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

12th May '10

perhaps GS are hearing elsewhere about possible "strategic value" deals arising from a farm down, as mentioned in the MS note ; )

If indeed they do end up farming down in Nganzi, I'll be amazed if it is to anyone other than ENI or perhaps TOTAL. Personally, though, I'd be quite happy for them to retain the risk of this year's programme and farm down after that (which will be needed when we get to pipeline issues etc).

There really is no rush!

flyinghorse

12th May '10

Case of the surge of the Penguins?
Investors hopping mad about not being in RKH? (and non ISA at that)
Advisors searching madly for the next exciting derisking program?

Exploration may have just become sexy again.

Isaac

12th May '10

Like I said when these were at £15 by the time we come to drill TGD....these will be trading around £20...I expect the current surge to continue....

Some have only woken up to the story....Problem for them is there is not much liquidity to go round!

Groundhog

12th May '10

8.84% in one day is quite extraordinary. I sense that any trading thoughts should be quashed, a wait for a further surge seems worth it

emptyend

13th May '10

8.84% in one day is quite extraordinary. I sense that any trading thoughts should be quashed, a wait for a further surge seems worth it

I rather suspect that nobody who uses charts would have seen it coming......because it is simply down to a couple of influential banks suddenly reappraising the fundamentals at the same time. Still, no doubt that won't stop some of them suddenly reading some significance into the move and pontificating that XYZ will now happen because their squiggly lines say so!

One of the problems with trading E&P shares in current circumstances is that, whilst the market would appear to be happy to trade £10 notes for £5, £6 or £7 (eg not only SOCO but, more transparently, with lots of others including GBP who have 10p per share net cash and yet their shares stand at 8p) there does eventually come a point where the market wakes up to the underlying value.....

......but it is difficult to tell "when the penny will drop" and a repricing will occur. So if one happens to be holding stocks that are "£10 notes trading at £6" then IMO it may not be a great idea to swap those for "£10 notes trading at £8" - contrary to what some elsewhere appear to be advocating.

emptyend

13th May '10

Someone on ADVFN pointed out the commentary in today's Independent. I commented over there, but repeat my observations here (as they are easier to find in future):

The key point in the article is here:
Beyond Vietnam, there is the promise of a potentially high impact campaign in the Democratic Republic of Congo later this year, "success at which could result in a nearly 80 per cent increase" in the broker's 2,819p target price.

Now......that says that Goldman is now countenancing the possibility that they might move to a target price of £50 by the end of the year! [thus finally falling into line with jonnyT and myself ;-)]

....but that ISN'T all, because if you go back to the source document from Goldman it says:
We also expect the potentially high
impact campaign in DRC to begin early in 3Q – success at which could
result in a nearly 80% increase in our target price. In addition, we
believe that the company’s TGT asset in Vietnam could attract the
attention of NOCs – typically willing to pay a premium over the level at
which the equity market values assets. The stock is the least
recommended in our E&P coverage (21% of sell-side analysts currently
carry a Buy recommendation vs. a subsector average of 53%
(Bloomberg)), which leads us to believe that exploration success or
reserves upgrades through appraisal will be disproportionately
rewarded by the market.

....and, furthermore, it would be interesting to know what assumptions underlie Goldman's figures in respect of Nganzi? Are they assuming a farmdown to 40-45%? I'd guess they probably are! Will that happen? Don't know yet - but we might in a matter of weeks!

-------------------------------------------------------------------

So......I'm expecting more upgrades to follow as this all unfolds - and then we'll see by August what the drillbit is starting to produce.

The key question for institutions is this: do you want to be underweight in a FTSE250 stock that could get from £18 to £60 or so by year end? It seems to me, as the share price hovers temporarily at new highs today at around £18 that the answer to that is going to be, for many, pretty obvious!

loglorry

13th May '10

ee - you are starting to sound like a bit of ramper. I expect Soco will have some success with the drill bit over the coming months but I think it is unwise to assume everything they drill will come in. It could happen and I suppose if so £60 might be on the cards but I would say £25 is more likely if they have reasonable luck.

Log

emptyend

13th May '10

ee - you are starting to sound like a bit of ramper.

Oh really? Why is that then? Just because we DO now (finally) happen to be on the verge of a major drilling programme that (in the independent assessment of Goldman and Morgan Stanley) has the potential to transform the share price, you NOW think I shouldn't comment on it????

When I QUOTE Goldman Sachs' report verbatim, is that ramping???? Or is it more of a service to those who might wish to know and be on a level playing field before the institutions (and perhaps you?) take their stock off them?

I expect Soco will have some success with the drill bit over the coming months but I think it is unwise to assume everything they drill will come in. It could happen and I suppose if so £60 might be on the cards but I would say £25 is more likely if they have reasonable luck.

It gives me no pleasure to say this - but that is utter nonsense!!

If the upside potential was merely £25, I would have sold out completely several years ago when the shares were at £23 or so!

