So what’s Soco Vietnam worth excluding TGD?

Monday, Oct 18 2010 by
29
So whats Soco Vietnam worth excluding TGD

I know I’ve made the odd comment about $15 and $20 a barrel on the TGD thread for SOCO International (LON:SIA) but that was largely from the gut without too much thought, hence a bit more application now… Firstly, AFAIA, nobody has ever put a figure on how much the Lizeroux 20% minority interest should be discounted for their carried interest. This is obviously important since Soco include Lizeroux’s entitlements in their booked reserves. Personally, I think Soco should be estimating what these amount to in the Annual Report notes.

It’s impossible to be accurate but I’ll suggest Lizeroux’s holding should be reduced to around 12.5% going forward to first production at TGT. In round figures, I’m thinking 20% of say $500m invested over 10 years, the bulk in more recent times, charged at 9% interest is likely to run up a bill currently of say $150m…bearing in mind of course that a certain amount of carried interest bills will have already been paid back from CNV production. Unless anyone else believes these figures are shaky, I think 12.5% forms a pretty solid basis. So, SV’s booked reserves need discounting by 12.5%. We also need to account for gas reserves being worth less than oil. As at 31 Dec 2009 booked Vietnam reserves were 124mmboe. My split on that is CNV 24 oil + 8 gas, plus TGT 92 oil. Total 116mmbls + 8mmboe

For the year end December 2010 booked reserves, I’d estimate an added 10 mmbbls for TGT making a total 126mmbbls + 8mmboe. Ok, that might look conservative but I’ve seen it all before where people get too excited on upgrades that don‘t materialise. One also has to bear in mind that potential downgrades on CNV (quite possible - even likely given production rates to date vs. production licence period) won’t be apparent in the overall Vietnam reserves declaration. So, knocking off the 12.5% Lizeroux component we get y/end 2010 110mmbbls + 7mmboe. At $15/bbl and $5/boe, 358m shares out fully diluted(incl conv) equates to 295p/sh.

This exercise is meant to seek a rock solid core valuation when contemplating a sale of Vietnam assets in the market without any consideration for TGD or additional reserves which may or may not result from TGT production history in future. Apart from the…

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SOCO International plc (SOCO) is a united Kingdom-based oil and gas exploration and production company. Its segments include South East Asia and Africa. It has field development, production and exploration interests in Vietnam, and exploration and appraisal interests in the Republic of Congo and Angola. In Vietnam, It’s Block 16-1 and Block 9-2 include the Te Giac Trang and Ca Ngu Vang Fields, which are located in shallow water in the Cuu Long Basin, near the Bach Ho Field. It holds working interest in Block 16-1 and Block 9-2 through its subsidiaries, SOCO Vietnam Ltd and OPECO Vietnam Limited. SOCO holds its interests in the Marine XI Block, located offshore Congo (Brazzaville) in the shallow water Lower Congo Basin, through its subsidiary, SOCO EPC. It holds working interest in the Mer Profonde Sud Block, offshore Congo (Brazzaville) through its subsidiary, SOCO Congo BEX Limited. SOCO's subsidiary, SOCO Cabinda Limited, holds participation interests in the Cabinda North Block. more »

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181 Comments on this Article show/hide all

emptyend 27th Oct '10 62 of 181
2

In reply to post #49852

extrader,

Where do we/PTTEP stand on the 'drop dead' date, by which time they have to decide whether to buy back in to TGD or not ? I thought they had 30 days from drill result declaration or some such ?

My working assumption is that they won't take up their entitlement to buy back in ..... will we see a formal RNS to this effect, if only as part of the process of clarifying 'the way forward' ?

Basically they have 30 days - but as a practical matter that isn't now the issue - the issue is purely whether there is a new licence....and there will certainly be an RNS clarifying that in due course.

dj's points:

Extremely unlikely in my book. Firstly, I don't think there's been one single instance in Vietnam where an appraisal area has been re-licenced as an independent explo area. Secondly, VN will want to make the relinquished areas of 16-1 look as attractive as possible when they come to market it and that would include TGD.

Both good points of course - but I don't think that  would rank as "extremely unlikely".

Thirdly, any new TGD-only licence would either come with existing terms, loaded with sunken TGD costs which otherwise would have been recoverable from TGT production(effectively becoming a $200m+ sig bonus from Soco's perspective), or, new, less favourable terms...plus in both cases at least a two well commitment I'd have thought. Either way, nothing like as attractive as a simple 12 month extension with a one well commitment on existing terms. For me, this has only two possible outcomes, extension or relinquishment.

