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

loglorry

9th 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!

Not that it really matters but I think the price I came to was to take the current 2P reserve number and multiple by $20/bbl (given the premium to Brent that Soco TGT crude sells for and the favourable tax) add in the cash but nothing for Africa and discount by about 30% (can't remember the exact number) to be inline with what the market currently discounts this sector to come to about 400-450p/shr. I can't remember the exact workings though but its pretty speculative anyway.

I think I said (but would need to check) that this is a medium term price target and given that Soco trades well below this I feel comfortable holding as any upside is in for free.

I've also said that obviously if there was a big reserve upgrade or a load of oil found in Africa I'd change my stance. Not sure why I take so much flack on this. For now though all the other things are speculation and they can just as well apply to other E&P stocks out there. For example there is good reason to expect an upgrade on Breagh for Sterling Resources given the extra thickness of the sands found in the recent production wells. I'm not going to price any of that in right now though.

Obviouslly if one takes a model where reserves at TGT are doubled, the price of oil rises to $200, M&A activity reduces the discount to NPV etc. etc. you get much higher numbers. In sincerly hope that that happens for all those holding Soco stock but I'm certainly not going to invest at todays price just on that hope. Just as I wouldn't have invested based on the hope that they would have drilled TGD again and managed to get sufficient gas drive to make the discovery commercial.

I think that is all pretty clear really. I expect that most of the analysts out there are also trying to place a value on Soco under similar assumptions. I'm pretty sure there is space here for us all to be roughly correct. What I don't think is fair is to be dumped in the idiot camp, with analysts, for ignoring the ifs/buts/maybes to come up with a conservative valuation still much higher than the current share price.

Surely what is important here is to come up with a good lower bound or conservative price target and invest on that basis and treat anything positive on top of that as icing on the cake. I've used the same methodology for quite a few investments and it has served me very well.

Good luck to you all especially ee because if he is right i'll make a lot of money rather than just a little bit. He has good grounds to expect the parameters of his model to come to fruition but none of them are hard facts yet.

Log

davjo

9th Sep '12

A few thoughts re potential TGT reserves upgrade :-

Yes, there is plenty of geological scope for a bumper upgrade but there is lots of evidence from past performance to suggest that the numbers might turn out to be a lot more conservative than hoped. Take Mongolia, for example, where popular BB opinion was pointing to maybe 200m bbls recoverable. Soco sold on the basis of the final payment due on 29m barrels having been produced. A long time since and still waiting. In Yemen, popular BB opinion was that reserves were understated yet when I contacted KUFPEC, a partner, they confirmed to me that they thought Soco's stated reserves were pretty well in line with theirs.

The thing is, reserve additions tend to move in a conservative fashion, bit by bit. Rarely do you get a massive upgrade from a development in its early stages. With TGT, the connectivity issue, accounting for most of the potential, cannot be confirmed without further drilling in the intermediate blocks between north and south, hopefully next year. Furthermore, drilling H5 is the only means of establishing booked reserves there. That clearly limits the scope of increasing booked reserves via the independent review, albeit there should be something from improved recovery factors etc., but again, more production history is likely to be needed to firm up.

There is also the question of what amount of increased reserves can be booked as a result of the CPR. They surely can't recommend an upgrade without an agreed development plan in place. My feeling is that Soco have initiated the CPR to convince PetroVietnam to engage in an increase in production facilities. Soco's CPR objective is therefore most likely to be to get the plan in place and book additional reserves later as a result.

I think it's important to recognise that TGT from the very start was a 40k bbls/day scheme in PV's eyes and that's the level at which the programme has been engineered...allowing for 15k bopd to be accommodated from HST/HSD next door. Stepping up from that is a very significant commitment in terms of capex and as said above, one assumes Soco's CPR objective is to convince PV to that end. One musn't underestimate PV's political advantage in letting the reserves angle run beyond licence expiry.

