Analysts reports

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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

djpreston

5th Feb '12

A very sensible note I thought.

What's increasingly obvious is that the market has it's knickers on a twist over the tgt flow data and any possible impact on reserves. I'd expect that management will be focussing on this aspect most forcibly in the results, which can't come soon enough IMO.

D - monster hangover today. Friends birthday party last night and only got to bed about 4am....thank God it's speaking weather out there. It gives me the perfect excuse to opt for a lazy say in front of a roaring fire and a DVD out two.....

LongbeardRanger

5th Feb '12

Interesting and sensible-sounding note, thanks for sharing.

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.

Do you (or, indeed, ML) have any idea of what kind of range this upside (i.e. that part not related to TGT east) will be in?

As regards TGT east, the scope for an upgrade has been clear for a while (including in last year's annual report..!) and hardly required a phD in rune-reading to decipher, so it will be interesting to see the market's reaction to any such upgrade (whether TGT east related or more general) as and when. My view is that even a substantial reserves upgrade would be unlikely to shake the market from its seeming indifference to SOCO (though I'm sure industry players are keeping a much more watchful eye on the situation). Problems with the flow rates and performance of the field certainly seem to be the biggest risk at the moment, as djpreston says - I haven't seen anything in the performance so far that is of great concern, but it's easy to see why one might have drawn the opposite conclusion, so a confirmation that all is on track and performing to (or preferably, ahead of ;-)) expectations would be most welcome.

On a more general (arguably off topic...) level, interesting to see they highlight Afren and Bowleven as having very wide discounts to NAV. In Bowleven's case there are sound reasons for a significant discount to NAV imho. Will be crucial for them to farm out on good terms this year I feel.

emptyend

5th Feb '12

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.

Do you (or, indeed, ML) have any idea of what kind of range this upside (i.e. that part not related to TGT east) will be in?

Not with any accuracy at all. My guess is that an increase of 30% or so is possible, but it really depends on the current view of the ultimate recovery rate (ie what percentage of OOIP will actually be recoverable). Davjo is more on top of the present assumptions than I am (and on the numbers for nearby fields), but there is a reasonable chance that what has been booked to date has been based on conservative recovery rates (lower than nearby fields).

Shouldn't be too long before we get more definitive information anyway.....so I'l wait for that at this stage, rather than bothering to argue the toss in speculative posts.

anteos

6th Feb '12

just out of curiosity:

One of the development wells had already encountered the reservoir section some 10
metres higher than expected

how are they able to make this statement, when nothing has been announced ;-)

peterg

6th Feb '12

It was in the 2010 prelims

emptyend

6th Feb '12

It was in the 2010 prelims

Yes indeed. Though the unquantified comment re "one of the latest" wells is new news - though doesn't actually change much since that is what would have been expected. What will be interesting is what they say when they quantify the impact of the greater size of reservoir - which I guess will be in mid-March (or perhaps before, if they get to the point where they have finished the present round of TGT drilling)

loglorry

6th Feb '12

Might be a dumb questions but does "the reservoir 10m higher than expceted" mean 10m thicker than expected? Surely it could be higher because the reservoir is not at a completely uniform depth across the structure without it meaning that there is an extra 10m of pay zone?

Surely the thickness of the pay zone will dictate OIP not just it's depth or does this actually mean 10m thicker when they say 10m higher than expected?

Log

ExTownie

6th Feb '12

I would take it to mean that the new well is closer to the crest of the oil bearing structure, with potentially higher flow rates than the previous well. I also assume that the pressure will make the bottom of the oil bearing part of structure fairly flat, since oil wants to migrate upwards, hence the reservoir is thicker as well as higher. No oil expert though....

ET

flyinghorse

6th Feb '12

Usually they will have a predrill expectation of formation tops/reservoir depth from depth converted seismic.

The degree of control and accuracy of conversion from time to depth is reflected on prognosed tops vs actual.

So my interpretation is that the 10m higher is with respect to prognosis,and is not massively out. (often out by 100s of feet if poor velocity control).