Well of course there is uncertainty over the terms - and if they were considered to be too onerous then I have no doubt whatsoever that SOCO would just walk away. However, I think you are mistaken in being categorical that there are only two outcomes.....I'd say that relinquishment is a 50% shot but the other two possible structures are each 25%  likelihoods. We'll soon see.

ee

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Isaac 27th Oct '10 63 of 181
2

Davjo

The thing that really gets to me is I know this is very likely to be the last big exploration play for both Ed and Roger. So clearly they want to depart on a high with a huge find. And TGD was their baby to do so. But the reality is it just has'nt worked out the way we would have liked.

My concern is will their ego get in the way of them drilling, drilling and more drilling of TGD but not being succesful? Just so they can retire on a high.

I mean it probably not ideal to end a long life career with numerous failures on TGD. But Ed/Roger if your reading this I think you both have done a lot of people proud with TGT, that is no minor find. Most people won't generate the wealth you two have created a lot of people on these boards so there really is nothing left to prove. Think you should both hold your head up high and have a good retirement!

I sincerly hope Soco don't drill TGD again though. Every well we have drilled on that prospect has caused us problems + time + money. It feels like a bad chapter in Soco's history. The sad reality is there is actually a lot of Oil in TGD, we just have'nt been clever enough to date to extract it.

One thing we can be certain of is the booked reserves at year end 09 + upgrades. We can reasonably be confident that Oil prices is more likely then not to be within the $75-80/bbl range in the next week. Therefore if we were to sell near term we could expect to get £4+ for our reserves. So why would one not lock this gain in ? The biggest risk to this value is a drop in Oil price IMO.

1) Soco does not have a bottomless pit of money - Fact.

2) Soco has found Oil in Nganzi - Fact

So would it not be a good idea for Soco to just focus on Nganzi ? We don't have lots of cash to fully exploit everything. I'd rather spend smaller portions of the cash on African wells and have a commericial find rather then plump a large chunk of it onto TGD. Given that we still own a large interest in the block we could farm down further and reduce costs. Although the last two wells on Nganzi did'nt produce a desirable result the reality is geology takes time to understand and at times it takes several wells to be drilled before we get a decent find.

Therefore it is silly for the market to sell this off on what it percieves to be a bad result for a wildcat well when it is the type of result one would expect from a wildcat.

And I don't think we need Dominion's acreage either, I think Soco have enough going on in Africa. And based on the wells drilled so far I think I want to be part of the action in the Son of Soco.

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extrader 28th Oct '10 64 of 181
6



Hi Isaac,

You comment re DRC

Although the last two wells on Nganzi did'nt produce a desirable result the reality is geology takes time to understand and at times it takes several wells to be drilled before we get a decent find.

If you replace "Nganzi' with 'TGD', maybe you 'll see why ES/RC probably want to have a final poke at TGD ?

Just a thought......

ATB

 

 

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emptyend 28th Oct '10 65 of 181

In reply to post #49861

Good post.

The thing that really gets to me is I know this is very likely to be the last big exploration play for both Ed and Roger. So clearly they want to depart on a high with a huge find. And TGD was their baby to do so. But the reality is it just has'nt worked out the way we would have liked.

My concern is will their ego get in the way of them drilling, drilling and more drilling of TGD but not being succesful? Just so they can retire on a high.

I mean it probably not ideal to end a long life career with numerous failures on TGD. But Ed/Roger if your reading this I think you both have done a lot of people proud with TGT, that is no minor find. Most people won't generate the wealth you two have created a lot of people on these boards so there really is nothing left to prove. Think you should both hold your head up high and have a good retirement!

Of course they won't be reading this. However, the point is a good one.

The execs have already made a lot of money for shareholders over the years - as even most/all of the more recent holders  will eventually come to acknowledge when the deal(s) finally get done. And no doubt they will have wanted to "go out with a bang".....but they have done their job well - managing the company prudently, made some good discoveries, acquired some good licences and  have managed to expose shareholders to the possibility of significant further upside via the drillbit.

The fact that it looks as if their best hopes aren't going to be achieved is just a fact of life. They have created additional value for whomever buys the company and that will ultimately be reflected in the share price  when deals get done......irrespective of what they market happens to think from time to time in the interim.

ee

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repobear 28th Oct '10 66 of 181
6

In reply to post #49860

Well of course there is uncertainty over the terms - and if they were considered to be too onerous then I have no doubt whatsoever that SOCO would just walk away. However, I think you are mistaken in being categorical that there are only two outcomes.....I'd say that relinquishment is a 50% shot but the other two possible structures are each 25% likelihoods. We'll soon see.

