Analysts reports

OK - looking through Merrill/BOA's note, they start by pointing out that SOCO has been seriously unloved (only 13% of analysts with Buy recs, the lowest in the sector) and worst-performing E&P YTD (+17% vs. sector +72%) and they now think that this discount should unwind as newflow picks up. They talk about the 25% discount to NAV as being a "Compelling valuation". They use $75 long-term Brent and $1.65 assumptions:

SIA targets 0.6bnboe of resources (4x reserves)

through the drill bit over the next 12 months, with the first well (Congo) spudding

in September. In addition, the forthcoming TGD (Vietnam) field seismic

reprocessing could re-ignite M&A discussions. With a more positive view on its

exploration portfolio, we raise our NAV to 1,651p (from 1,299p). The stock trades

at a 25% discount to NAV, against a 5% sector average discount. We upgrade

SIA to Buy and raise our PO to 1,650p

They go on to point to all the well-known factors re TGT and TGD and M&A, and note that production at CNV should be soon ramped from the present 12k boepd to 20k boepd thanks to water injection and then note that the market gives little credit for Congo at present.

Interestingly, I'm not sure that Merrill fully understand the potential of the West African assets either, as they are very vague on the Nganzi prospects and they also say they "would not be surprised" to see SOCO farm out there. I wouldn't be surprised either, but as some of us heard first-hand, the technical team are urging the risk managers to drill WITHOUT farming down - which is a first! I note they suggest the Nganzi WI is 38%....which it is not. Block 5 is 38% though........  ;-)

Their drilling schedule summary also points to a "gross" potential of 100mn bbls from the next HPHT well in VN. Again, as we know from the AGM, this is perhaps the (conservative?) truth in relation to that fault block - but it certainly isn't the WHOLE truth, as success with that well would substantially derisk the rest of the fan!

On the M&A point (per the various discussions we've had on the boards about whether a deal MUST wait for a further well on TGD), Merrill make the interesting comment that:

we highlight that, last October, Soco confirmed it had received a

preliminary approach regarding the sale of a majority of the company’s portfolio.

Since then, there has been no update on this front. However, we believe that by

reducing the geological uncertainty surrounding TGD, through increased reservoir

knowledge, the potential bidder could be brought back to the table.

...my bold.  As you know, it has been my view for a long while that it may well not be ESSENTIAL for a further well to be drilled - and that if a bidder waits until the well is drilled, then a success will very definitely put the asking price up (and attract other bidders). So I'm certainly not ruling out a deal being done before (subject to price - which I still think would need to be £25+ based on the current state of development of the VN assets).

Re TGT they say initial production in 2011 will be 40k boepd ramping up to 100k plateau (confirming previous indications) and note that:

The company submitted the TGT field Development plan for Governmental

approval in 2Q09, with all appropriate regulatory and review committee approvals

set to be granted shortly. Tenders for long lead items have already been issued,

with bids from FPSO providers (for a 1m bbl storage unit) currently under review.

Reportedly, SBM Offshore, Prosafe, Swire, BW Offshore and Bumi Armada are

bidding for the job. Key to the development of the field is flow assurance between

the FPSO and the wellhead.

Curiously they say that:

The cash balance of the company totals around US$300m. We note that most of

this is likely to be used to repay its outstanding convertible bond (US$250m),

puttable to the company in May 2010. Even with this expected cash outflow in

2010, we see Soco well placed to meet its capex requirements over the next

couple of years.

......which appears to be assuming all the bonds get put. Merrill must know where the bonds are trading, surely??? [I assume that they are now very close to or even over par, given the recent run-up?? Anyone got the exact current level?]

And (astonishingly IMO) they ascribe only 211p per share in their 1651p NAV to risked exploration upside, with 282p of risked development and 1159p core (including (only) the initial production rates at TGT from 2011). It seems to me (from their comments on the HPHT area and Nganzi) that they could easily double their risked explo numbers if the company did indeed drill Nganzi without farming out and if they fully explained the derisking impact of the "100mn bbl" well on TGD.......and I'd expect both of those to be made clear to analysts by October, if perhaps not in next week's interims.

ee

ps......  There is little doubt IMO that  many investors have exited the stock on the back of analysts' recommendations. It'll be interesting to see what happens as they try to get back in. I'd be unsurprised if the shares were back at £20+ by year-end, irrespective of any M&A news.

In reply to emptyend (post #1).

.....which appears to be assuming all the bonds get put. Merrill must know where the bonds are trading, surely??? [I assume that they are now very close to or even over par, given the recent run-up?? Anyone got the exact current level?]

