Analysts reports

6th Aug '09 by emptyend

736 comments 241847 reads

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

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Emptyend

Premium Member

736 comments

kenobi

3rd Nov '11

propaganda which slags off the company and its management for not behaving like a speculator imagines they should. Of course they don't. They are the ultimate long term players.

>> exactly!!!!!!, to an investor, sell up for a fiver and we'll go onto the next trade,
>> for a director, this is the culmination of a lifetimes work, I only get one shot at exiting, I'll do it at a time of my own choosing (and hopefully price of my choosing)

kenobi

3rd Nov '11

>>>I have bought back in again at just over 300p. If that doesn't offer relatively safe value and a decent potential upside tell me what does.

great repo is back in, welcome back, and a bullish sign if ever I saw one !

K

emptyend

3rd Nov '11

May I draw people's attention again to the header???

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

I don't think there has been an on-topic post since mid-afternoon yesterday....and I'm not inclined to indulge further digressions, having had 12 hours of free-for-all.

AnonymousUser858

3rd Nov '11

Apologise for being slightly off topic but am clearing out some files and have just come across a piece of analysis by Richard Slape for Seymour Pierce issued back in March 2003. Although the subject is Dana rather than Soco, I think this report neatly illustrates the issues and difficulties one faces in trying to make sense/use of analyst reports as well as speaking to the issue of long term investment in this sector vs short term trading/speculation.

Slape had a down on Dana from its earliest years - I've no idea why. Every time he looked at the company he made the same mistakes and reached the same conclusions. AIUI he rarely if ever attended analyst presentations or spoke with management to investigate his concerns. Basically he shot from the hip and missed more often than not.

In 2003 with the shares standing at 187.5p he concluded that Dana lacked any merit and should be sold. I held a significantly different opinion and held a large position in Dana for many years. It came good. Slape continued to make bad calls on Dana for year after year after year.

So when we read current analyst comment on Soco and when we see the price targets they contain, let's not ever make the mistake of bowing our knee to their wisdom and expertise. Instead let's use their reports as sources of raw data and let's exploit them as good indicators of prevailing sentiment in the corporate/institutional investment world. And then let's make up our own minds.

T

djpreston

3rd Nov '11

Amen T.

emptyend

3rd Nov '11

Every time he looked at the company he made the same mistakes and reached the same conclusions. AIUI he rarely if ever attended analyst presentations or spoke with management to investigate his concerns.

This is actually an extremely important point to bear in mind. There is a great deal of "garbage in, garbage out" in analyst notes - and PLENTY of fundamental misunderstandings!

For example, some years ago I had an exchange with one analyst (I won't mention his name, because there were a number of analysts who made precisely the same mistake) which revealed that he was incorrectly double-deducting taxation payable under SOCO's JOC arrangements in Vietnam. The JOCs pay tax (as with any corporate body) ....but the only other element of the state's "tax" take is the fact that PV are a partner in the JOC. The analyst concerned had made some wrong assumptions - and I fully expect that several other analysts are STILL making similar wrong assumptions. I encouraged him to speak to the company - who confirmed that he had got it wrong....and he later corrected his numbers.

And that brings me on to tournesol's other point.......

...there are a number of analysts who produce pieces on SOCO who NEVER contact the company, NEVER attend analysts meetings and NEVER show the company their models and invite them to comment and/or point out any errors in their models. I've no reason to think it is any different when they write about other companies.

Accordingly it is possible...indeed highly probable....that once fundamental errors have been made in the initial analysis of the company, those errors are carried through indefinitely and are never corrected.

Nor should it be assumed that analysts who DO all the right things (speaking to the company, turning up to listen to management commentary, asking for clarifications and corrections to errors etc etc) are EVEN THEN producing accurate or reasonable pieces of work. It is observable (for those who know the company and its assets well) that even the house brokers' analysts cannot be relied upon to understand things properly and to model them properly. And that particularly applies in the case of the company's Vietnam JOC assets, because they are somewhat "non-standard" and don't fit easily into the standard industry models (I believe most analysts use a package derived from an off-the-shelf WoodMac product...though perhaps that may have changed in the recent past?).

And then we have the question of whether the assumptions are reasonable. I've got no problem with analysts who use different oil price assumptions and state them - eg $90 long-term Brent is commonly in use at present....DESPITE Brent having been over $100 for most of this year and over $110 for half of it. And I've got no problem with analysts picking any GBP/USD FX rate and stating it.....

BUT....do all the analysts factor in the $5-6 spread over Brent that TGT oil sells for? I doubt it....

