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

MadDutch

15th Mar '12

Kenobi, thank you. I saw previous posts on this subject, probably from you. I was very alarmed, it will be a dangerous situation for us if it is true.

That is what I meant by posting "This is not a fire sale."

I am sorry if I have upset two of us but consider this. It comes too soon after the Conoco Phillips problem, so it may be policy and might not be coincidence; if it is, we are faced with an unsatisfactory situation. A lower price or a considerable delay. Company policy is to realize value and some Directors will want to wait. The board will probably be divided, so shareholders views may be useful.

We are minority shareholders in Viet Nam, but we do have an alternative strategy to a sale in the short term, and it can be used as a strong position in negotiation if it is used skillfully.

If a buyer tries to screw me, I do the opposite to the thing he wants no matter how expensive or difficult it is for me. That brings him closer to my position with an incentive to settle. We will have an enormous cash pile, so the directors must not spend it on share buybacks because the other side will not be bothered by them.

But seeing "their" oil being sold, and "their" money being given to shareholders; will focus their minds on the need to find an acceptable compromise. If that does not work, substantial dividend growth will apply more pressure. It will also keep the large shareholders on side.

I do not think our friends and colleagues here have realized that we may have a considerable delay. Lets hope that I am mistaken.

MD

MadDutch

16th Mar '12

According to IG Index, which gives me a free of charge live price feed (including their spread), Soco is down 5.6% this morning, while Tullow is up 2.7% and Afren up 1.9%.

Does anyone know the reason for this? I cannot find anything.

MD

I have been in Soco for 12 years and short term price movements are normally irrelevant. I will be in Soco until the directors sell, but this one is interesting on a short term perspective, following yesterdays news.

loglorry

16th Mar '12

MD I noticed this too. Maybe a larger holder deciding to exit based on results. The drop wasn't on large volume. I hate to say it but I can see hot money looking for large upside perhaps exiting here. I can't see there being a lot of large upside in the near future. It might take many months and I'm afraid ee prediction of a quick bid and a high level take out is loosing a lot of credibility. I'm happy to hold here but I'm sure others are not as patient.

Log

emptyend

16th Mar '12

I'm afraid ee prediction of a quick bid and a high level take out is loosing a lot of credibility

Make a note in your diary to come back and tell me that in 6 months time. In the meantime, invest in a spellchecker.

loglorry

16th Mar '12

Ha ha ee, funnily enough I did make a note about six months when you said the same thing and here I am :-)

Take it easy mate you really do get personal when anyone challenges anything you write about Soco. You seriously need to calm down for your own sake. It is actually OK to be wrong about some things. Nobody expects clairvoyance and your voice is just one amongst many.

I would say though If you do make estimates and repeatedly challenge lower ones made by analysts who then turn out to be bang on you must expect to loose a bit of credibility.

Log

emptyend

16th Mar '12

I would say though If you do make estimates and repeatedly challenge lower ones made by analysts who then turn out to be bang on you must expect to loose a bit of credibility.

There is only one number that matters - and that is ultimate value. Earnings are not really that important - and even some of the analysts have got them wrong. My figures were no more wrong than many of the analysts - though it is true that the consensus for EPS was almost spot-on (but equally true that many analysts weren't that close to it!)

Meantime don't forget that spellchecker - I thought I'd wandered on to ADVFN.

Take it easy mate you really do get personal when anyone challenges anything you write about Soco.

Nope. I get annoyed when people start mentioning me by name, calling me "mate" and taking stuff out of context. I'm perfectly open to challenges on my posted opinions - as should be evident from the perfectly cordial exchanges with davjo and others. Play the ball not the man, as they used to say elsewhere.

emptyend

16th Mar '12

Does anyone know the reason for this? I cannot find anything.

I'd guess it is related to FTSE options, given that 292,000 UT at 10.15.

The recent high volumes post-results may have encouraged some to try to get bigger size done in Soco than the market normally sees on a Friday?

Can't see it being anything specific unless the removals lorry has been hijacked ;-)

loglorry

16th Mar '12

Well if only the final number matters (although I'd say when it happens is also important), and you'd probably agree you have little or no control of that, then why not just take a chill pill and go and do something more interesting for a few months.

I don't expect you'd ever admit being wildly out with your estimates on the last set of results but I'm afraid the simple fact of the matter is that you were and some of the analysts who you criticised for being very out of touch with reality were much more on the mark.

