This thread is intended solely as a place to discuss analysts' notes on SOCO.
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.