...and why do virtually all of them discount their model cashflows at a 10% discount rate? Last year (August 2010, for example) RBC's notes were accompanied by a stock-specific sensitivity table for discount rates and oil prices. For some reason they no longer do this, but it is of some use to look back at the table they published then, because at the time their estimated NAV for SOCO (at $84 oil and a 10% discount rate) was 575p ....which is only slightly above the 558p NAV they published yesterday:

So, from that table....if instead of $84 and 10% (producing 575p) they had used $100 and 7.5%.......the resulting NAV estimate would have been 830p.

And interpolating the table and referencing it to their NAV estimate made yesterday (558p, based on $90 and 10%), if RBC were currently using $100 Brent and a 7% discount rate, their NAV estimate would now be approximately 791p, instead of 558p.

I mention this, because it is a crucially-important part of the valuation process. Obviously one can understand why analysts don't muck around often with their basic assumptions, because they would then need to do new notes on every company in order to rebase their numbers. But I'm sure we can all see the difference made by a few percent off the discount rate and a few dollars on the oil price assumptions!

And, more pertinently, it is important to consider what assumptions a buyer might be using when they seek to value SOCO's assets (or those of other companies, come to that)? What is reasonable? $100 Brent prices don't look to be any less reasonable an assumption than $90, do they? What about the discount rate? Is 10% a reasonable number? Not IMO....not by a long way:

....and here's why.....if you look at the rates being paid by oil companies to issue USD bonds, they are astonishingly low. Even KNOC of South Korea was able to issue a 5 year USD bond a couple of weeks ago with a yield of 4.14%. Better credits (such as most of the Chinese oil companies....or any of the large western companies) would pay even less.

So...discount rates matter. They may not seem to matter much to an analyst who is mainly interested in comparing stocks across a sector - but they are of massive importance when it comes to deciding the price for a strategic M&A project. I don't, incidentally, think that discount rates for E&P M&A should be very close to the bond yields - but neither do I think they should be 10% in the current environment. Perhaps 7-8%?

MadDutch

3rd Nov '11

I can see nothing disruptive whatsoever in Kenobi's posts at 2.36 and 2.38 today,

I am asking the moderator to explain.

MD

emptyend

4th Nov '11

They were off-topic....as yours is!

I tried to draw a line under the digressions 6 hours before in post 412. Kenobi ignored that - so I flagged his posts for disruption.

There has since been at least two posts on substantive matters of analysis - what a shame you couldn't have continued the recovery of the thread!

I urge people to return to topic - as clearly stated in the header.

Mark Simpson

4th Nov '11

IMO it's this difference in discount rate that will make any deal to sell SV a win-win for both parties. By selling to a NOC or a Major, Soco will get a value that is higher than the cashflows discounted at the rate of return that shareholders demand (10-15%?) and hence the value the market places on the assets. The value of the cashflows to the NOC is higher than the price they will pay since as ee points out they can raise debt to pay for it at a long term rate far below 10%, hence they profit from the transaction.

Of course the same argument could be made for any entity generating long-term cashflows. The key to profiting from this as a shareholder is identifying how attractive the assets are to companies with low WACC. Given the nature of the assets and history of offers for SV, SOCO seems a better bet than most companies. That the company is currently trading at a significant discount to the NPV10 of the SV cashflows (from analysts reports and my own simplified calculations) makes it an even better deal.

emptyend

4th Nov '11

That is all correct, IMO, dangersimpson.

The factor that you don't mention is that (unlike 90% of other companies in the sector) SOCO has some control over its own share register. Even the analysts recognise that at least 140mn shares out of the 340mn are not in the free float - and I would personally put the effective figure rather higher since (for example) I suspect that the Maugein estate is still being advised by the Chairman.

IMO it's this difference in discount rate that will make any deal to sell SV a win-win for both parties. By selling to a NOC or a Major, Soco will get a value that is higher than the cashflows discounted at the rate of return that shareholders demand (10-15%?) and hence the value the market places on the assets.

This is one of the reasons why I have always expected an eventual deal to be done on a very fancy premium to the market price. The market insists on pricing the assets at a discount to analysts overly-conservative NAV assumptions.....but management won't be dealing on those terms.

I would also be unsurprised to see that valuation gap being closed quite sharply in the run-up to a deal - but to still have a big premium.

Spurticus

4th Nov '11

ee,

...an eventual deal...

That's really the heart of the problem with SOCO, and has been for some time, isn't it?

The 'valuation gap' is clearly apparent even versus the broker notes, never mind your posts above, but as you say, full value for assets is primarily (only?) likely to be closed by M&A activity, and a NOC/Major won't pay a full price until the "known unknowns" are known (reserves, TGD, output).

