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…
Worthwhile discussion point - though of course one that is rather tricky to be sure about - not least because I would expect the two TGT wells drilled recently to have established a good basis for a material reserves upgrade (which on RBC figures would be worth around 70p per share)
Turning to the details:
Indeed, when Soco sold Yemen, the oil price was in the $90s yet the sale was apparently based on $70.
Yes - reportedly. Though they ALSO paid something for 3P upside - so if one was looking purely at 2P then the price per barrel would actually have been higher. At the end of the day the only thing that counts is the cash paid.....both sides will arrange the presentation of the deal to tell a strong story to their own constituencies.....and the Yemen deal was no different (though you'll recall the price was pretty close to what we'd thought fair at the time - only about $30mn short of my own figure IIRC).
The other point about the Lizeroux interest is that whilst costs plus interest are being recouped from production (and whilst cost recovery for PV's stake is also incomplete), SOCO's entitlements will likely be a majority of the total production....which will have a highly positive impact on cashflow.
NAV of Viet barrels is $20 based on $75 oil, that doesn’t mean a buyer will base his purchase at $75. Indeed, when Soco sold Yemen, the oil price was in the $90s yet the sale was apparently based on $70. It could be that attitudes to future oil prices have changed since then and $75 now might be accepted in M&A circles but we can’t know that until it manifests itself in a transaction. Clearly $20/bbl rather than the $15/bbl example above would yield 395p/sh and higher TGT barrels a good bit more but that’s in the lap of the gods at this point in time!
This is where we get into quite tricky territory from a valuation standpoint. One important point is that certainly CNV and possibly TGT and certainly (if worth anything) TGD are very long-lived assets, of some 25-30 years. And that is relevant when one considers the dramatic falls in interest rates over recent years - because the value of future barrels would be discounted by less.....much less, allowing for compounding! And that might be particularly the case if the buyer was a sovereign-backed regional entity that was on a mission to plug a long-term strategic gap in energy supplies.....and there may be more than one such potential buyer.
You are of course quite right that we cannot know what price per barrel is appropriate until a deal gets done......and, for that reason, I'm not sure it is worth the effort to try to guess when there are so many unknowns (for those outside the process - though the number of unknowns for those signing CA's will be substantially reduced from the recent past!).....
....though to help reduce the unknowns I would observe that the recent Chevron deal for gas in VN settled on a formula that is expected to pay around $5 per mmbtu and I believe that when SOCO's gas price is finally settled it is likely to be around $3-3.50 per mmbtu ($16-19 per boe unless I've screwed up the maths)....which will trigger a big back-payment increment over what has been paid for production to date.
As at 31 Dec 2009 booked Viet reserves were 124mmboe. My split on that is CNV 24 oil + 8 gas, plus TGT 92 oil. Total 116mmbls + 8mmboe
For y/end Dec 2010 booked reserves I’d estimate an added 10 mmbbls for TGT making a total 126mmbbls + 8mmboe.
I'd think by year-end that the TGT reserves increase would be a bit bigger - because it would be driven by an increase in proved volumetics (obviously one would expect a further increase on production start-up)...maybe 20-30mn additional? Note from the last RNS that the TGT reservoir came in 10m high to even the revised prognosis with the TGT-H1-2P step-out well, which (I think) was targeting one of the largest sections of expected additional pay on the east side of fault block H1. Compare the blue line areas on slide 8 of the interims presentations (which represent the area used for the already-booked 2P) with the larger 2P and 3P areas based on the PSDM seismic......the volumetric expectations for which were exceeded..... I think it would be wrong to be over-cautious (though perhaps those who heard the AGM commentary on the slides may have a clearer view on this?).
There is also the question of whether your gas numbers (and I wouldn't argue with 45-50mn boe gross at CNV) are wet or dry gas.....and what prices are obtained for the condsensate being stripped out of the gas (and what proportion of the "gas" that condensate represents).
In sum, I'm very comfortable that the share price is well-underpinned without all the explo.....and, in many ways, that is all I need to know.
rgds
ee