Obviously a lower figure than £50-60 IS more likely, but I think that unless there is enough success to see the shares at £35 or so then I suspect a number of those of us who are longer-term holders will be extremely disappointed. I'd reckon £35-38 is a central expectation for year-end and that £25 is in the bottom 1-2% of possible outcomes (assuming no oil price collapse).

thebuffoon

13th May '10

If the share price isn't at least £9 by the end of the year 'extremely disappointed' will not do justice to my feelings..

That reminds me, I never did post over at TMF. I meant to tell them that cutting a cake produces crumbs. :^}

Buffy

johnnylite

13th May '10

ee

Interesting target prices you are quoting here. Personally I don't believe the price will get anywhere near 5000 this year. For that to happen, TGD and 1 or 2 Nganzi wells would have to come in. Although next year it is distinctly possible IMHO.

For what it's worth, my absolute downside is around the current price now so my view is that all the exploration and appraisal (of TGT) are basically in for free. Applying some conservative probabilities to all the wells and multiplying up I estimate the chance of total failure this year as being about 6%. This is very conservatve (50% for TGT upside, 60% for TGD first well, and only10% for each Nganzi).

My risked NAV on this conservative basis is around 2800 so that would be my year end target. To hit this, we would only need a hit on TGD and some reasonable flows from the TGT appraisals. Nganzi is wildcat drilling so is thrown in for free.

Soco is my largest holding by far but will not sit complacently through drilling. If the price appreciates from here then I will likely top slice. I still bear the bitter scars of the Encore 90% appraisal well failing. TGD could do the same.

Finally, one question, what would be required for a definitive result for the TGD well. Clearly flowing oil is needed but what if the rate was quite low? Anyone any thoughts on what level of flow would be required to prove commerciality on this critical well?

JL

emptyend

13th May '10

what would be required for a definitive result for the TGD well. Clearly flowing oil is needed but what if the rate was quite low? Anyone any thoughts on what level of flow would be required to prove commerciality on this critical well?

Probably quite low, given that it is an easy tie-in to the TGT platform!

Personally I don't believe the price will get anywhere near 5000 this year. For that to happen, TGD and 1 or 2 Nganzi wells would have to come in. Although next year it is distinctly possible IMHO.

Well I don't disagree that for £50 (£12.50, Buffy ;-)) to be hit then drilling success will be needed at at least TGD plus one or two Nganzi wells.......but they will be done by September! Why should the share price then not reflect any success before year-end?

repobear

13th May '10

The key point in the article is here:
Beyond Vietnam, there is the promise of a potentially high impact campaign in the Democratic Republic of Congo later this year, "success at which could result in a nearly 80 per cent increase" in the broker's 2,819p target price.

Well that's a pretty significant increase and it looks like the penny's finally dropping for some of our city scribblers.

Who know's where we'll be if we get TGD sorted and a success in Nganzi without a farmdown. I'd like to know what the Nganzi numbers are based on and what they're calculating for the fan.

That bloody 90% number is a problem for me too. The clock is running and the prospect of another series of delays and cock-ups is what worries me.

Que sera sera I am going to West London this weekend but not as yet to Wembley,-)

repobear

loglorry

13th May '10

Ha ha six thumbs down for my post :-)

Oh well can't please everyone especially those who are long. My point really was that banding around numbers like £60/shr by year end seem a little bit too optomisitc. I realise ee said "could get to £60/shr" but let's be realistic here. Almost all the drillng would have to have spectacular results for that to happen and this is highly improbably.

I'm very long this share and I'd love to see it reach this sort of level but unfortunately when you multiple together all those chances of success they don't equal 100%. That doesn't mean I don't think there is considerable upside from here. I do. I just don't think £60 in a year is realistic.

Bring on the thumbs !

Log

fullbreakfast

13th May '10

Ha ha six thumbs down for my post :-)

Oh well can't please everyone especially those who are long. My point really was that banding around numbers like £60/shr by year end seem a little bit too optomisitc.

"Over-optimistic" may be fair comment; "a bit of a ramper" is rude.

emptyend

13th May '10

My point really was that banding around numbers like £60/shr by year end seem a little bit too optomisitc. I realise ee said "could get to £60/shr" but let's be realistic here. Almost all the drillng would have to have spectacular results for that to happen and this is highly improbably.

Fullbreakfast has made the main point that was irritating. However, you do NOT seem to have taken on board Goldman's figures - they aren't MY figures being "bandied around", they are Goldman's!!

An 80% uplift (in the Nganzi success case, per their note!) to their price target would mean a rise to £50 in present-day money - and they then say that there is the possibility of an additional M&A premium if TGT (and TGD, presumably) attracts the NOCs. So a premium over £50 seems to me to imply something in the £60 area.

Yes that would certainly require some good success at Nganzi as well as TGD - but all of these wells will be done by about October, so "could get to £60" by year end seems to me to be entirely fair comment - even if it would require good drilling success to do that!