This site is becoming more like fantasy island every day. Thank you davjo for sheddding some light on how the TGD situation will most likely pan out. Why on earth should the Vietnamese government give preferential treatment to Soco on TGD? They haven't covered themselves with glory and anyone looking at this rationally would most likely conclude that a fresh start on TGD might be the best option.

FWIW, my numbers are relinquishment a little way short of the dreaded 90%, extension around 10%, a new license around 2%.

Soco, or Soco Vietnam, will get sold for more money than the current share price, probably 50% more, imv. However I would advise holders, or prospective adders, to have a healthy degree of cynicism about these 'scenarios' under which it may happen and TGD is magically retained.

When TGD is lost will probably give the best entry point and shorter wait for the sale. In the meantime there are some quite exciting ways to profit in oil and gas. This looks like a rerun of the Dana 'sold off too cheap 'routine when decent opportunitiues were just ignored by many here

repo

 

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nigelpm 28th Oct '10 67 of 181
4

In reply to post #49870


This looks like a rerun of the Dana 'sold off too cheap 'routine when decent opportunitiues were just ignored by many here


Yes, there are some great opportunities out there (tempted to look at Encore again) but Soco is a bit different in that the downside is well and truly copper bottomed and with the chance of a 50% return over the next 6 months to a year it looks stonking risk:reward.

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thebuffoon 28th Oct '10 68 of 181
3

Repo,

This site is becoming more like fantasy island every day.

Spot on. It's been a magical ride.

http://www.fantasyisland.co.uk/

:^}

Buffy

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repobear 28th Oct '10 69 of 181
2

In reply to post #49872

Yes, there are some great opportunities out there (tempted to look at Encore again) but Soco is a bit different in that the downside is well and truly copper bottomed and with the chance of a 50% return over the next 6 months to a year it looks stonking risk:reward.

Hi Nigel,

I would say that after the TGD license is lost and another African failure, which look to me to be the most likely outcomes, there is a more than decent chance that the tired bulls will exit for greener pastures elsewhere and at some stage early next year the opportunity might be even better. If the TGD license is extended I doubt that the same optimism will be evident as before and it'll be a long wait till it's drilled and Soco Vietnam is sold.

In the meantime there are companies with upcoming testing/drilling on potentially highly material discoveries and there is next to no discussion.

TMF and ADVFN are streets ahead on some of these opportunities, imv.

repo

 

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emptyend 28th Oct '10 70 of 181
2

In reply to post #49874

In the meantime there are companies with upcoming testing/drilling on potentially highly material discoveries and there is next to no discussion.

Who is stopping you from starting one?

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djpreston 28th Oct '10 71 of 181
7

Well repo, no one's stopping you from starting a thread on those companies.

Trouble is, with many other opps, there isn't the same downside protection in terms of discovered reserves and proven commercial wells. Soco has that in CNV and TGT which, on their own, would provide a decent 50%+ return in the event of monetisation over the course of a year (possibly/probably less).

As I've said before, that's a decent risk reward for me. XEL, if they get a problem with the well in terms of flow, will be crushed - where's the downside on Soco from here? (Ignoring POO collapse which would hit all co's in the sector).

Undeniably there are some great companies out there - I really like the Columbians (gte, pxt, etc - possibly a little over cooked right now?) and others but soco has its place I'd say.

Fund Management: European Wealth
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djpreston 28th Oct '10 72 of 181
1

Snap - sorry ee, started my reply then had a phonecall.

Fund Management: European Wealth
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emptyend 28th Oct '10 73 of 181
7

In reply to post #49878

Snap - sorry ee, started my reply then had a phonecall.

Pesky clients....or, worse, pesky brokers! Get your priorities right!  ;-)

I'm in complete agreement with you over the downside protection with SOCO (asset and ultimate value protection - obviously there is no protection from market vaguaries in the meantime, even though I have been very surprised at the extent of the move down and the huge discount opening up against core value). Obviously repo (and the market) doesn't agree with me about the timescale for value realisation....but that is fine.....it is what makes a market and creates opportunities for others. There is no compulsion for everyone to believe my view about the timescale (after all, I was wrong in 2008) - just as there is no complusion for people to join repo in upping sticks and rushing off to what some perceive as better opportunities elsewhere.

ee

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loglorry 28th Oct '10 74 of 181
3

I do tend to agree that the downside protection with Soco does mean one can more comfortably take bigger positions while still maintaining decent upside from explo. The trouble I have with this view is that the market can often ignore this and punish bad drilling results regardless. This I think is more because the hot money quickly flows out of a stock if it's prospects evaporate as they have done with Soco.

