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

emptyend

13th Aug '12

I note with interest that JP Morgan have now taken the quiet "walk of shame" and have been disappeared from the company's broker roster over the summer months. These things can happen if you don't pay close enough attention to company newsflow.....

And it is probably helpful to work with only one adviser in SOCO International (LON:SIA) 's circumstances, given that they have effective control over their shareholder register.

So it is worth returning to ML's pre-Olympics note of 3rd July which gave a risked NAV estimate of 499p based on 300mn boe gross core 2P at TGT with 200mn potential gross upside (risked at 30%), with a further 50mn boe potential gross upside at CNV, risked at 25%.

It is my belief that a large slice of upside derisking is now imminent, along the lines I've been indicating in recent months in various posts - and rather greater than that allowed for by Merrill (ie allowing for greater recovery factors, bigger area and OOIP numbers and greater assuredness from the results of development drilling and production....and perhaps a big chunk for the connectivity which [on re-examination...."initial interference tests confirm a high degree of connectivity within the main sands"] appears to have been evident from the data now for around 6 months).....

....I could see as much as a doubling of net 2P reserves in VN (to perhaps as high as 240mn) and an indication that net 3P could be 400-500mn, if the connectivity thesis ...err....holds water.

In that event, I'd suggest (pace Boris Johnson) the Geiger counter of Soco-mania may soon go zoink off the scale.

Isaac

13th Aug '12

One day Sir you will be right.....Let's hope soon.

It is interesting to note Soco announce notice of results and effecitvely inviting analyts to come to their presentation....I wonder why? As they tend not to historically...

What are they up to...? :-)

davjo

13th Aug '12

Evening ee

So it is worth returning to ML's pre-Olympics note of 3rd July which gave a risked NAV estimate of 499p based on 300mn boe gross core 2P at TGT with 200mn potential gross upside (risked at 30%), with a further 50mn boe potential gross upside at CNV, risked at 25%.

I'm not sure we should rely on everything ML says, notably in relation to CNV. They have for some years quoted "CNV 2006 Appraisal Adds" amounting to 8.3 mmboe net to Soco worth 16.7p/sh. I checked this with the company ages ago. ML are mistaken, it doesn't exist. As to the 50mn boe gross, in fact that's supposedly oil. I fail to see where on earth they get that from....albeit risked at 25% it's only valued at 5.4p/sh. There is absolutely no sign of any improvement in output beyond the proposed new well, which in itself, if drilled, will struggle to see the quoted reserves produced within the licence period. Point being though, it brings the quality of ML's overall analysis into question.

It is my belief that a large slice of upside derisking is now imminent..........and perhaps a big chunk for the connectivity which [on re-examination...."initial interference tests confirm a high degree of connectivity within the main sands"] appears to have been evident from the data now for around 6 months)

That connectivity comment, as far as I could see, related only to the H2 block. AIUI, for connectivity to have real reserve enhancing value, it needs to be proved across the northern and southern fault blocks, which to date has not been confirmed one way or the other.

I could see as much as a doubling of net 2P reserves in VN

One of my favourite long held beliefs is that life is full of surprises but I think that would qualify as a surprise too far ;-)

emptyend

14th Aug '12

It is interesting to note Soco announce notice of results and effecitvely inviting analyts to come to their presentation....I wonder why? As they tend not to historically...

Practice has varied on that point. IMO they tend to RNS the date when they particularly want to ensure that analysts have no excuse for missing it.

emptyend

14th Aug '12

G'day dj,

One of my favourite long held beliefs is that life is full of surprises but I think that would qualify as a surprise too far ;-)

I think we can agree that it would qualify as a surprise (to almost everyone). However, you will know that the company has some form on surprises, having swept up OPECO's stake in 16-1 just prior to a string of positive news.

brings the quality of ML's overall analysis into question.

As you know, over the 13+ years I've followed the company, I've generally considered that analysts have had a very weak grip on the numbers. There was a brief period in 2007/8 when I saw more or less eye to eye with them, but that hasn't been the case for some while (though JPM belatedly wrote a good piece back in March). I happen to think ML are closer than most - but I still think they are well off the mark. But then I have the luxury of being able to use a large slice of guesswork and not needing to justify my numbers with reference to published facts, which is what an analyst who wished to stay employed would need to do.

That connectivity comment, as far as I could see, related only to the H2 block. AIUI, for connectivity to have real reserve enhancing value, it needs to be proved across the northern and southern fault blocks, which to date has not been confirmed one way or the other.

