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…
In trying to anticipate any imminent TGT reserves upgrade, I’ve been running some numbers to see if it’s possible to gauge what this might amount to by considering the production profile as envisaged at this point in time. AIUI, the plan is roughly to produce 55k bopd ramping up to c.97.5k bopd when Phase 2 kicks in after 2 or 3 years. As we all know, once production peaks, decline sets in. This typically happens for this type of development after 6-7 years. Taking all that on board and projecting production through the life of the development licence, I get recoverable reserves resulting from different decline rates as follows :-
10% : 380m
12.5% : 340m
15% : 300m
Does this cover the range of possible outcomes? I don’t know. What I do know is that CERA’s recent study of a 1000 oil fields noted that UK fields declined well in advance of 10% on an individual basis and Norway’s giant fields typically 13% with other subclasses declining equally fast or even faster. So how may TGT compare with North Sea/Norway? Again I don’t know, other than to note that TGT is a conventional sandstone reservoir set in a relatively mature basin, so I imagine it shouldn’t have markedly different characteristics in respect of its production profile…unless some more knowledgeable person knows different?
So what does this tell us? For me, it fits my cautionary upgrade stance stated in earlier posts. It also emphasises the wide range of uncertainty from a buyers’ perspective, which won’t be resolved until a number of years production history is in the bag. Yes, things like enhanced recovery may lift production in future years but that ain’t going to be evident in any near term sale price of the asset. In my view, if Soco sell in the near future it’ll be based within the reserve range noted above, probably towards the lower end, equating to around 410p/sh at a guess. If they don’t fancy that, I can see them holding out for a year or two until they can get what they want.
I’d be delighted to hear opposing arguments ;-)