I'm told that the convertible was 99.78 this morning (I think that is probably the bid side, but it might be the offer....my informant wasn't clear).

ee

Merrill's note said...

Drilling on Block Marine XI (S1/Lyeke well 31p risked, 154p unrisked) is due to start in Sep, followed by the smaller Viodo appraisal (6p risked, 38p unrisked).

In fact I understand that the Lyeke well is now scheduled to spud on 19th August. Even allowing for SW10's Law, this should give a result in the early part of September, following which there is likely to be an analysts meeting ( ie when they're all back from holiday etc).

A spud on 19th August would be consistent with the indication given a few weeks ago and reported here: http://www.stockopedia.com/forum/view/28022/interim-management-statement?comment=14#14 - but is rather earlier than some will have assumed (including Merrill, rather puzzlingly!!!)

Similarly, there is no basis for the assumptions Merrill appear have made about farming down in Nganzi. That remains a possibility - but it is also quite possible (as present) that SOCO drill the wells next year with the full 85% stake. No decisions have been taken - so the outcome might well depend on whether the potential farminees have anything attractive to bring to the table.

ee

Following yesterday's immediate analysts' reactions to the interims, summarised here, some of the analysts seem to have been revising their views a bit following the conference call (and no doubt being corrected on a number of evident misunderstandings!).

One such (still somewhat confused) analyst note is out today from Citi - though is does also contain some useful snippets: 

• First oil guidance on TGT maintained with Soco indicating they are close to signing a Letter of Intent for the FPSO.
• Total capex spend of $1bn on TGT will be split equally between phases 1 and 2.
• A $400-500mn reserves-based loan deal is under discussion for TGT development finance, to be decided by year-end
• Citi add 109p risked to their NAV (having finally begun to understand the scale of the explo programme, despite them claiming this is "new"!), with the new NAV being 1409p
• They retain their "hold" rec, as they "struggle to see medium term catalysts that will retain investor appetite through the winter"

IMO this sort of reluctance to understand the company properly goes a long way to explaining why Citi were replaced as a broker to the company, especially when one looks at the details of their unrisked upside estimates for the upcoming campaign:

• Marine XI 2009 wells.....139p

• Next TGD well..... 146p

• Marine XI & XIV 2010 wells.......167p

• Nganzi.....1464p

I wouldn't quibble too much with the Marine XI/XIV estimates, though I have seen others that are double the above.......however, they have 1464p against Nganzi unrisked - and put a mere 15p per share into their risked NAV [thus utterly overlooking SOCO's own assessment of the CoS in Nganzi and the possibility that they might drill without farming down, despite the company considering reducing to a 30% operating interest]. As for the thought that the next TGD well has potential for only 146p of added NAV, I'm afraid that they will be forced to make a major revision to that figure when the seismic reprocessing has been finished and they can be led (by the nose) through the consequences for derisking the TGD fan.

ee

JP Morgan have also had a go and have confirmed several of the points made by Citi re TGT development etc.

In addition, they say:

• the capex budget of $1bn for TGT may be reduced by up to $150mn, due to lower steel costs (tho' FPSO costs haven't fallen)
• lower production at CNV lops 500bopd off their peak estimates and thus 28p off their core NAV
• the wells on Marine XI are each expected to take 30 days (this is clearly management guidance and IMO includes an element of caution re SW10's Law.....I'd still expect Liyeke to produce results well within 30 days)
• they correctly report the position on the step-out well on Viodo in that it is lower risk than a big step-out but will nevertheless derisk larger step-outs due to having more sophisticated info on the geology than they have at present
• Chevron are shooting 3D over Block 0 in offshore Cabinda to test their view that there is "substantial remaining prospectivity"  (part of Marine XIV abuts Chevron's block)
• Nganzi targets are prospect A (200mn bbls) and prospect B (100mn). SOCO "may consider farming down.....having received interest from several parties". The main Nganzi risk is reservoir, despite there being oil seeps.
• "Exploration campaign over the next 12-18 months could prove up over 2000p of value"

There was also an interesting comment on the planned TGD well :

If successful, the well could de-risk substantially more upside (fan channel). Given that Soco will secure a rig for 12-24 months (to drill in CNV, TGD and then TGT), a second well testing the upside could be drilled immediately after the first well. Management is confident that the well will be significantly easier than the original well to drill. Given the potential upside from TGD, management said that it was unlikely that it would sell down their interests in Vietnam in the near future.