Certainly confirmation hasn't occurred - at least in the form of any public announcement (ie the company may consider that they have seen confirming evidence, even if they haven't yet shared it with anyone - other than the independent consultants re reserves). However, the point of me quoting from the prelims announcement in March was to show that connectivity at TGT had been a focus of attention for a long time now - well before the June AGM where it was raised more explicitly. In other words I think there has been a steady development of the company's thoughts on the connectivity question during the course of 2012.....initial evidence from early production leading to persuasion of PV regarding production plan upgrades.....then on to greater evidence from the H4 drilling, followed by a swift sweeping up of the minority.....and then....??

IMO the next steps will most likely be a big reserves upgrade, followed by a substantial upgrade in the production plan (accompanied by an announcement of an intention to start paying dividends). Of course, if anyone should happen to be willing to agree management's valuation at any point, then we shareholders may only see a bit of that.

Perfectly reasonable of course for you and others to remain sceptical. It is only one bloke's guesswork.

flyinghorse

14th Aug '12

It will be interesting to see what the current stakeholder list is (Last one seen in March 2012) and whether a special one off dividend strategy will keep everyone settled going into a regular dividend program if thats what's proposed.
This may prove a more feasabile route in getting the value out that you want than waiting for a buyer.

On a separate note I learnt years ago that selling things in small pieces rather than one big sale gets you more value.
I once had a classic car that I tried to sell complete for the price I wanted (ie companys valuation of its self).
I could not sell it. I broke it in to pieces and sold them separately and ended up getting more than the price I originally wanted for the complete car. Its a lot more work. I have repeated this several times now with various styles of asset.

FH

emptyend

14th Aug '12

On a separate note I learnt years ago that selling things in small pieces rather than one big sale gets you more value.

Thats a fair point of course. However, in this case it is (IMO) largely precluded due to the need to address management succession - as well as tax issues in relation to VN.

"Son of SOCO" assets in Africa though could well be merged into another company with existing management (such as £CNE) once the value of VN has been crystallised.

I still think (as I've been saying recently) that a whole company sale is now more likely than it was a year or two back. I don't think much value has to be left on the table for this to happen (only a few minor elements eg H5 upside).

davjo

14th Aug '12

G'day ee

All fair comment. I'm just mindful of past bias to conservative reserve upgrades.....Yemen, Mongolia for example. As ever, it'll all come out in the wash....hopefully to screams of yabbadabbadooo :-)

emptyend

14th Aug '12

Aye - it'll come out in the wash in t'end.

Meanwhile, over at The Chronic Investor, I notice that they have been in a tizz.

On 9th July they said:

Soco International ( SIA ) has brought a second oil platform into production at its Te Giac Trang field offshore Vietnam which will increase field production from 42,000 barrels of oil per day to 55,000. Nonetheless, we remain sellers.

....but two days later it was:

Shares in SOCO International have rallied over 15 per cent in the past fortnight ahead of confirmation that production has commenced from a second platform at the company's flagship Te Giac Trang field (TGT) in Vietnam. The news has alleviated some of our concerns over the expected pace of the ramp-up at TGT and we no longer recommend selling the shares

Fortunately they didn't go for a complete volte face........but I guess they thought they'd better change course quickly given that the 15% rise had taken the shares back above the level at which they recommended a sell.

They'd do better with a pin.

kenobi

5th Sep '12

http://www.dailypolitical.com/finance/stock-market/soco-international-stock-rating-lowered-by-rbc-capital-sia.htm

Soco International (LON: SIA) was downgraded by investment analysts at RBC Capital to a “sector perform” rating in a note issued to investors on Wednesday. They currently have a $6.35 (400 GBX) target price on the stock.

Disappointing to see this kind of comment from an analyst, when the company have clearly indicated there should be a reserves update in the next month or two, and strange to see the share price fall when the price is at 335 and they have a target price of 400p, 20% higher, but I guess that's how these things work,

MadDutch

6th Sep '12

Given analysts ability to get most things wrong, I am not surprised and frankly dont care.

It will not persuade the director / owners of this business to sell for a low price.

MD

emptyend

6th Sep '12

Disappointing to see this kind of comment from an analyst

Followers of the analyst will also note that this is a complete volte face from his previous note of 22nd August and appears to have been issued as a result of him having noticed errors in his model to do with cost recovery. I was also once expecting cost recovery to continue for longer - but I found out in March that it wouldn't, as a result of a discrepancy I noticed between the prelims and a January presentation. Getting it right five months late may turn out to be a theme for this and other analysts.....

extrader

6th Sep '12

Hi ee,

Al Stanton's lowered his target from 450p to 400p.
You're 'on the record' as currently having a target price of 660p.
Was your own earlier not-for-public-consumption 'internal target' around 710p ie do you broadly agree with his calculations re the effect of revised/reduced cost recovery value ? What explanation , if any, did Soco management offer as to how the cost recovery basis came to be (mis)interpreted by so many ? ATB

emptyend

6th Sep '12

Was your own earlier not-for-public-consumption 'internal target' around 710p

I have never thought of that number. I'm "on the record" from ages ago as expecting £6-8 depending on whether the whole company is sold etc.......though last year I cut the bottom end to c 550p if VN was sold on its own. In recent months I've come to the view (per connectivity suggestions etc that a number of others have picked up but I haven't had first hand, other than via RNS comment) that the top of the range is more likely than the bottom - hence suggesting that it was likely to be nearer £8 than Log's 420p ...so, say, 660p+.

do you broadly agree with his calculations re the effect of revised/reduced cost recovery value ?

