Interim Results 2009

12th Aug '09 by emptyend

30 comments 3512 reads

http://www.investegate.co.uk/Article.aspx?id=200908120700052880X

None of the extracts below come as material news to those who attended the AGM (my bold for the more significant points):

Outlook

Commencing extensive exploration and appraisal programme in Africa and Vietnam targeting over 600 million barrels of mean, unrisked recoverable reserves……

SOCO is pleased to announce record first half turnover of $66.6 million and after tax profit from continuing operations of $31.6 million. Additionally, SOCO retains a very strong balance sheet and has not needed to secure additional funding. Both are significant achievements, particularly when taken in the context of the recent industry and economic environment. ….

On 1 July 2009, Petrovietnam became a full paying participant on its 41% share of the TGT field development after approving the TGT Field Development Area, which is targeted for first oil in mid-2011…..

Following an assessment of the commerciality of the previous discoveries in the awarded area in the VT Appraisal Area, the HLJOC opted to relinquish this area. Petrovietnam issued a formal approval of the relinquishment in July. ….

SOCO EPC has finalised the terms of a rig contract for a two well drilling programme in the Marine XI Block that is expected to commence within days of this report as the rig is now in transit to the location to commence the Liyeke well on the S1 prospect…..

The same contractor that conducted the seismic programme on the Nganzi Block has been mobilised to acquire both 2D and 3D seismic in Cabinda North. Acquisition of the 2D seismic began earlier this month….

Capital expenditure of $36.2 million in the first half of 2009 was lower than the $120.7 million spend in the first half of 2008 following the successful hook up and completion of the majority of the Group's construction and development activities on the CNV field in Vietnam and the Bualuang development in Thailand in 2008…..

During the first half of 2009 the Group's production, net to the Group's working interest, of 6,734 BOEPD was sourced from its CNV field in Vietnam (3,083 BOEPD) and its Bualuang field in Thailand (3,651 BOPD). This is up, on a pro rata basis, from 6,501 BOEPD in the equivalent period last year from its Yemen interest prior to its disposal in April 2008. This is also an increase from 4,464…

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emptyend

12th Aug '09

Analysts' initial comments:

Morgan Stanley:

A more bullish view from management than in

previous months: The positives: 1) Emphasis that

exploration activity will pick up after a very quiet H1 with

the drilling program targeting c.600mb (gross) in the

next 12 months; 2) the development program for TGT is

on track for first oil in mid 2011; and 3) a strong cash

balance of US$294m. The negatives 1) the drilling of

TGD (Block 16-1, Vietnam) has been pushed back to

take a more practical view on the impact from the

monsoon season (now Q2/Q3 2010 rather then end Q1)

while the Viodo step out (Congo) is smaller than

anticipated; 2) uncertainty remains on the productivity

levels at CNV (Block 9-2, Vietnam) due to the lack of

fracturing on the eastern lobe. Conference call – 10am

(UK time) today

Interesting to see their observation on the Viodo step-out. I wasn’t aware that anyone had been expecting the big step-out (that remains possible/probable in the next drilling campaign there).

Merrill:

Congo exploration campaign starting imminently – BUY

Soco’s 1H09 results confirm the active exploration phase in Congo/Vietnam that

SIA is about to enter. This firmly offsets any minor impact on sentiment that the

pre-announced weak performance of the CNV field may have – see below. As

highlighted previously (Positioning ahead of the newsflow, 6 Aug) its exploration

programme targets 0.6bn boe of gross resources over the next 12-18 months

offering potential to transform SIA and to reignite M&A discussions. The first

Congo well (S1/Lyeke, 31p risked, 154p unrisked) is to spud imminently with

results due in c30 days. We keep our NAV unchanged at 1,651p – BUY

Arbuthnot (FWIW):

SOCO has posted a record set of results for H1 2009.
The headline numbers reflect the change in the company's operations in the past year with revenues of $66.6m (H1 08: zero) and pre tax profits $45.7m (H1 08: $605k loss). Average production for its assets and Thailand and Vietnam was 6,734boepd.
However, the real story is its exploration portfolio. The company is about to embark on a major exploration and appraisal campaign over the next 18 months which is targeting 600mmbbl of unrisked recoverable reserves. The first well in the Marine XI block in the Congo has a pre-drill estimate of 125mmbbl and due to spud later this month.
Work continues on its TGT development in Vietnam which is due to come on stream in mid-2011. This is SOCO's largest project to date and will be a major driver for growth when it comes on stream.
The company's strong balance sheet ($294m of cash and liquid investments) means that that no additional funding is required for its projects. This is very positive, given the difficulties some companies have had recently raising capital in the equity markets.
We are very positive on the future of SOCO and look forward to the results from Marine XI which will be the next major share price driver.