I've emboldened the key bits here!  I've always suspected that they may continue drilling at TGD if the first well goes to plan - and we may get a better steer on that in the next month or so when more details of the reprocessed seismic become available! As for the potential for a sale in Vietnam, you'll note that the word "unlikely" denotes a small amount of uncertainty!!

ee

It is worth comparing Citi and JP Morgan in respect of the estimated unrisked figures for the upside from the upcoming drilling campaign [nb - slightly edited shortly after my initial post]:

I suggest that JPM have a much better handle on the TGD upside than Citi appear to! However, despite that, I see that their upside figure for TGD is based on a mere 594mn boe gross figure for the potential of TGD - which IMO is potentially itself a large understatement (given the guesses being tossed around at the AGM.....guesses which I'd expect to see being firmed up at the next analysts presentation when they can go into more detail (post seismic reprocessing) about the sizing of the TGD fan and associated prospects in the HPHT area!).

The jury is obviously deservedly out for now about the potential upside scope of Nganzi (where the slight delay to drilling arises from the need to build access roads in after the rains end in May) - but all the analysts currently assume they will farm down and will get nothing in return (other than some costs covered). That may not turn out to be the case - and if they turn down the farm-in offers and drill it on their own, then I think there will be a sharp turnaround in analyst excitedness!  And, I'd suggest, if they DO farm down then there is likely to be some fairly interesting entry to other acreage that would have been eased thereby........

Finally, having sorted though the various comments of analysts after these results, I'm fast coming round to the view that analysts really haven't got a grip on the company at all. It reminds me of the 2002-5 period when SOCO were barely being covered by analysts and such comments as were published castly under-estimated the value of the company (according to my own spreadsheets). In recent years I've not bothered with keeping my own spreadsheets on the NAV, as the analysts eventually seemed to get a handle on the company and their valuations converged with my own.....but I'm so underwhelmed by the current attempts at "analysis" that I may have to start doing my own again.

ee

Hi EE

how did you manage to get those vertical lines? I thought that wasn't possible here?

T

In reply to emptyend (post #6)

I'm fast coming round to the view that analysts really haven't got a grip on the company at all.

How much of that is down to SIA management  either deliberately not giving them the right steer, failing to give them the right steer, or analysts just not doing their job properly?

In reply to tiswas (post #8)

I'm fast coming round to the view that analysts really haven't got a grip on the company at all.

How much of that is down to SIA management  either deliberately not giving them the right steer, failing to give them the right steer, or analysts just not doing their job properly?

I'd say that about 80% is down to analysts not doing their jobs properly (usually by not understanding or incorrectly interpreting what they have been told....horses to water etc) and about 20% is because the company are only telling them the parts of the story that can be backed up by hard evidence (deals done, holes drilled etc) and are being deliberately conservative in what they are saying about the upside potential, pending the emergence of what analysts might consider to be decent evidence.

The main area where this impinges at present is over TGD and the HPHT area, where they are guiding primarily based on the 100mn bbl fault block that is the principal target of the next well but are unable to say anything much about the potential upside from the fan, pending the final seismic reprocessing runs.

An analyst doing a proper job IMO should be asking about the bits that the company management are not (yet) advertising....much in the way that shareholders asked similar questions at the AGM! Analysts are MUCH too keen to focus on providing conservative estimates of NAV (eg by ignoring anything that isn't being drilled in the next 6 months, or leaving ALL of the exploration assets out of their formal NAV completely!) - what I think they SHOULD be doing is providing their best estimate of the value of the company.....where such a "best estimate" is equally likely to be too high as it is to be too low! Their present methodologies (which have regressed slightly in recent years, it seems) provide a systematic bias against any company with exploration upside, causing investors to under-value them.....which is one reason why E&P companies will continue to be taken over by people who look at the complete value of companies and not just "whats gonna be revealed in the next 6 months"!

ee

ps tournesol - try the table feature on the toolbar

Someone has kindly sent me the latest issue of toilet paper from Collins Stewart.

Obviously they are worried about the fact that their NAV estimates (up from 1089p to 1272p on the interims and associated news) are a long way below consensus, because they say (prominently on page 1):

One possible reason we’re below consensus

Our NAV estimates on SOCO still look below those of some other observers. One reason for this could be in the calculation of SOCO’s net interests in some of its key assets. In particular, SOCO Vietnam owns 25% of CNV (block 9-2) and 28.5% of TGT/TGD (block 16-1). However, SOCO Vietnam is only 80% owned by SOCO, making SOCO’s  net interest 20% in CNV and 24.8% in TGT/TGD (including 2% through OPECO).

 

Sadly the answer looks to be much more simple than all of the other analysts failing to notice that SOCO Vietnam is only 80% owned (a point which even the slowest fools will surely have noticed many years ago!).......and much more their fault!....

