loads of cash, very attractive acreage and excellent management team. I'l keep being patient and let them get on with it.

emptyend

21st Jan '10

Times comment/buy tip:

http://business.timesonline.co.uk/tol/business/markets/article6995929.ece

With the uncertainty created by the convertible bond out of the way and Soco now firmly on the front foot, it is a much better prospect than before. Buy on weakness.

Funny how they write as if there has been some sort of radical change. In fact there is nothing material that wasn't pretty clear last summer. All that has happened is that a few (misplaced, IMO) fears that were being claimed have now been allayed - and so the market is running out of excuses not to notice what is going on.

Cuthbert C

21st Jan '10

Morning EE

Funny how they write as if there has been some sort of radical change. In fact there is nothing material that wasn't pretty clear last summer.

surely there has been a radical change - the change in sentiment - or rather the turning point in sentiment that we seem to be passing through right now

seems to me that for the past couple of years you and your merry band of fellow travellers (including me) have been ahead of the curve - ie ahead of the rest of the market. But all that has meant is that we have been hanging around waiting for everyone else to wake up and smell the coffee. Until that happens, we are in the position of people who are right but right too soon - which is actualy not ideal in an investment context.

Seems to me that the market is just starting to hear the sound of a coffee grinder and the aroma is starting to waft through the air. People are starting to sniff appreciatively. This is exactly what we need in the run up to the next 12 months exploration and appraisal activity.

The removal of unreasonable concerns (on the part of analysts) is surely a very real benefit, even if the concerns themselves were based on flawed analysis.

emptyend

21st Jan '10

In reply to tournesol (post #34)

seems to me that for the past couple of years you and your merry band of fellow travellers (including me) have been ahead of the curve - ie ahead of the rest of the market. But all that has meant is that we have been hanging around waiting for everyone else to wake up and smell the coffee. Until that happens, we are in the position of people who are right but right too soon - which is actualy not ideal in an investment context.

Yes that is about right. I've been ruminating too over that exact point in the last few months. It has been a considerable irritation (and continues to be for now at least.....and quite possibly will stay that way until the summer, even if the share price outperforms as I expect).

The removal of unreasonable concerns (on the part of analysts) is surely a very real benefit, even if the concerns themselves were based on flawed analysis.

Yes, I don't dispute that. It is a benefit - but it isn't anything that has changed in respect of the company!

The investment problem is: does one ignore the facts as one knows them simply because others choose not to recognise them? If we were invested in a company that was "takeover proof" then there is a strong case for that. However, it is much more difficult when one knows perfectly well that someone in China (should the mood take them and should they make a similar analysis to us) could have simply picked up the phone to RdS at any point and had an offer of £30 a share (or whatever) agreed in a matter of days.

It is all very much easier ex-post.

cheers

emptyend

21st Jan '10

Just to copy over an exchange from ADVFN:

idiot level question... does this mean more shares... ie dilution. which would not be a good thing? and yet you guys seem to be pleased. please could someone explain?

My response was this:

Yes there is dilution in theory, because the upside would be spread over more shares. However, it is my opinion that they can use the additional cash to create a bigger upside in aggregate to offset this - thus raising returns to shareholders.

Specifically, I expect them to be much more aggressive in their plans for Africa (both re drilling plans and acreage/deals) and I think there is a good chance that the fan structure in VN (with 1bn bbls of upside potential) will get drilled in 2010. Accordingly, I think that this improves the chances of an accelerated monetisation in Vietnam and (by simultaneously facilitating aggressive expansion in Africa) it also raises the probability that a whole company deal might be done (though I still think it more likely that Thailand and VN will be disposed separately).

At the same time as they are potentially accelerating the upside by raising additional cash, they have also added significant downside protection. Some people in the market (though wrongly IMO) have been worried about the May put on the convertible. This puts those worries to bed.

FWIW

ps...the exchanges continued for a bit. See http://www.advfn.com/cmn/fbb/thread.php3?id=14382883&from=4387

emptyend

21st Jan '10

Directors have raised their stakes:

http://www.investegate.co.uk/Article.aspx?id=201001211121019168F

Fairly modest in the context of things - but still half a million quid of fresh cash.

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Operational Update & Placing 20 Jan 2010

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Marben100

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