Anyway unlike you I don't have endless time to spend batting this about. So let's leave it there.

Log

kenobi

16th Mar '12

Soco International Plc (SIA) fell 5.4 percent after Oriel Securities Ltd. cut its rating on the stock.
http://www.businessweek.com/news/2012-03-16/u-dot-k-dot-stocks-are-little-changed-tullow-oil-rbs-advance

could be something to do with the fall,

K

emptyend

16th Mar '12

I don't expect you'd ever admit being wildly out with your estimates on the last set of results but I'm afraid the simple fact of the matter is that you were

Those who bothered to read the very first line of the thread I started on the results will have seen that I did precisely that within a few minutes of the announcement!! Though I did also say in the original post that they were "guesses" and never pretended they were "estimates".

Well if only the final number matters (although I'd say when it happens is also important), and you'd probably agree you have little or no control of that, then why not just take a chill pill and go and do something more interesting for a few months.

The results were out this week - and deserved some comment. Prior to that, I had in fact been posting very little in recent months for the precise reason you suggest. I've said what I expect to happen - and we'll just have to wait and see...well, those of us who aren't obsessed by attempting to score overly personal points will, anyway :-)

Meanwhile, to bring this thread back to the topic of analysts reports, a new poster has made a couple of useful contributions elsewhere, quoting Nomura and Macquarie. I particularly note the comment attributed to Nomura:

Although the field has only just started up, with production data from seven out of 55 producing intervals, management is confident that 2P reserves can increase from 300mmboe to more than 400mmboe. This is partly driven by strong recovery factors

I also understand that management flagged a reserves increase for some point in the next 6 months.

Supposing that this is correct, lets just back-calculate from my £6 per share expectation and use a relatively conservative (per JPM's numbers) figure of $20 per 2P bbl. What would that equate to in terms of 2P reserves?:

£6 x 338.06 x 1.57 = $3.184bn..... divide by $20 = 159.2mn bbls of 2P reserves.

CNV reserves are probably around 145mn bbls gross effectively ( a guess, following some production and assuming the adjustment for the gas, liquids etc is reserves-neutral)...which is 29mn bbls net to SOCO....so that would leave 130.2mn bbls to be attributed to TGT reserves for 80% of SOCO Vietnam and OPECO.

Is that likely? OPECO is wholly owned, and SOCO continue to get 100% of the SOCO VN cashflow until they have been fully repaid....so in practice I guess that effectively SOCO own something like 27% of the 30.5% of TGT owned by OPECO and SOCO Vietnam (may be a bit too high, but it depends on unrecovered costs etc). If that were correct then that implies around 482mn bbls gross 2P for TGT would be needed to get to £6.

.......which sounds toppy. But if someone paid $24 pb (which was the top end of the range estimated by JPM re the Perenco deal), then the equivalent figure implied for gross TGT reserves drops to 384mn bbls....which IMO is well within the bounds of possibility.

In sum, I think its too early to be sure about valuation - except to say that any deal for Vietnam will be done at a very substantially higher price than the current share price....which is all one needs to know, really.

MadDutch

16th Mar '12

ee, log and Kenobi,

Thanks for your help this morning. I phoned Brewin Dolphin who are my options broker and asked if the Tullow price rise was due to the option expirey. He said it is due to Tullow re valuing an existing oil discovery, to include a 600 metre column of sweet light crude, and the market is pleased with this news. I sold a covered call and made £470. So asking the question here and getting an answer means that I owe you a pint, ee! Thanks.

I also know there was a negative broker report, but considerd the well reasoned and positive report from Nomura to cancel it, so no change in my view.

MD

Kenobi, your comment is excellent "we might not drill TGD if we don't think the returns are there, [&] perhaps we won't be able to agree production levels there either ?

That should shift them! I owe you a pint too!

MadDutch

16th Mar '12

There are 2 positive analyst reports on TMF, price target around £4.

They must be fans of DJ! ;-)

drowsy

16th Mar '12

Actually in the IC mag Soco is still a sell as "we remain wary of further political delays to the ramp up at TGT"

emptyend

16th Mar '12

Actually in the IC mag Soco is still a sell

Good to see that the Chronic hasn't lost its touch.

I must say it is unsettling enough when a previously-fired broker admits that the 2011 profits were 37% above its own estimates, says it is trading at a discount to core NAV and suggests that a reserves upgrade could add a chunk more....and has a buy rec on it.

