So what’s Soco Vietnam worth excluding TGD?

18th Oct '10 by davjo

181 comments 68044 reads

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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emptyend

4th Mar '11

A take-out price [could be] much in excess of our current target price of 400p.

I've highlighted a crucial admission from Evolution. They are only a recent convert to SIA - and may take a while (too long?) to get a grip on valuation. I'm still happy with my own expectations after the TGT news, FWIW, notwithstanding dj's caution. The timing issue resolves to whether there is any buyer out there (only ONE is needed!) who is prepared to pay "tomorrow's price today" - and it is my expectation that there is....hence the recent topping up. More particularly, I am not prepared to take the gamble that there isn't any such buyer, especially given the geopolitical backdrop!

ee.

repobear

Asian buyers are typically cautious and want as many possible uncertainities firmed up. I just can't see them putting best part of two billion pound on the table without having a good idea about likely recovery rates. I don't know where davjo got his information from but if it's true then there will be no deal, this side of Q4 2011, imv.

A couple of months of production should allow the Asians to move and thereafter it could be quite a scramble and I suspect a very nice price for Soco;-)

The lack of information coming out of Soco Towers as regards TGT is either a sign that a deal is almost upon us or that considerable uncertaintainties remain over recovery rates and reserves. I suspect it's the latter.

repo

loglorry

Thing is repo it could happen anytime really. I would say purely because from experience everything takes longer than expected it is likely to be towards the end of the year but I guess you never really know.

Being out of the stock at these levels seems foolish when a bid might just spring up at 450-500p. The risk at these levels also seems quite low compared to alternatives out there.

Soco sounds like a good stock to hold along with some more speculative stuff like GKP and VST for example. I doubt we'll double our money in short order but equally assets do underpin the price. It doesn't have the same explo upside as an EO or an SLG but there is M&A upside and potential reserves upgrades from TGT.

In short just a different animal really and horses for courses.

Log

nigelpm

Being out of the stock at these levels seems foolish when a bid might just spring up at 450-500p. The risk at these levels also seems quite low compared to alternatives out there.

Really hit the nail on the head there log.

It's completely nuts IMHO.

Hi log,

Being out of the stock at these levels seems foolish when a bid might just spring up at 450-500p. The risk at these levels also seems quite low compared to alternatives out there.

It might and Pompey might win the FA Cup again, but not in 2011, unfortunately.

If they can't nail down the recovery rates at this stage the buyers don't know what they're buying and the seller doesn't know what he is selling. A deal may still get done and in the price range you suggest, but history suggests Soco sell post production phase, davjo has heard whispers and everything with SIA takes longer than expected.

Noone is going to lose money from here if they hold their nerve and the upside looks 50% plus within a year. Don't get me wrong it's a cracking investment at these levels and offer good balance to a more risky exploration led portfolio.

If I get back in in several months I'll just lock the shares away until the deal is done. Current holders have to do the same I feel, but not kid themselves that the deal is 'imminent'. If it happens sooner it is a bonus.

repo

I think repo we are in agreement but I would say that if a potential bidder was serious they'd probably see a lot more data that we get in the various RNS's. As you say both sides to a potential deal will know a lot more by September and even more by the end of the year.

To be honest I am quite crap at timing the market so I don't see much point in selling out here and trying to make some more money elsewhere between now and the sale time. Any other investment would also need to pay out in time and perhaps that is a bit too stresseful. Look at Rhu and his investment in Vast over on Advfn. He has been itching to get into SLG for ages but his money has been tied up in VST.

One should not forget though that there is still risk staying long here so it is not all a one way bet. Political risk although small always exists. It is also possible that there is a reserves decrease or some operational problems.

I'd also like to say that my attitude may well change if the price runs up to 450p for example as the risk/return increases substantially. I'm not in the camp that thinks 600p is achievable and I'd take 500p happily.

Log

fuiseog

Repo,

About as likely as Ireland winning cricket -:)

davjo

davjo has heard whispers

Not really, just reverting back to RC‘s comment and layering in some new info.
http://www.stockopedia.com/content/meet-the-management-interview-with-roger-cagle-of-soco-international-plc-39617/
we’ve always given the market guidance that we think this field can be in the 4-500m barrel recoverable reserve range and we believe that the reinterpretation has moved us in that direction from what we’ve already booked. So, did it get us all the way there? No and even with drilling these development wells, that won’t get us all the way there either because what you’re going to need is a bit of production so you can ascertain the recovery factor………

I understand that recovery factors in the range of 40% to 55% have been found in similar sands at nearby Cuu Long fields. This is reckoned to be at the high end for lacustrine deposits though and presumably for this reason, Soco have apparently assumed something in the low 30s for now. The potential implications from “a bit of production” are obvious.

kenobi

5th Mar '11

good spot, interesting, It would certainly mirror the yemen sale, if they had some production data first.
Certainly Ed at the AGM after the yemen sale, said to me , and once we had production data, the buyer is more willing to accept estimates of recoverable oil. However, the big difference this time, is that they'd like to retire this time we think, so where as before it didn't make much difference if yemen was sold 6 months earlier or later, now it makes a big difference to the management,

so maybe, or maybe not is my view, helpful as ever,

K

Not sure retirement would force their hands early to be honest. I'm sure they can just take it fairly easy anyway now until tgt is online. It's not like they need a huge payout to go on a massive bender !

Why not just sit back and wait for production to strengthen their hand before they play their final round if cards ?

7th Mar '11

Why not just sit back and wait for production to strengthen their hand before they play their final round if cards ?