At the end of the day, I think Soco's objectives are twofold. Firstly to convince PV on enhanced production facilities and secondly to add value through drilling next year re the connectivity issue and verifying H5 reserves...or otherwise. Hence, it is entirely possible that a third party might pay up in the meantime but I think it's much more likely that they'll stick in there and see how it pans out next year before considering selling out.

Just my opinion. Apologies if any of that is jumbled...hic ;-)

Isaac

10th Sep '12

Thanks, I find your post interesting, educational and sensible. You offer a more realistic view then anyone else imo.

emptyend

10th Sep '12

lots of evidence from past performance to suggest that the numbers might turn out to be a lot more conservative than hoped. Take Mongolia, for example, where popular BB opinion was pointing to maybe 200m bbls recoverable. Soco sold on the basis of the final payment due on 29m barrels having been produced. A long time since and still waiting. In Yemen, popular BB opinion was that reserves were understated yet when I contacted KUFPEC, a partner, they confirmed to me that they thought Soco's stated reserves were pretty well in line with theirs.

I can't recall any such expectations re Mongolia, though I certainly recall that the final terms disappointed almost everyone. The additional payment is triggered when the cumulative total hits 27.8mn bbls incidentally - which compared with a total of 29,000 bbls produced in the pilot programme in the first four months of 2005. 27.8mn was at the time the booked P1 reserves.....and the P2 was 42mn bbls.

In terms of where the Mongolia asset was in the production cycle, there was relatively little proven, virtually zero production - and quite a bit of capex required. And, of course, there was a very limited range of buyers who would be interested in making the necessary investment to convert P2 into P1.

Re Yemen, IIRC, the price achieved was within about 10% of expectations - though again there would have been quite a restricted list of buyers, given the security issues etc.

The situation with the Vietnam assets is different:

much more work has been done, converting P2 barrels to (producing) P1
the range of possible buyers is much wider
there is a strong (if not especially long) production story
there is significant upside still remaining (H5, connectivity proof, ultimate recovery rates)
there is an established price benchmark for mature assets via the Perenco/Conoco deal

The thing is, reserve additions tend to move in a conservative fashion, bit by bit. Rarely do you get a massive upgrade from a development in its early stages. With TGT, the connectivity issue, accounting for most of the potential, cannot be confirmed without further drilling in the intermediate blocks between north and south, hopefully next year. Furthermore, drilling H5 is the only means of establishing booked reserves there. That clearly limits the scope of increasing booked reserves via the independent review, albeit there should be something from improved recovery factors etc., but again, more production history is likely to be needed to firm up.

Certainly it is true to say that reserves additions move conservatively. However, there is now plenty of production data to support:

the conversion of a large chunk of P2 into P1
the use of markedly higher recovery assumptions
the inclusion within P2 of a larger OOIP number, as a result of observed production data (the connectivity theory) and PSDM'd seismic supported by well control from the last dozen wells

....so, yes, the connectivity theory and the H5 potential won't be definitively proven (to P1 standards) withough further drilling and work - but a fair slice of P2 (or at least P3) should be available. The bottom end of my 40-100% range is primarily based on being able to raise the assumptions about recoverability, based on observed production experience.

There is also the question of what amount of increased reserves can be booked as a result of the CPR. They surely can't recommend an upgrade without an agreed development plan in place. My feeling is that Soco have initiated the CPR to convince PetroVietnam to engage in an increase in production facilities. Soco's CPR objective is therefore most likely to be to get the plan in place and book additional reserves later as a result.

There is a "chicken and egg" issue here. It is quite common to produce a CPR which incorporates the assumption (for example) that various capex investments will be made to expand production capabilities. Indeed CPR validation of such reserves potential is usually required in order to obtain investment sanction. What is never the case (and here I think you a little mixed up) is that reserves can be booked in the absence of major capex required by third parties.....so if Bach Ho capacity and the offshore pipelines didn't exist then there would be doubts - because the required investment would be on a scale that was well beyond the means of the company. In this case, however, we know that (worst case) production could be expanded over Bach Ho at a capex cost of a few tens of millions (and, no doubt, some sacrifice of margin due to tariffs).....so IMO there is no problem over whether Plan A, Plan B or Plan C would be selected to produce the reserves.