.....they have made the precise mistake that I alluded to over here  http://www.stockopedia.com/forum/view/29921/valuation-sentiment-and-sp-direction?comment=46#46 and here http://www.stockopedia.com/forum/view/29921/valuation-sentiment-and-sp-direction?comment=55#55 

....viz, they have used entitlements figures of 15mn bbls at CNV and 37mn bbls at TGT....plus 21mn bbls of upside potential at TGT - and a further 10mn bbls of upside potential at TGD (both of which they then risk further). So that means they think SOCO's entitlements in Vietnam only add up to 83mn barrels.....and THEN only if the exploration and appraisal wells come in! In contrast, they show WI barrels totalling 155mn bbls in Vietnam, including the TGT/TGD upside (which we could also have a big argument about, in time, as it may turn out to be more than double that!).

WHAT DINGBATS!!!!!

Obviously if you mistakenly ignore 46.5% of the company's most important assets then you are going to come in lower than everyone else!!!

I'm afraid I don't have the will to look any further at their note and have filed it in the virtual round receptacle!

ee

Both Citi and JP Morgan have reported in their notes that Soco have flagged their Thailand assets as non-core. No surprise there. Citi also go on to say that Soco said on the conference call that various smaller operators had expressed an interest, though nothing was yet agreed.

It might therefore be appropriate to consider what the Thailand assets might be worth. JPM have them in their NAV at $197mn (including some risked explo upside), whilst Citi's figure is $170mn (core only) and Morgan Stanley's is $196mn.

So...say $200mn area? That would pay off a chunk of the convertible and help preserve the cash pile for more interesting opportunities. It would also mean that they could probably dispense with (or reduce the size of) the loan deal that is being discussed with a view to putting it in place by year-end.

If I were a betting man, I'd think the Thai assets might be gone by December.....

ee

ps.....by the way, it looks as if plateau production at TGT is now being planned as 125,000 bopd, as the phase one platform will be 50,000 bopd and the phase 2 platform (to the south) will be 75,000 bopd

Havent yet seen the note but CS have apparently gone from Neutral with a target of 1309p to Underperform and 1224p target.

Edit with comment:

"We believe that Soco's 12-month exploration program, across Vietnam, Republic of Congo and the Democratic Republic of Congo (600 million barrels of oil equivalent  of net upside potential in all) is not diverse enough for us to buy into at the current price," it says. Also lowers target price to 1224p from 1309p. Shares +0.1% at 1338p. (ISD)

Clearly another outfit that doesnt see any newslfow.......

In reply to djpreston (post #12)

"not diverse enough"??

What a curious point of view!!

All the M&A excitement is over companies that have strategically-sized assets......you can't get that if you are a £1bn company operating all over the place!

ee

I hope to see the Credit Suisse and UBS notes in due course, but in the meantime I've had a look at RBC's:

• NAV up 50p to 1921p (due to the "new" prospect inventory in Africa that we all knew about two months ago!)
• They think SOCO's shares are now more leveraged to African explo than to proving up and divesting Vietnam
• Sticking with sector perform due to lack of newsflow after Marine XI (which they are negative on because....err.....everyone else has been rubbish at drilling in the shallow waters off Africa). However, they also suggest buying on weakness ahead of Nganzi drilling and possible Vietnam deal in late 2010

Their risked estimates related to the upcoming drilling are (including Citi and JPM's UNrisked figures for comparison) given below. Sadly their note doesn't allow unrisked figures to be derived:

RBC's 36p relates to Cabinda. You can see from the above that they don't seem to have fully considered the implications of the drilling campaign, in omitting Nganzi - perhaps the analyst was writing from a beach?

They also have Bualuang in at $160mn ......not far behind the others I mentioned in post 11

Their note concludes.....

Our target price of 1350p is 30% below our sum-of-the-parts NAV of 1921p/share, with the caveat that we would expect a price close to our NAV in the event of a corporate deal.

...which rather neatly sums up the investment dilemma. IF nothing happens on the bid front then the shares may trade cheaply - however, if someone decides to make a run at the company then obviously that would be a lot higher!

Of course if someone want to wait until late 2010 before bidding then, if successful drilling has occurred in the interim in Nganzi and on TGD, then the chances are that the thick end of £20 will have been added to the NAV (per JPM's comments). Sadly I don't have a crystal ball - but I really do think that it is stupidly brave of analysts to assume that "nothing will happen" between the Marine XI drilling and the start of wells at TGD/Nganzi......and I think it is rash to be out of the stock over this period (though, as ever, there is scope to argue about exactly what % one should hold).

ee