So 10m higher is good if the pay is thicker than prognosed,but then the base of the reservoir may also be 10m higher.

FH

ExTownie

6th Feb '12

So 10m higher is good if the pay is thicker than prognosed,but then the base of the reservoir may also be 10m higher. - flyinghorse

I assume that if this is the same reservoir we are looking at, the base will be at pretty much the same level in both, since oil will migrate up to the highest point. If the two are not connected then I can see how the base levels could be different. I am happy to be corrected though.

loglorry

7th Feb '12

FH thanks for your reply. So it sounds like the 10m is just an error between what was expected due to seismic and what was actually encountered and this is well within the bounds of what can normally happen. If this is true then it doesn't look like we can infer anything particularly about extra reservoir thickness (depth) from this because as you say the bottom hight be 10m higher too.

However if this height is relative to another well that was drilled (which I think might be the case) then what ET is saying is that they might be nearer the crest of the formation as shown in the classic picture of a reservoir here http://www.sacoilholdings.com/oil/crude-oil.php. In other words as they drill nearer the crest of the formation they make oil contact sooner. This would perhaps imply a larger than first predicted reservoir.

Very hard to say I suppose without all the data.

emptyend

9th Feb '12

Just for the record, I've had a look on FT.com to see what the consensus forecasts are from the analysts.

The FT records the consensus forecasts of 16 analysts as:

Earnings:

2011 f/y      27.72 cents per share (range 12 - 61)

2011 H2    25.2 cents per share (range 15.4 - 35, 2 analysts only)

2012 f/y      78.72 cents per share (range 38 -161)

Revenue:

2011 f/y    $210.18mn (range $133mn - $308.87mn)

2011 H2   $177.37mn (range $173.9mn -$180.84mn, 2 analysts only)

2012 f/y     $619.42mn (range $373mn - $912.47mn, 12 analysts only)

For the avoidance of doubt, the FT earnings numbers are based on fully-diluted EPS (as one can tell from the historical data).

The back of my envelope suggests a likely beat of expectations(at least for the revenue numbers) - even at the top end of the very wide range!

I might note that if the earnings forecasts for 2012 at the top of the range prove correct (161 cents), that would make the forward PER roughly 3.

Must remember to check back against these when we get to see the 2011 actuals in a few weeks......and then check again a few weeks later to see where the analysts' 2012 forecasts have moved to! ;-)

ps....just three of the data points in that range. The latest notes I have (Nov) show :

MS......EPS: 2011 22.5 cents, 2012 49.1 cents ..... Revenue: 2011 $199.1mn, 2012 $420.1mn

ML.......EPS: 2011 27 cents, 2012 57 cents........ Revenue: 2011 $249mn , 2012 $535mn

RBC.....EPS: 2011 38 cents, 2012 147 cents.......Revenue: 2011 £200.3mn, 2012 $768.1mn

....some reputations are going to be made and lost on this one...... ;-)

loglorry

10th Feb '12

Barclays cuts Soco International PLC price target to 355P from 420P

http://www.lse.co.uk/ShareNews.asp?shareprice=RKH&ArticleCode=4wjoghrr1kkj24a&ArticleHeadline=BRIEFRESEARCH_ALERTBarclays_ups_JKX_Oil__Gas_to_equalweight_ups_target_on_Afren_Tullow_Oil_others

No doubt ee will be along soon to tell us why the Barclays research is wrong and he is right but I thought I'd post it anyway.

Log

rhomboid1

10th Feb '12

Hi Log
Do you have a copy of the barclays research note because without understanding the underlying assumptions it seems impossible for anyone to comment? Incidentally I think ee will have a far firmer grasp on the underlying picture than most/all brokers but less of an impact on the shareprice ..hence the disconnect between 'value' and shareprice that will close abruptly at some ..imminent..point !