I don't know what they are, I haven't looked at them and they are irrelevant to me in any case (for calculation purposes). It is clear that Stanton over-estimated the cost recovery (and hence the amount of cash to be generated); I also did that when we were considering the cashflow implications of cost recovery around a year ago......but my views on a takeout price are based primarily on asset values and my expectations for a big uplift in TGT 2P (OOIP, recovery factors, production experience, connectivity etc) arising from the review now underway. From the sidelines, there is considerable uncertainty about the quantum of that - but I'm happy that it will work through to the sort of share price range I talk about above (ie I'm looking for a 2P uplift of 40-100%....though the chances are that the top end won't happen and that potential will only appear in the 3P category).

We'll see soon enough....

swanvesta

6th Sep '12

Naive question... ee's target is for a trade sale. What does an analyst target actually represent? Is it also their idea of fair value in a trade sale, or is it current fair value (i.e. allowing for sector discount) or is it what the SP might achieve with a fair wind?!

emptyend

6th Sep '12

Naive question... ee's target is for a trade sale. What does an analyst target actually represent?

Actually that is an extremely good question indeed!

As you rightly point out, my expectations are based on a trade sale. Analysts are NOT estimating the value in a trade sale....at least not now. If and when it becomes obvious that an approach has been made, they might start doing so. The operative word being "if"......if its not too late....;-)

Is it also their idea of fair value in a trade sale, or is it current fair value (i.e. allowing for sector discount) or is it what the SP might achieve with a fair wind?!

The concept of target price varies a bit. Some I think would view it as a likely sell signal if reached - others might see it more as a fair value estimate. With every analyst, they are looking across the sector trying to assess relative valuations (because really the only thing that is important to them is whether their relative values are right - absolutes don't really matter) but IMO they are to a large degree prisoners of the past, both in relation to recent relative share price performance and in relation to the historical figures that they plug into their models.

The important (crucial) difference between my approach and theirs is that they are working exclusively with historical data and announced plans, whereas I am incorporating some (hopefully intelligent) guesswork about the quality, quantity and value of the underlying assets - especially in relation to developments that might reasonably be expected to occur in the coming months. Of course sometimes those expectations prove wide of the mark (especially in relation to delays and most especially where they rely on logical actions by third parties!!!)...but that is the nature of the beast.

swanvesta

7th Sep '12

Thanks ee. I'm quite happy with 400p on that basis and I think this agrees with what others have been saying too (Log for example wasn't talking about a take-out price, as far as I know.)

Basic $20/bbl reserve calcs suggest NAV might be 500p or so, with which I believe the main analysts agree, so a 40% reserves upgrade would get us to your range, with a small discount for the buyer.

emptyend

7th Sep '12

I think this agrees with what others have been saying too (Log for example wasn't talking about a take-out price, as far as I know.)

....mmmm not sure about that!

One of the main issues has always been that people are not specific about what their price estimates/guesses relate to. I've always been completely clear that I'm talking about a scenario of a trade sale deal for VN or the whole company - whenever that happens to occur (whether "tomorrow" or later)!

I have been repeatedly told I'm wrong by a smallish group of highly vociferous and personally aggressive people. Some of these people are now seeking to change their tune and pretend that they were saying something different when they were insisting I was wrong.......

Of course we are still a long way away from my valuation in terms of share price - and some time (who knows how much?). But at some point it will all come together and we'll be able to see who really was right about the value of SOCO. Of course I'm guilty as charged in having expected a third party to move in decisively before now....but its a tricky game trying to figure out what suits the agenda of unknown third parties...

adam

7th Sep '12

so when is the reserve u/g? what else needs doing?

peterg

7th Sep '12

so when is the reserve u/g? what else needs doing?

Soon, though of course all we know at the monent is that it's an updated reserves report, you will have to wait and see if it's an upgrade or not :-)! As has been reported elsewhere the work is currently apparently about 75% complete, after which a premliminary report will be given to the company. As I understand it it is normal for it then to go through one or more iterations of being passed back and forth for correction and clarification before completion, so I'd guess anywhere between 3-8 weeks before it's finished, and probably at the long end of that.

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Emptyend

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