Yes, a bid could come at any time, but that's true of any company - IMO, for a full value bid, the balance of probability is slanted heavily towards "later" (next year), but possibly a LOT later (2-3 years?).

This from the IMS sounds to me more like a strategy of growing the SE Asia asset portfolio:

The Company continues to evaluate exploration opportunities in South East Asia and Africa. Although it is not guaranteed that any new projects will be introduced in the near term, the TGT oil development in Vietnam significantly adds to an already strong balance sheet ensuring that the Company will be well financed to conduct an aggressive exploration programme.

I think a bookie would be giving generous odds for anything in 2011/2012. (Mr. Market doesn't appear to give short-term M&A any real credence, and whilst it can be wrong, it can also be right).

Spurticus

emptyend

4th Nov '11

All fair comment of course. We'll see. But in the meantime why not recheck the timelines on the points you mention here:

and a NOC/Major won't pay a full price until the "known unknowns" are known (reserves, TGD, output).

...and, as I pointed out a while ago, there has been zero credence given to any of the previous deals - until the morning they appeared. So I don't get at all bothered by this observation:

(Mr. Market doesn't appear to give short-term M&A any real credence, and whilst it can be wrong, it can also be right).

Adherents to the efficient market hypothesis always assume that all expectations are already "in the price". Take a look at how much Mr Market knew about the recent deals for Encore, Dominion and others before they emerged....

cheers

Isaac

4th Nov '11

ee

I note your post has 24 positive recs, I think this implies that atleast 24 readers agree with your post? OK.

I've read your post with interest, thanks for sharing your thoughts.

But I have also taken a few minutes to think through some of the comments you have made

Nor should it be assumed that analysts who DO all the right things (speaking to the company, turning up to listen to management commentary, asking for clarifications and corrections to errors etc etc) are EVEN THEN producing accurate or reasonable pieces of work. It is observable (for those who know the company and its assets well) that even the house brokers' analysts cannot be relied upon to understand things properly and to model them properly.

I think this is a reasonable statement and I fully agree, but I have'nt quite come round to agreeing with the following paragraph :

So, from that table....if instead of $84 and 10% (producing 575p) they had used $100 and 7.5%.......the resulting NAV estimate would have been 830p.

And interpolating the table and referencing it to their NAV estimate made yesterday (558p, based on $90 and 10%), if RBC were currently using $100 Brent and a 7% discount rate, their NAV estimate would now be approximately 791p, instead of 558p.

The reason I can't agree with your valuation is because it appears that you have simply taken a couple of assumptions used in the analyst note and just altered it to adjust the NAV, in this case Oil price and discount rate.

But have you considered that the Original model used by RBC has incorrect components that made up the original NAV model?

As you rightly point out do all the analysts factor in the $5-6 spread over Brent that TGT oil sells for? I doubt it....

Well there are two sides to every coin & so is everything in RBC's model factually correct? I don't think anyone but the company can honestly answer that.

As they may have left out the $5-6 brent spread of TGT Crude over Brent they could have equally added components to their model that are inaccurate so I can't quite agree that simply adjusting the Oil price and discount factor can provide an accurate valuation model.

I am especially sceptical as if the price company was worth £8 then why would the company not buy back shares at £3.20

I accept there could be a number of reasons as to why this maybe, they may simply wish to keep loads of cash on the balance sheet in the current environment, they may genuinely wish to pursue acquisitions or they intend to carry out a intensive & expensive drilling programme on TGD etc etc etc It is difficult for me to know what they are really planning to do from my arm chair!

However having said that there a number of companies that are flush with cash in this boom oil price environment and I think it is reasonable for them to have made an approach for Soco if there was such a big disconnect between the market price of £3.20 and £8? I just think that is very good value to buy in the market and I would have thought you would get a queue of companies wanting to buy in. And I am pretty sure a number of companies have looked at Soco.

So why have'nt they made an approach?

I think it is more important to look at why one's NAV could be wrong and take a sceptical view as to what could potentially be wrong with an Investment rather then an optimistic view - This can save one quite a bit of money in the long term IMO as opposed to taking a bullish view.

On Dragon's Den the Investors tend to look for flaws in an Investment & only when they are satisfied their concerns are addressed do they cough up.

I remain sceptical of an £8 valuation, I hope I am dead wrong though. On this occasion I would love to be wrong.

emptyend

4th Nov '11

Good to see a reasoned post for a change.Please keep it up :-)

I am not making "a valuation". I am merely pointing out that the NAV estimate by RBC would look radically different if a different set of equally plausible assumptions were being taken. Similar considerations will apply to every model - and no doubt all of the models are flawed to a greater or lesser extent.