I think it's important to recognise that TGT from the very start was a 40k bbls/day scheme in PV's eyes and that's the level at which the programme has been engineered...allowing for 15k bopd to be accommodated from HST/HSD next door. Stepping up from that is a very significant commitment in terms of capex and as said above, one assumes Soco's CPR objective is to convince PV to that end. One musn't underestimate PV's political advantage in letting the reserves angle run beyond licence expiry.

I think you have to recall the context - which was, at that time, there was the possibility of a further FPSO being required if TGD came in - but nobody knew what size would be needed in that case. In other words, there were options available to expand production - and there still are.....and they don't necessarily need vast capex either [though there is a capex vs opex trade-off that might be a decision best taken by a buyer!]

At the end of the day, I think Soco's objectives are twofold. Firstly to convince PV on enhanced production facilities and secondly to add value through drilling next year re the connectivity issue and verifying H5 reserves...or otherwise. Hence, it is entirely possible that a third party might pay up in the meantime but I think it's much more likely that they'll stick in there and see how it pans out next year before considering selling out.

I think SOCO's objectives are quite clear - which is to get an externally-agreed quantification of reserves. Everything else flows from that.....it is the starting point for the future....but it most certainly doesn't follow that they stick around to try to convert every little bit of P2 into P1 (or P3 into P2) - and in fact there is nothing in their track record to suggest that they will do that, especially if the potential upside is properly reflected in the P2/P3 numbers (which could never have been the case whilst TGD was a live prospect).

rgds

emptyend

10th Sep '12

As I said in #594:

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.......

......

I've also said that obviously if there was a big reserve upgrade or a load of oil found in Africa I'd change my stance. Not sure why I take so much flack on this.

No flak would have been dished out, were it not for the fact that you and others were so aggressively dismissive of my views which clearly incorporated the reserves impact arising from the work already completed since 2008.

I expect that most of the analysts out there are also trying to place a value on Soco under similar assumptions. I'm pretty sure there is space here for us all to be roughly correct.....

Surely what is important here is to come up with a good lower bound or conservative price target and invest on that basis and treat anything positive on top of that as icing on the cake.

good grounds to expect the parameters of his model to come to fruition but none of them are hard facts yet

Analysts and others who are looking only at the existing booked 2P are ignoring the reality on the ground that the work has already been done to justify a big uplift in 2P. Precisely how big an uplift will remain a matter of very considerable (though rather pointless) debate, but I simply don't believe it is in any way a sensible approach (hence my dismissiveness of analysts, especially at this juncture) to ignore the fact that there have been a succession of areas which have produced upside surprises re TGT in the last two years or so - and these will undoubtedly flow through into the CPR.....

....as I said elsewhere, it is a complicated version of an obvious "nick to second slip in cricket" - we are simply waiting for the umpire to put his finger up .....though in this case of course we don't know for sure what the scale of the decision might be....which is why coming up with a good lower bound is the correct approach. My "lower bound" of 40% uplift in 2P is largely based (but not exclusively) upon raising the assumed recovery rates from the low 30s to the low/mid 40s (compared to the c.50% reportedly supported by production data in some wells). The top end is unlikely to be reached, due to a range of factors - some of which were alluded to by Davjo above.....but they may well appear in the 3P numbers if not in the 2P.

As to value in share price terms, one simply has to work though the impact of a reserves uplift to my "lower bound" and multiply by the 2P valuation obtained by Conoco when they sold their assets to Perenco. Those assets, of course, didn't include any of the potential P3 upside that I expect to see in SOCO's CPR as a result of the known existance of the 200mn bbls OOIP prospect at H5 and the connectivity thesis.