If the hot money leaves the share price drops and only stale bulls are left all waiting for an exit. This results in lost opportunity cost elsewhere. We can all argue that Soco is worth £4+ but the market won't give you that today.

Probably the most sensible idea I've seen is for Soco to aquire/merger with an operator like Dominion Petroleum which has lots of explo upside but not much money. Soco could then fund a drilling campaign again and get everyone exicited. This would probably be the best way to re-rate the shares for both Dominion and Soco .

Until that happens we'll probably drift around £3 mark.

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emptyend 28th Oct '10 75 of 181
8

In reply to post #49882

The trouble I have with this view is that the market can often ignore this and punish bad drilling results regardless. This I think is more because the hot money quickly flows out of a stock if it's prospects evaporate as they have done with Soco.

To be honest I'm very surprised indeed that there appears to have been so much "hot money" in SOCO in the first place, especially as the scale of the price moves has suggested selling on an institutional scale. Prospects for large and quick upside from drilling have certainly evaporated - but the prospects for large and quick upside from a deal haven't, especially when one looks at the market value of the assets (and their scarcity). One can certainly debate the timing etc - but management has a track record and an explicit objective of realising value - so to me a material discount to core NAV make no sense whatsoever.....and is therefore unlikely to persist.

If the hot money leaves the share price drops and only stale bulls are left all waiting for an exit. This results in lost opportunity cost elsewhere. We can all argue that Soco is worth £4+ but the market won't give you that today.

I think the "stale bulls" comment is brokertalk nonsense. I've held the shares for over 11 years; many others here are long term holders. They aren't "stale" - they just know perfectly well that the final exit is now getting to be quite close.  "Opportunity cost" is merely a fact of investment life - there is ALWAYS an opportunity cost. And opportunity costs are always trotted out as a reason for trading rather than doing nothing - but there is no guarantee that one won't be jumping on another interesting-looking train just as it hits the buffers.

Probably the most sensible idea I've seen is for Soco to aquire/merger with an operator like Dominion Petroleum which has lots of explo upside but not much money. Soco could then fund a drilling campaign again and get everyone exicited. This would probably be the best way to re-rate the shares for both Dominion and Soco .

That is probably the most bonkers idea I have heard in a long while!!   I know WShak is advocating it - but if I was long of Dominion I might be arguing for it too! ;-)

Deals in Africa may happen in the fullness of time - but item number 1,2 and 3 on the agenda is IMO the monetisation in Vietnam (and it remains a possibility, albeit now more remote IMO, that Vietnam will be monetised along with the whole company). There are a few i's to be dotted and t's crossed - but it won't be long....

ee

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djpreston 28th Oct '10 76 of 181
8

Yep, we can argue all we like about the merits of a son of soco vehicle and what shape it might take but what is completely dominating management thoughts right now is crystalising the value of what's been done at TGT (and CNV).

If anything, you could argue that there could/should be hot money coming in now that the cupboard is metaphorically bare (in terms of big explo upside) and thus focus on monetisation.

As for SoS, I can see some logic for it and have argued for a sub Saharan explo co of size for some time - roll rump Soco into dpl and aex/others and get a liquid mid cap exposed to a "sexy" story... For now, however, I (and other big holders) just want the value outed.

Fund Management: European Wealth
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fullbreakfast 28th Oct '10 77 of 181
5

I added about 20% to my holding at a variety of prices yesterday, having sat on my hands following the TGD failure. I did this by way of spread bets expiring next June (without using much leverage - I like to keep spread bet positions 70-100% funded in the account). Time will tell whether these bets need to get rolled.

Given the large discount to any sensible view of NAV, it's not necessary to have any view on TGD being extended or re-licensed to see the investment logic IMO. On this point I am not convinced that obtaining an extension or new licence would necessarily block a Vietnam sale. Ed and Roger may well be keen to do more drilling there, but they don't work in a vacuum - if someone came up with an offer for Vietnam as a whole that was attractive to the Contini and Maugein interests and to Blackrock, a deal would likely happen.