My point is that analysts are not necessarily using the same valuation metrics that a bidder would use. In fact I'd suggest that they definitely won't be, at least for some bidders in respect of the discount rate. We will find out in due course - but IMO the price of a deal (depending on what sort of deal gets agreed) will be in the £6 to £8 per share range. There are a range of influences that get me to such numbers, including expected reserves upgrades and results showing strong cashflows - and perhaps including some value for TGD. But the point of the post was to show that even making slightly different assumptions about oil prices and discount rates could have a significant impact on NAV estimates.

This isn't a time to get overly precise about things. There are plenty of unknowns in terms of the way a bidder may look at the business. But I'm confident that the value is well above current market prices and significantly above analyst estimates. We'll see if that is right in due course.

AnonymousUser858

5th Nov '11

I think some people here lack an understanding of the way E&P's are run. (natural enough considering)

In my experience a typical E&P has a team of people called something along the lines of "Corporate Planners" - or something similar - whose job is to build, maintain and run a suite of valuation models. . The core models will cover the assets already owned by the company and will represent a wide range of scenarios - different combinations of what-if type situations for different values/combinations of critical parameters - level of production - timing of production increments/decrements - forecast rate of decline - price of oil - cost of operations - taxation - exchange rate - etc etc etc.

These models will aim to make visible a broad range of alternative futures in order to allow management to steer the company through the intricate and complex issues they have to deal with towards an optimum result. Sometimes companies do things that appear to be sub-optimal because observers are not cognisant of other inter-related issues which the management are trying to weave into the mix. A classic example is where activity is geared up or throttled back to make optimum use of accrued tax losses.

In addition to the core models of the company's own assets, the corporate planners will also model assets and asset portfolios which do not belong to the company but to joint-venture partners, competitors, potential targets or potential predators. These models will not be purely stand alone but will aggregative. The basic idea is to see what an asset would be worth when integrated with an existing asset portfolio. This can work both ways. A company might calculate that one of its assets is worth more to another player than it is to them - leading to a sale which achieves a win-win outcome. Or conversely, might identify assets that would be worth more to them than they are to their current owner - leading to a purchase which is win-win.

Obviously any asset transaction is priced on the basis of the models used by both sides - the most significant issue being where each company pitches their assumptions. If the seller is assuming a POO of $100 whereas the buyer is assuming $120 then each side could use exactly the same model and could see the result of a sale based on $110 as a win for their side.

Of course the models do not stop at single assets. They cover entire portfolios aka companies. A company like say Premier will have been running a model on Encore for many years before the winds, tides and portents all come into alignment with Premier's own situation - its cash position, its tax position, the attractiveness of its other projects, the capacity of its own staff, the availability of rigs, exploration costs, etc etc etc

And one day at the regular briefing from the Corporate Planners the CEO will be advised that the risk/reward/upside/downside balance has tipped and the object of the past 5 years' analysis has moved into the cross-hairs. He/she then has to decide whether to move into action. Typically such action will be an informal contact designed to determine the other side's level of interest in discussing a deal. That will typically depend on the other side's models which might or might not be flagging the potential for a beneficial deal. If the target gives a come-on response things can develop very rapidly. Typically both sides disclose their models to each other so they can see the common ground and identify where differences need to be discussed. If the target gives a cold response things will rarely progress.

Sometimes you see situations like Dana where there is a clear mismatch between the valuations of both sides and a refusal to reconsider. In that case the problem was the modelling done by a few major shareholders which needed to realise short term profits to bolster overall investment performance and which placed no value on the incremental return available by waiting formedium/long term organic growth.

Coming back to Soco. There can be no doubt at all that other larger companies are modelling Soco's individual assets and total portfolio and are working out their value when merged into their own existing asset vase. These models will have been under scrutiny for years. And I woud expect that there have been many cold calls made by potential acquirers sounding out Soco management's readiness to welcome a deal. And there may well have been calls made by Soco management to potential acquirers to do the same thing in reverse.

Every day that passes deals another card to each of the players in this game. At some point one of the players will see that he now has a winning hand and the chips will go down. That's when it will be revealed whether other players think they can outbid.

Analysts working for brokers do a similar kind of thing to the above but because they are covering a wider universe their models are typically less sophisticated, less detailed and less subject to checks and balances (such as review by other experts) than the internal planners. That's why they so often prove to be wrong when significant events occur.

Retail investors by and large are less engaged. a few might knock up simplistic valuation models, but most of us don't really bother, especially during periods when there is a huge gap between share prices and valuations. I don't need to know whether Soco's assets are worth 568p or 620p, I just need to know that a SP of 340p is an opportunity.