These may not yet be "hard" facts......but they are facts, nonetheless!

jseth123

10th Sep '12

Maybe of interest to some ;-)

BP agrees $5.5bn Gulf of Mexico sale - http://www.ft.com/cms/s/0/f8c0a5f8-faec-11e1-b775-00144feabdc0.html#axzz25xXIXAPQ

Peter Hutton of RBC Capital Markets said the price of the BP-Plains deal was “significantly higher” than expected, and maintained “BP’s strong track record on transaction values”. Last month, he had estimated the assets’ value at $2.2bn.

davjo

10th Sep '12

What is never the case (and here I think you a little mixed up) is that reserves can be booked in the absence of major capex required by third parties.....so if Bach Ho capacity and the offshore pipelines didn't exist then there would be doubts - because the required investment would be on a scale that was well beyond the means of the company. In this case, however, we know that (worst case) production could be expanded over Bach Ho at a capex cost of a few tens of millions (and, no doubt, some sacrifice of margin due to tariffs).....so IMO there is no problem over whether Plan A, Plan B or Plan C would be selected to produce the reserves.

I don't think I'm mixed up at all on this point. You accept there would be doubts if Bach Ho wasn't there but you can't know whether Bach Ho is an acceptable solution. I know Soco have said in the past that it is an option but that's just as likely to be idle talk of the moment without considering what VietSovpetro future plans are for the infrastructure. Clearly, operations have scaled down considerably in recent years with equipment taken out of service. Bear in mind also that all this stuff was Russian built 25+ years ago, no doubt to a pretty crap specification. In any event, producing additional oil via Bach Ho is only likely to involve lowish volumes in the short/medium term. Producing the sort of flows envisaged from your hoped for reserves upgrade will, imo, require new infrastructure. Since PV will be the final arbiter on whether this infrastructure ever gets built within Soco's licence period, I don't see how they can actually book additional reserves without that being sanctioned. I agree that the CPR might provide 2P estimates allowing for further investment but I certainly don't see Soco actually booking such additional reserves until PV sanction of the required capital investment. Who knows, PV might disagree!

One other point in respect of your 40%-100% uplift in reserves estimate. You mention all the positives but you don't seem to account for what Soco describes TGT as a "highly complex reservoir"....resulting from the multi inter-bedded horizons therein. Don't you think such resrvoir demands serious caution when estimating reserves? I'm sure the CPR will address exactly that point as I'm sure Soco will do likewise. Hence, I don't think the CPR will be in your guesstimate range. That's not to say you won't be proved right in the end but I think it'll be way down the road before it's likely to be proved.

As ever, just testing the various arguments ;-)

emptyend

11th Sep '12

I don't think I'm mixed up at all on this point. You accept there would be doubts if Bach Ho wasn't there but you can't know whether Bach Ho is an acceptable solution.

....mmmm. With respect I think you are.

The point is that the field is not in a virgin basin....it isn't in the Falklands, it isn't in Mozambique, it isn't off the Shetlands! There are no doubts whatsoever that oil will be developed and produced if it is commercial to do so - and that is simply a matter of mathematics (with known inputs), not a matter of logistics or politics! We know that there is ample spare capacity across Bach Ho and we know that they could also get another FPSO. And we know they can raise production to at least some extent by partial conversion of the existing FPSO. We know all of those options have (at least approximately) known costs. They could choose any of them - and the choice merely affects the value of the reserves ($18, $20 pb or whatever), not whether they exist and can be commercialised! There is therefore no doubt over the reserves per se - just over their precise value.

I know Soco have said in the past that it is an option but that's just as likely to be idle talk of the moment without considering what VietSovpetro future plans are for the infrastructure. Clearly, operations have scaled down considerably in recent years with equipment taken out of service.

I've previously pointed you to this link:

Vietnam’s oil production has decreased over the last seven years primarily as a result of declining output at the Bach Ho (White Tiger) field, which accounts for about half of the country’s crude oil production. After reaching peak output of 263,000 bbl/d in 2003, the field’s production dropped to an average 92,000 bbl/d in early 2011. It is expected that Bach Ho’s production decline rate will range from 20,000 bbl/d to 25,000 bbl/d through 2014. Vietsovpetro intends to boost oil production by using water injection to stem declines of aging fields and by investing $7 billion on exploration activities over the next five years.