I'm also sceptical about how many 'stale bulls' remain - would have thought the failure at TGD, where almost everyone expected success, together with yesterday's result, would have removed most of the weak holders and 'hot money'.

But then, I am frequently wrong :o)


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repobear 28th Oct '10 78 of 181
12

In reply to post #49887

I have posted regularly on other companies here but the response has been muted to say the least.

Encore Oil (LON:EO.) had fantastic news yesterday and pulled off a coup I reckon.

http://www.stockopedia.com/content/catcher-further-exploration-starts-48412/?comment=18#18

Response ...nul zero rien niks nada. The hope/expectation value there is about 5p now I reckon and there is a lot of upcoming newsflow. It won't stop the shares getting badly beaten up if Varadero fails but that'll be an opportunity for the well informed. As will success.

Xcite Energy (LON:XEL) looks to have the potential for making money. The technical discussion on ADVFN is interesting. I agree that a poor flow rate will crush the share price but  early 'unofficial' newsflow here is likely. No doubt most of you will turn your noses up at that again, and be wrong again. Buying in after the result will almost certainly bring decent rewards too. There is more than one way to skin a cat.

SLG. Well I've said enough about that one. Some people here have looked and seen the value. Nobody has attempted to put the bear case here. There is one but it doesn't stack up too well for anyone who looks at the investment case properly.

If Soco wasn't so well followed here if you'd put it in that recent London conference it would have been flagged up as one of the better opportunities. Now that TGD has failed and there have been two misses in Africa it has slipped down the list.

I must say that son of Soco has little appeal. I'd rather follow the lower political risk in the NS and the teams of people who know the patch well. Encore, Sterling Energy (LON:SEY), Xcite Energy (LON:XEL), Nautical Petroleum (LON:NPE), EnQuest (LON:ENQ), Ithaca Energy Inc (LON:IAE) and Deo Petroleum (LON:DEO) all have more chance of making me money I believe.

I haven't sold that many shares since the TGD failure and I am in as deep as many but I'm not kidding myself that the route back to a decent result will necessarily be that rapid. Did ee mention 6 weeks yesterday? It is another investment and If I believe there are better intervening risk/reward situations over the coming months I'll let some more shares go. Taking a loss on my pre TGD top up is the medicine that sometimes investors have to take.

The stale bulls argument seems pretty relevant to me having had some feedback from quite a few long term holders. I can see SIA drifting from here and if I sell some more and I am wrong about that or a takeover so be it. It seems to me that not too many here on S'ocopedia like to make that point too openly.

repo



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emptyend 28th Oct '10 79 of 181
4

In reply to post #49892

I haven't sold that many shares since the TGD failure and I am in as deep as many but I'm not kidding myself that the route back to a decent result will necessarily be that rapid. Did ee mention 6 weeks yesterday?

Yes - but not in the context you imply! You've qualified your own expectations with a "necessarily".....whilst I indicated an expected 6 months, whilst declining to rule out something much quicker.....Post 39 quote:

I don't think they will still have TGT/CNV in 6 months - and they may not have them in 6 weeks.

...which is NOT the same thing as suggesting that they will do a deal in the next 6 weeks. Having had my words twisted previously and seen a six month expectation morph into "imminent", I feel I must point that out.

Re the comments about other shares, I rarely say much now about shares "in the peer group" of smaller explorers....unless it happens to be a matter of fact and not too speculative. Most of the situations you raise are essentially speculative, so it is difficult to contribute much without getting speculating a bit oneself.

Different story on SOCO. I've speculated continually for over 10 years - and I'm not going to stop doing so until they hang up their boots.

ee

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loglorry 28th Oct '10 80 of 181
1

Different story on SOCO. I've speculated continually for over 10 years - and I'm not going to stop doing so until they hang up their boots.

Why bother being quite so active in research and bb posting then? It seems clear you will almost certainly exit Soco when the directors do so save yourself a lot of work and just wait until then. Maybe you just like reading and wrirting about Soco and other oilies for fun. Surely the idea is to make money and that might mean shifting horses once in a while?

Everyone to their own though I guess.

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kenobi 28th Oct '10 81 of 181
3


Before we get too carried away with TGT/CNV being sold, is it realistic to sell these at a good price with no production history ?

Historically this has been when SOCO has sold assets, when they had some production history, now I know stage one TGT is next summer, and I know this is a big deal to them as it's not just an on going asset, they want to exit the area potential, and retire off management, and that there'll be pressure from large holders. But no one will be happy if they don't get a good price.

Cheers K

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