Rhomboid

emptyend

10th Feb '12

No doubt ee will be along soon to tell us why the Barclays research is wrong and he is right

No. I won't be wasting my time, especially for someone so perpetually sarcastic and ungrateful (nothing to do with SOCO - everything to do with your blind punting in the banks some while ago and your then keenness to obtain my opinions). Funny how things change.

loglorry

11th Feb '12

Rhomboid1 - no just saw the headline downgrade. I'd like to see the full report if possible. Obviously different assumptions lead to different valuations but it is probably wrong to only focus on the ones that have nice valuations associated with them. Some think that analysts are almost universally inept unless the figures they produce agree with their own bullish stance. Obviously they do make mistakes but presumably they are hired in senior positions and paid large salaries for some reason so perhaps best not to ignore them completely. The other thing to point out is that although we might dismiss them the wider market who actually have the power to drive prices probably don't.

Ha ha ee. Yes sarcasm lowest form of wit. I think you need to take a chill pill though its only a bulletin board. I did find out a lot more about banks over the last few years though and made close to seven figures investing in them so like most people I have made plenty mistakes and still do but hopefully learnt from them to some extent.

You'll probably cheer up a bit when they drill the AEX well a bit deeper and find enough gas to power a small continent or maybe not.

Log

rhomboid1

11th Feb '12

Log
The important point i was trying to make is that most analysts make fundamental errors of fact when putting together their models, recent very material howlers involved tax rates, cost recovery mechanisms and even basic stuff like wrong % interests, that aside without knowing the oil price deck they're using or dcf factors it all is of passing interest only.

Granted they impact on wider sentiment but with soco controlling their own exit strategy i'm content to wait it out.

In the meantime polite discussion should be the order of the day IMHO..

Cheers

emptyend

11th Feb '12

The important point i was trying to make is that most analysts make fundamental errors of fact when putting together their models, recent very material howlers involved tax rates, cost recovery mechanisms and even basic stuff like wrong % interests

Just on that point, I'd observe that the range of estimates indicates that the understanding of many analysts is self-evidently weak. You have only to look at the range of estimates to see that. Aside from quite legitimate and obvious uncertainties and differences of opinion (such as over the production profile at TGT), I suspect that many STILL don't correctly model the tax impacts of the JOC structure - and the cost recovery impacts on the P&L are not immediately obvious (even to me)....though I would expect to see the revenue and cashflow line items inflated by the cost recovery and balancing reclassifications of assets in the balance sheet in respect of recovered costs. However, I would also expect the 9% pa rolled-up interest rate chargeable on the cost carry of the minority partner to drop straight through to the P&L (and I'd guess that item alone might be pretty significant for 2012).

loglorry

11th Feb '12

I totally agree and without knowing the details of the analysts models it is almost impossible to say if they have missed all these very material details. This is the reason I think Soco is undervalued and I'm also long. My original comment although I admit a bit overly sarcastic was hopefully to flush out the inaccuracies in the Barcap model.

All that said I've yet to hear of many people that are long a stock that can't think of a valuation model that makes them think the stock screaming buy meanwhile there are sellers at the current price a plenty. We all have a natural bias to justify our purchases or long positions. It is normal but that doesn't make it right.

I'd also say that the price the market puts on the stock is at times always going to discount any risked discounted cash flow model. The same is true for almost all Oil and Gas stocks out there at the moment. If Soco bring TGT into production then it should become more and more obvious the are worth more than 300p. I could make the same argument about stocks like Sterling Resources who are bringing Breagh online currently. It doesn't mean the price in the secondary market will reflect these models at all - it could just mean there is lots of equity selling going on in the funds that hold these stocks.

Log

emptyend

13th Feb '12

FWIW I haven't seen the BarCap note as yet. However, I would bet a pound to a penny that it doesn't correctly model TGT. I'm not interested in posting to "justify" my long position. The facts will undoubtedly speak for themselves in due course.

I'm interested to see that the Gulf Keystone Petroleum (LON:GKP) share price appears to go from strength to strength. Nothing much fundamental has changed there recently - only the expectation of Exxon appearing with a massive bid, which seems now to be being given more credence by the market.....the shares have more than doubled since December 19th when the company denied it was in talks......

......in the case of SOCO International (LON:SIA) I'm not expecting there to be the same sort of pre-deal rumours in the market beforehand - hence staying long and merely waiting.

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Emptyend

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