They have plenty of spare capacity and have made no material new finds AFAICR (and even if they did there would be the thick end of 200,000bopd capacity). They have a clear choice - let it rust or use it. If it needed new facilities to replace those taken out of service than this would merely raise costs and make the FPSO alternatives (even) more attractive.

One other point in respect of your 40%-100% uplift in reserves estimate. You mention all the positives but you don't seem to account for what Soco describes TGT as a "highly complex reservoir"....resulting from the multi inter-bedded horizons therein. Don't you think such resrvoir demands serious caution when estimating reserves? I'm sure the CPR will address exactly that point as I'm sure Soco will do likewise. Hence, I don't think the CPR will be in your guesstimate range. That's not to say you won't be proved right in the end but I think it'll be way down the road before it's likely to be proved.

Fair enough - thats your call. As you know, on balance I still expect a deal before the final CPR sees the light of day. I'm certain that serious caution will be applied - and indeed HAS been applied in the past. At some point such cautions will begin to unwind as a result of hard evidence...... :-)

rgds

kenobi

29th Oct '12

http://www.dailypolitical.com/finance/stock-market/rbc-capital-raises-soco-international-to-outperform-sia.htm

The firm currently has a $7.24 (450 GBX) price target on the stock.

probably helps to explain why despite much of the market being down soco were up 10p today,

cheers K

emptyend

3rd Jan '13

It might be worth recording the numbers currently available on ft.com for analysts' forecasts:

2012:

Revenue: Consensus $580.43mn (range $321mn- $784mn, 15 analysts)

EPS: Consensus 73.96 cents (range 41 cents to 120 cents, 16 analysts)

2013:

Revenue: Consensus $666.34mn (range $383mn- $970mn, 15 analysts)

EPS: Consensus 82.89 cents (range 46 cents to 140 cents, 16 analysts)

FWIW according to the FT's (partial) records, the H1 2012 numbers beat consensus by around 10-12%.

redhill

3rd Jan '13

It might be worth recording the numbers currently available on ft.com for analysts' forecasts:

2012:

Revenue: Consensus $580.43mn (range $321mn- $784mn, 15 analysts)

EPS: Consensus 73.96 cents (range 41 cents to 120 cents, 16 analysts)

2013:

Revenue: Consensus $666.34mn (range $383mn- $970mn, 15 analysts)

EPS: Consensus 82.89 cents (range 46 cents to 140 cents, 16 analysts)

FWIW according to the FT's (partial) records, the H1 2012 numbers beat consensus by around 10-12%.

The analysts' consensus of course is meaningless as it is composed of such wildly varying extremes - evidence of no consensus, in fact.

I'm always amazed at how such estimates (not just for Soco) can vary by such wide margins when all the analysts supposedly have access to the same data - presumably some of the estimates will be considerably out of date, but that alone doesn't explain the varying figures.

Asagi

3rd Jan '13

Tangential but the answer can be that old forecasts are still in the system of data aggregators. An analyst or house can drop coverage but the old estimate doesn't die and goes into the sums.

Asagi

(long SIA)

emptyend

3rd Jan '13

The analysts' consensus of course is meaningless as it is composed of such wildly varying extremes - evidence of no consensus, in fact.

I've always thought it was a silly expression, without any obvious statistical basis. I dare say Asagi is right too that there are some outdated forecasts that still live on. Personally I would discard any "analysis" that is more than 6 months old.

I'm always amazed at how such estimates (not just for Soco) can vary by such wide margins when all the analysts supposedly have access to the same data - presumably some of the estimates will be considerably out of date, but that alone doesn't explain the varying figures.