For armchair investors to pontificate about the timing of a corporate transaction is rather pointless. For such investors to claim that the absence of any announced deal proves that a deal is not being considered or is not in prospect is simply silly. For them to criticise management for not following a simplistic game plan based on a superficial analysis of a partial subset of facts is ludicrous.

All we can do is consider our own valuation and our own circumstances and decide how to optimise our own outcome. I have 25% of my investable funds in Soco. I regard that as a safe, low risk investment. Having recently topped up very substantially below £3, I currently expect to make around 100% return from here within 2-3 years. Of course I follow developments and read discussions but that is as a means of mitigating risk rather than frenetic trading and soul searching on points of detail. For example if production problems started to emerge that raised the spectre of a Chinguetti type debacle, I'd be out like a shot. But failing that kind of development I aim for masterly inactivity.

djpreston

5th Nov '11

Bravo T.

Never seen a better explantion.

Isaac

8th Nov '11

$115 Brent!!!!! :-))))

What price does your Al Stanton Model at $115/bbl have for Soco ee? :-)))) £10+ surely? :-)

emptyend

2nd Feb '12

Fresh rumours of bid talk - if one just stops at reading the newspaper quickly......but it turns out to be just a third-tier broker stating the obvious (and no doubt completely unrelated to the share price move being commented upon!):

Elsewhere, bid talk was being revived around Soco International. Its shares spurted up 8.5p to 300.2p after Brewin Dolphin predicted that the explorer would "either divest its Vietnamese assets, be taken over or... return significant cash to shareholders."

Who'd have thunk it? ;-)

kenobi

2nd Feb '12

yes, news just in, fire is hot !

emptyend

5th Feb '12

ML have a 40 page sector piece out which says:

ongoing development drilling is aimed at proving the extension of
the field to the East as the reprocessed seismic indicates. This could result in
20-40% resource upside in the TGT field medium-term. One of the
development wells had already encountered the reservoir section some 10
metres higher than expected, de-risking this upside, and one of the most
recent TGT development wells also supported this extension.

This 20-40% upside is, of course, incremental to any upside arising from the start of production and the recent greater certainty of reservoir performance (evidenced by the multiple well testing etc). Interesting to see the comment about one of the latest TGT wells, given no data has yet been released.

In addition, the
installation of new oil/gas separation facilities at the Bach Ho platform should
improve the allocation of volumes of Soco’s CNV field and could allow the
company to claim back past unallocated volumes to the operator. We see
this potentially representing US$30-60mn of back-payments to Soco.

There are several parts to this story too........

1) Yes they should get credit for unallocated volumes of liquids already supplied - $50-60mn was my guess there

2) The separation analysis should allow them to finalise the pricing of CNV gas going forward

3) There should be an uplift to reserves at CNV as a consequence of the resolution of the above; one third of the recoverables at CNV is wet gas IIRC.

ML's NAV estimate is 498.34p....which is a number I could quibble with, but there is no point - given how far above the current share price it is and the likelihood of news in the next 2-3 months which will cause ML to upgrade towards my guesstimates.

On the topic of sector valuations ML say:

Our NAVs remain unchanged and now the group trade at an average c40%
discount to NAV with the largest discounts going to Bowleven and Afren. This
discount to NAV has remained stubbornly wide since the sell-off in Jul-11 and is
completely dislocated from oil prices.

Yes indeed. ML's overall summary of the sector status is:

European E&Ps enter 2012 as almost the ‘value play’ within the Euro Oils space.
We see the value proposition anchored around (1) dislocated valuations (c40%
discounts to NAV) against a robust oil price backdrop with the largest discounts
going to Afren and Bowleven; (2) reduced expectations due to mixed operational
/drilling results; and (3) exaggerated concerns about the sector’s financing ability.
Even without counting on a ‘risk on’ move in the market, we believe that E&Ps
offer significant potential to re-rate as the year unfolds driven by (1) active highimpact
exploration calendars, (2) improving cashflow generation for producers
that reduces funding requirements and (3) consolidation/value crystallisation
opportunities that could bridge the valuation gap

And they go on to say:

the coming months will be key to
crystallise value in the sector. With the sector discounting US$60/bbl Brent and both
national and international oil companies trying to beef up their exploration portfolios
and inject LT growth, we believe that sector consolidation is just a matter of time.
Our M&A/farm-out candidates are Rockhopper, PetroCeltic & Soco.

Reasonable summary, given what is known and confirmable at present. I expect it to change after 14th March though.

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Emptyend

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