Incidentally, looking back in some old emails today (digging out the gas numbers for dj) I found an email from early July 2008 which noted that every single broker covering SOCO International (LON:SIA) at that time had a buy rec out on it (for the first time ever). That was a few days after it nearly touched £6 equivalent.....and a couple of weeks after the shares had spent the only two days in 13 years at a level above my own (then 590p equivalent) valuation. Its a pity that my heart ruled my head at that time and that greed trumped fear....but, as we know from repo and others, everyone finds it easy in hindsight.

Have a good weekend all.

kenobi

16th Mar '12

Actually in the IC mag Soco is still a sell as "we remain wary of further political delays to the ramp up at TGT"

Well that's a relief, don't need the curse of a ic buy rec,

seriously they have a fair point, there seems to be some political risk now that we didn't know about

however even at lower production rates, surely a buy ?

drowsy

16th Mar '12

They do say that the "shares are hardly expensive at nine times projected earnings"......

loglorry

16th Mar '12

"Good to see that the Chronic hasn't lost its touch."

I hate to say it but they were actually pretty good on their last call. I suspect they were right for the wrong reasons but they did call the share price much lower then and it did indeed transpire to go lower.

Just saying that's all !

emptyend

21st Mar '12

I should perhaps mention here that JPMorgan yesterday produced by far the best and most comprehensive note on SOCO International (LON:SIA) that I've ever seen from them. The note runs to 12 pages of discussion about valuation and covers all the various valuation points that I have been banging on about for years.

Amongst other matters it discusses the read-across from Conoco/Perenco and (importantly for the sceptics ;-)) lists 10 potential reasons why the market might ignore the implications. It also discusses the various corporate finance alternatives for unlocking value.

I'm not going to quote extensively from it, as I think the whole note deserves to be read by anyone interested (but I am not in a position to provide copies - so please don't ask). However, here are a few snippets:

Value of Vietnam obscured by reinvestment strategy -
asset restructuring + return of capital potential solutions

We highlight the large mismatch between the implied value of SOCO
(392-679p) using the transaction multiple from the recent ConocoPhillips /
Perenco deal ($20/boe), and the market valuation of SOCO (329p). We
also consider whether a Cairn India style partial IPO of SOCO Vietnam
and a return of capital could rerate the shares. Using a 2012E EV/EBITAX
multiple of 5.9x would imply a core NAV of 547p. We acknowledge that
SOCO suffers from a lack of exploration catalysts in 2012 and TGT
reserves uncertainty; it also faces bureaucratic challenges in Vietnam. We
believe the valuation is attractive and corporate finance solutions exist to
address the discount. Thus we retain our overweight stance.....

....we believe the (Perenco) transaction underscores that
Vietnamese assets can crystallize value far in excess of relatively conservative NAV
estimates which typically drive share prices in the UK E&P sector. Even assuming
the lowest reserve guidance of c250 mmboe, results in a higher implied core NAV
than ours when based upon the $20/bbl transaction multiple (392p). At $20/bbl, the
implied core NAV ranges from 392p to 679p, based on the low and high case reserve
scenarios for TGT of 250-500 mmbo (gross, conservatively not giving any value for
the sales gas which is expected to peak around 30 mmscfd)......

....we believe SOCO's valuation remains compelling
on all metrics - NAV, transaction read through EV/boe metrics and cash flow
multiples.

Either things will play out along the lines that I (and JPM, more recently) have been expecting, or they won't......but we will find out in the next few months IMO.

kenobi

21st Mar '12

Good to see this kind of note from brokers,

Interesting suggestions re the Cairn IPO issue, I wonder where they would float SOCO vietnam, Is vietnam an option ?

Good to see there are other options if a compelling sale price cannot be achieved. A reserves upgrade would make the potential price range narrower, but I know you've speculated this might not happen until a deal is done,

K

emptyend

21st Mar '12

Interesting suggestions re the Cairn IPO issue, I wonder where they would float SOCO vietnam, Is vietnam an option ?

Singapore most likely - but I think that is purely hypothetical/conceptual for now. I'd view it very much as a Plan C possibility, with much less than 10% likelihood of happening.

You are right about the importance of the reserves assessment. I think there are good grounds for optimism, for the reasons that have previously been discussed to death.

ps....JPM's discount rate assumption is 12% - and even they say We suspect that an industry buyer would apply a lower discount rate than 12%

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Emptyend

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