Bear in mind that management risks the TGD well at 90% and that the fan interpretation could well be "severely derisked" (quoting Ed Story) by that well. And also bear in mind that the first Ngazi well is risked at 30% or so.....and is plainly "as good as it gets" for a wildcat well in a new basin (where there are several other independent targets that will be drilled back-to-back).

So yes.....£60 would require good success in drilling - but if Tullow can do it then why can't SOCO? If the City should start to see SOCO as "the new Tullow" then £60 equivalent by year-end wouldn't seem unreasonable, especially if they retain all of Nganzi. Count up the potential increase to their reserves (currently 142mn boe) and make up your own mind.

....and don't forget that the development drilling on TGT, starting in July, may also add 70-80mn bbls 2P reserves by year-end also.

loglorry

13th May '10

Well ee I do hope you are right and no offence meant by the "ramper" comment. I still stand by what I said though that you were starting to sound like one. I'm not saying it isn't justified just that the odds are slim and £25 is a lot more realistic. As you say Nganzi is a wildcat basin and so 20-30% CoS sounds about right.

I just don't think one should get too carried away with "potential". I sold out of Aminex before their recent failure (or at least not run away success). I personally think people can get a bit carried away with this dream of a "big win" lottery ticket. At the end of the day it is a probability game. You spend your money, drill the wells and hopefully you find something commercial.

In my view the numbers look good for Soco to increase their assets in the near future but I still thiink £60 is rather a wild figure by year end.

I am taking on Goldman's figures but even then they have a target price of £28 no £60!

Anyway were are really just arguing over semantics. Of course you are right that they have a shot at £60 but I think £25 is a lot more probable.

Log

emptyend

14th May '10

I am taking on Goldman's figures but even then they have a target price of £28 no £60!

But you AREN'T taking on board Goldman's figures - that is precisely my point!!

Goldman have a £28.19 target price NOW - AND they are saying that success at Nganzi might lead them to raise it by 80%.......AND then that there is the potential of a further bid premium for the VN assets!

Anyway were are really just arguing over semantics. Of course you are right that they have a shot at £60 but I think £25 is a lot more probable.

And it ISN'T a "matter of semantics". Yes £60 may be a low probability outcome......maybe 5%-10%. But IMO, given the various independent factors that could add value by year-end (TGD, the fan, Nganzi wells x 3, TGT development drilling, M&A bid premium, increased NAV per share due to lower dilution than expected etc etc) I'd think that £25 is in fact less likely than £60...... though I'd also accept that the median/average luck scenario would probably represent a price in the £30s.

IMO there is a high probability of what, relative to the market, would be considered an excellent return by year-end (which is why some like MS make it one of their top picks in one of their favoured sectors).........and there is a low probability of significant disappointment - and a rather higher probability (though still quite low) of some very serious returns.

I'm NOT interested in trying to convince you about it though. You are perfectly entitled to take the view that I'm being too optimistic.....but please don't imply that I'm making it all up when what I'm actually doing is quoting analysts verbatim!

repobear

14th May '10

Spot on ee. Run the numbers with high, medium and low success probabilities.

repobear

loglorry

14th May '10

In conclusion it seems that I'm a little less optomistic of success than you which is fair enough. I still think it has a good chance of near doubling from this price so that's good enough for most people I'd have thought.

On a slighly different topic I would have preferred if the CB had been put back to Soco. It currently provides a way for institutions into the stock which limits their downside and for this reason I feel that it has limited the upside on the common somewhat. Also with delta hedging going on it means risk arb desks take short positions in the stock. With the CB out of the equation I'd have thought there would be more chance of direct investment in the common.

Anyway good luck to all.

emptyend

14th May '10

On a slighly different topic I would have preferred if the CB had been put back to Soco. It currently provides a way for institutions into the stock which limits their downside and for this reason I feel that it has limited the upside on the common somewhat. Also with delta hedging going on it means risk arb desks take short positions in the stock. With the CB out of the equation I'd have thought there would be more chance of direct investment in the common.

Again you seem to have missed an important point! It seems (per Morgan Stanley's research, confirming my own enquiries) that close to two-thirds of the convertible bond WILL be put back this weekend! This is somewhat surprising , as the convertible has been trading just over par even before the recent rise, but no doubt there were a number of (long/short) trades put on that were locked up to a specific date....as well as perhaps the more important point that many of those who piled into the convertible at the low point a year ago [c.80] will have been pure fixed income funds who were not in it for the equity option and were therefore not prepared to take the risk of hanging on beyond the put date when the bonds have (just) moved above par. In other words, they look at it now as a pure fixed income deal paying 4.5% to maturity.....and that isn't great, relative to other fixed income investments for similar credits. Last year the yield was substantially higher (over 30%pa IIRC , at one point).

Presumably the number of bonds that were actually put will be reported on Monday morning.....and I suspect that those who haven't read the Morgan Stanley note(or made their own enquiries) will be surprised. I know that I was certainly surprised when I discovered it!

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Emptyend

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