(EDIT....)

Tristone:

SIA reported H1/09 profit of $31.6 mm ($0.38/sh diluted) well above our estimate of $9.2 mm ($0.11/sh) due to lower than expected royalties, depreciation and taxes. Production of 6,734 boe/d was lower than forecast as CNV production was 3.1 mboe/d vs our expectations of 3.5 mboe/d. The partners have relinquished the VT area as existing discoveries were viewed as insufficient to support the infrastructure needed for development. We carried it in our RENAV at 13.8p/sh risked. SIA expects the S1 well on Marine XI in Congo (Brazzaville) will spud in the next few days. We carry the well at 45p/sh risked, 193p/sh unrisked. Initial interpretations of seismic on the DRC Nganzi block are encouraging as several large structures have been identified. Drilling is expected in H2/10. SIA is entering an active exploration phase targeting over 675 mmb gross (300 mmb net) in the next 12-18 months. We continue to like the exploration upside in the portfolio and look forward to initial results from its African exploration program.

So - earnings more than three times Tristone's expectation......rather suggests their model is wrong, doesn't it, especially as they had slightly over-estimated production? The VT relinquishment was clearly flagged at the AGM, so should have been no surprise to anyone who was vaguely on the ball. [end of Edit]

[EDIT 2]:

UBS:

SOCO reported H109 results this morning. Working interest production of 6.734

kboe/d was 11% ahead of UBS and the key driver behind the beat at the operating

level with both EBIT ($44m) and PBT ($46m) coming in 10% ahead of UBS. A

relatively higher tax rate led to net income ($31.6m) coming in 5% below UBS.....

SOCO is trading at a 31% discount to $75 risked NAV vs. the sector at a 23% discount.

UBS makes no mention of the drilling programme targetting 600mn bbls net to SOCO's WI. This seems to me to be an amazing omission, given that 600mn bbls is more than 4x reported 2P reserves!

[End of EDIT 2]

It'll be interesting to see if there is any change in the mood music following the 10am conference call. If I were an analyst, I'd be looking to make a link between the Sinochem bid for Emerald (announced earlier today) and the fact that Sinochem (reportedly, per RNS earlier in the year) remain on the table with their interest in SOCO. I'd also be asking for a clearer steer on the TGD upside potential in the context of what the reprocessed seismic has shown so far.....as those of us who attended the AGM will know, the first well on TGD may be targetting a 100mn bbl fault block - but there could be a billion or so more barrels behind it!

FWIW the profit number is a 46% increase in operating profit compared to the full year profit for 2008 from continuing operations, and PBT is up 22% compared to the full year (lower due to lower interest on cash balances).

I'd also note that:

As the Group has a strong financial position it has purchased short term liquid investments of over six months maturity in order to maximise investment revenues.

I haven't asked the question but would bet that back in May they will have made a series of one year investments to lock up some of the cash until May 2010 in anticipation of some of the convertible being redeemed. These are shown as "liquid investments" in the balance sheet - and the $102mn shown as such is consistent with management planning numbers expressed at the AGM to the effect that they thought about 30% or so of the convertible may be redeemed. Obviously the outcome may be substantially different, depending on the share price next May.

The basic EPS of 43.1 cents per share is equivalent to around 52p per share over a full year, putting the shares on a 2009 PER of around 25x. The Cazenove initiation note in June (which I guess will be revised in the next week or few) estimated the 2011 EPS at 188p per share, which would make a prospective PER of a forward basis of about 7x. Even 2011 of course would only reflect about half a year of TGT production.....

Operating cashflow remains strongly positive at $26mn for the 6 months, post tax and interest.

.....but, as usual, the results themselves aren't the main event.....

....people should be looking forward to the spud announcement at Liyeke next week [having noted the "rig in transit" comment that ties in with the expected spud date of the 19th] and to the presentation etc that will follow the conclusion of that well in early September!

marben100

During the first six months of 2009, the Group realised a price of $47.48 per barrel of oil compared to $55.27 per barrel in the period from start up of operations in South East Asia to year end 2008.