As I dare say you'll recall, I'm always pretty dismissive of analysts' numbers. That isn't so much borne from prejudice, but from clear evidence that they have from time to time:

Failed to add up correctly (eg in a piece from yesteryear, much commented on at the time by KoD on TMF)
Completely misunderstood the fiscal position of the JOCs
Totally ignored large elements of value, based on nothing more than whim or an arbitrary timeline
Not even read some of the RNS information put into the market by the company
Written pieces without attending analysts meetings
Failed to ask the company to review their comments for any manifest errors

Some of the "analysts" were also notorious for their non-attendence and their complete lack of any enquiry to the company and others (even some who should have been well-briefed) for their persistent misunderstanding of the facts. Against that backdrop, it isn't surprising that there have been a wide dispersion of published numbers. If I were to read 15 analyst notes, I suspect I would be putting at least 10 of them straight in the bin as being competely worthless due to manifest errors.

Anyway....time will tell. I'll be interested to see how much the analyst assessments move when the reserves information emerges - though of course the most interesting numbers in that context are the NAV estimates, which the FT doesn't collect.

emptyend

14th Jan '13

To save anyone the trouble of asking, I've got no idea why the share price spiked up in the last hour today (other than a possible Cabinda deal, which wouldn't be big enough IMO to support that move on top of the recent strength).

Of course it might be the imminent emergence of the CPR news - but I wouldn't count on that either (just yet anyway)...

....so the most likely cause seems to be a contrarian view of the fact that Morgan Stanley analyst team (formerly at Collins Stewart) have picked SOCO International (LON:SIA) as one of three stocks to avoid in the sector for 2013. As usual, they don't have much to support that view, but suggest that the CPR might be underwhelming when it emerges. I wouldn't put much store on that though, as they also failed to notice the RNS about the buyback programme which emerged two days before their note was published.

;-)

Any more informed guesses would be of interest.....

fuiseog

15th Jan '13

Is it not just a volume response with almost 700k traded on the day? Apart from 1m+ on 10th that's well above daily averages over the past couple of months?

emptyend

15th Jan '13

Is it not just a volume response

Yes of course - but the question to ask is why 63% (440k) of daily volume on the LSE printed in the last hour of trading compared to 37% in the first seven and a half hours.....

intriguingly it was a similar picture last Thursday (the 1mn+ day you refer to)....62% (625k) of volume in the last hour.....

adam

15th Jan '13

Perhaps a friendly MM is warehousing stock keeping the real buyer off the register? Not sure such an unofficial WPA is legal, but I am told it does go on.

adam

31st Jan '13

http://www.brokerforecasts.com/news/article/articleId/4529745

JP Morgan Cazenove downgrades a raft of E&P Stocks

GreenRover

31st Jan '13

JP Morgan Cazenove downgrades a raft of E&P Stocks
SOCO International - reduced to 418p (from 420p), Serica Energy - reduced to 47p (from 50p), Genel Energy – reduced to 940p (from 1,060p) and Afren – reduced to 195p (from 210p)

So they've reduced the target price by less than 0.5% So what!

Their information is worth exactly what you and I paid for it. (£0.00)

They are not running a charity, so can you guess why they would put this info out for free?

kenobi

31st Jan '13

http://www.stockmarketwire.com/article/4529967/FLASH-JP-Morgan-Cazenove-downgrades-SOCO-International-from-overweight-to-neutral-target-price-cut-from-418p-to-420p.html

the link I have has them reducing it from 418 to 420 !

it's not so much the price target though is it, it's them saying they're moving to neutral on the stock from overweight.

Disappointing, but eh ? I'd rather hear something about the reserves review, which was due, last time I asked, at the end of Jan, which will be today then. It may slip a bit further and be a little while before we hear about it , but hopefully the wheels on something significant are turning quietly in the background, the days tick on, I believe we have H5 pencilled in for drilling in H1 of 2013, so maybe that will be a significant discovery, and then once this is done and they've tried to squeeze as much throughput out of the fpso, well then there's a solution to the production bottleneck. Assuming they don't do a deal for the Vietnamese assets before then, there is the potential upside anyway,

K
PS I would be interested in hearing why they think soco is now neutral and worth .5% less, anyone know ?

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