The much stronger POO so far should have a significan positive impact on net earnings in 2H09.

tingtang

A couple of questions from the back of the class.

<i>Ambassador António Monteiro</i> - Was he (a) a political appointment. (b) a 'contact' man, or (c) does he have particular skills?

Re the Vt relinquishment - did I read it correctly that Soco subsidiary Co had only a 2% interest there?

tt.

lowersharpnose

[Soco] holds a 28.5% working interest in Block 16-1, which is operated by the Hoang Long Joint Operating Company (HLJOC). OPECO, Inc. holds a 2% working interest in Block 16-1.

IIRC, Soco own OPECO completely.

So if HLJOC own 98% & OPECO own the remaining 2% (Is this right?)

Soco's share in 16-1 is 28.5% of 98% plus 100% of 2% = 29.93%

lsn

In reply to tingtang (post #4)

Re VT, no you didn't read it correctly. SOCO have a total interest in VT of 24.8%, of which 2% is via OPECO and the rest is via SOCO Vietnam......not that it matters much, as it has always been perpheral at best in anyone's thinking.

Monteiro has extremely strong political contacts in both DRC and Angola. Previous comments on him made on Stockopedia can be found using the VERY USEFUL search facility here: Search

cheers

In reply to lowersharpnose (post #5)

So if HLJOC own 98% & OPECO own the remaining 2% (Is this right?)

Soco's share in 16-1 is 28.5% of 98% plus 100% of 2% = 29.93%

2% is held directly via OPECO. SOCO Vietnam hold 28.5%....but the parent company SOCO holds only 80% of SOCO Vietnam - hence the total WI in 16-1 is 22.8%+2%=24.8%.

However, SOCO have funded their 20% minority partner in 16-1, and will be recouping all their funding costs (plus interest at 9%) out of production BEFORE that other partner gets any cash flow at all.....therefore their initial cashflow will reflect the whole 30.5% (28.5%+2%) of entitlements in relation to TGT. But it doesn't stop there - because they have ALSO funded (jointly with PTTEP) PV through the exporation phase (ie for all expenditure prior to 1st July this year)....and their cashflow when production starts will be still further enhanced by this cash being recouped too!

I say "will" - but of course that is unlikely to be the case, as they will probably have sold by then.......but any valuation of SOCO in Vietnam MUST take full account of the enhanced cashflows that will arise from the initial production at TGT!

Reuters comment:

http://uk.reuters.com/article/idUKLC21463220090812?sp=true
- Targets 500 mln barrels from Africa, 100 mln in Vietnam
- Would consider sale of Thailand operations

British oil & gas explorer SOCO International (SIA.L) is to launch a major exploration programme in West Africa over the next 18 months after swinging to a first-half profit after tax of $31.6 million.

Chief executive Ed Story told Reuters he hoped to find around 500 million barrels of oil from campaigns in the Democratic Republic of Congo (DRC) and the neighbouring Congo Republic, on top of an anticipated 100 million new barrels in Vietnam.

"The next 12 months will demonstrate whether or not we are right," Story said in a telephone interview.

...at least they have the correct focus, thanks to Ed's steer! I've added comments to an earlier post above from other analysts who appear to have missed the obvious!

Thank you - that search facility is as good as you suggested.

As an ex Portuguese colony he should be especially useful in Angola, and Mozambique too, as suggested by Man Siard, if the Co survive long enough to get going over there, although one should not forget that 'son of Soco' could well do that..

Those old Colonies have maintained the Colonial languages for Government & Business affairs. Even the North of this island (Cyprus) although Turkish speaking still base their administration and law on the British system.

Here is a snippet taken from the Dow Jones comment on the Sinochem bid for Emerald.....

"An energy analyst at a U.S. bank said there is consensus between Chinese companies, the government in Beijing and regulators that now is the time for them to go out and buy foreign assets.

"For a lot of China companies, if they are not doing their bit and acquiring foreign resources, it makes them look bad, so I think everybody wants to get on the bandwagon," the analyst said" ........

Being so much closer to their own market than the americas must put Soco very much in the frame, I am beginning to believe ee now that something could happen very soon!, price may well prove a stumbling block though as Soco isn't going to go cheap.

tt..

Interim Results 2009

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