Other things being equal, one might easily take that view. But one certainly cannot assume that other things ARE equal - and in my opinion there are other reasons that an early deal may be considered - including the fact that it is currently a sellers market for oil assets whilst Mid-East tensions continue to fuel the oil price! Will that still be the case in 6 months time? Possibly - but nobody knows! Will someone on the list of potential buyers decide to bite the bullet and to pay a price today that would match SOCO's aspirations for the post-production value of VN? Again nobody knows....but, as I have recently tired of saying, it only takes ONE buyer. And nobody knows what is going on in the heads of the Koreans, the Japanese, the Chinese, the Indians and the many others who are charged with increasing their national energy security!

1st Jun '11

Just to keep stuff in one place, I was asked a question on ADVFN re TGT:

Haven't RNS statements on TGT drilling results been somewhat economical with numbers? I can't remember seeing any public guidance on potential TGT upgrades.
Is your >500mn just rose-tinted speculation? :)

And my response was:

You are right that there has been no guidance whatsoever (public or otherwise). However, the facts are that SOCO have always been of the view from the early days of discovery that there will be 500mn bbls recoverable from TGT - and they have since recently PSDM'd the seismic (showing a much larger area of closure and depth of structure, leading them to think the structural crests had been missed with the explo wells) and validated that seismic with development drilling (exceeding expectations in one or two cases). IMO this points to perhaps 600-700mn bbls potentially recoverable IF the recovery factors are towards the top end of those observed in other fields in the basin......and SOCO are making very much more conservative recovery estimates in their current assessments of 2P reserves. Accordingly, I don't think it impossible that the booked reserves could (for whomever owns them at the time ;-)) actually see an uplift based on 450-500mn bbls gross or so by year-end.....and with more to come once the phase 2 drilling validates the seismic in the southern blocks (by which time expected recovery factors should be much more accurately known).

They have kept their current internal views very much to themselves - and indeed have resisted the temptation to raise reserves ahead of production start-up. This is entirely sensible IMO, as it gives plenty of room for negotiating the exit terms....and that is one reason why I've thought it quite possible that a deal will be done before production start-up.

...just for the record.

1st Jul '11

Reuters article sourced from Vietnam

Crude oil and gas production is expected to start next August at a jacket of the Te Giac Trang field offshore Vietnam, which would nearly double the field output to 95,000 barrels per day (bpd), operators said.

Te Giac Trang (White Rhino) in block 16-1, operated by Hoang Long Joint Operating Co and where Soco International PLC owns 28.5 percent, will begin extracting around 55,000 bpd next month, Soco said in May.

On Wednesday Hoang Long JOC signed a $44 million deal with Petrovietnam Equipment Assembly & Metal Joint Stock Co, run by Petrovietnam's construction arm PVC , to build the topside of the H4 jacket, Petrovietnam statement released late on Thursday said.

Construction will run between July 4 and late May 2012 and H4 is slated to get its first flow of crude oil and gas around next August, the statement said.

FWIW - adds little, save for the cost of the H4 jacket topsides.

4th Jul '11

Vietsovpetro discovers oil near Bach Ho field
http://www.saigon-gpdaily.com.vn/National/2011/7/94083/
Vietsovpetro has found oil in Mioxen layer in the northeastern part of Bach Ho oilfield offshore southern Vietnam, said its Geological Deputy General Director Tran Hoi.

The oil flow of around 4,560 barrels a day was discovered at the depth of 3,377-3,396m in lot 09-1 which is located separatedly from Bach Ho oil field which is under production.
At present, Vietsovpetro is making an assessment for the new oil reserve and an exploitation scheme, he added.

Seems Upstream reckons the discovery is to the NW of Bach Ho
http://www.upstreamonline.com/live/article264297.ece

Whatever, it’s close to TGT. Noting the depths though, it strikes me as Oligocene rather than Miocene, which is interesting in that this horizon accounts for very little TGT reserves, yet was I think the original explo target. Who knows whether this latest discovery means anything at all for Soco but it sure can’t be seen as negative….especially the flow rate. Hopefully, it means Oligocene prospectivety has some upside during drilling and production of TGT ;-)

Note : observations are purely speculative!

5th Jul '11

If I recall correctly from the AGM, ES made the point that horizons below TGT had not been drilled. Maybe others better informed about the geology and drilling history could comment?

Just on the topic of Oligocene and Miocene reserves and distribution, it may be worth just looking back to the September 2007 interims presentation (pages 8&9). These have long been superceded but, at the time, the oligocene potential was firmly thought to be under the H1/H2 fault blocks and in the TGD appraisal area - with not much in the area of TGT-3X or TGT-4X.

And going back further (September 2006 interims) we can see on p7 the claim that TGT has 500mn bbls recoverable, of which 225mn had been booked. And from the same presentation it is clear that this claim was based on only the first three exploration wells on TGT (pre-dating TGT-4X). Page 8 in the same presentation gives an illustration of TGT at the time (which is interesting to compare with more recent illustrations)

And going back still further (December 2005 presentation), TGT was estimated at the time to have mean recoverables of 171mn bbls in the LBH 5.2 Miocene and 193mn bbls in the Oligocene C&D (see pages 14 & 15)....though of course even TGT-2X hadn't been drilled at that time (and it subsequently tested at 3,300bopd in the Oligocene C).

The key slide, though, in all the presentations is slide 8 in the 2010 interims presentation. This shows the distribution of the reserves estimates based on the 2006 time-migrated seismic in comparison to the distribution of the reserves based on the 2009 PSDM seismic. In sum, the 2P reserves area on fault block H1 and H2 is very slightly larger (+5-10%?)....but the 3P reserves area is roughly 50% greater than the 2P area. In the southern blocks, the 2P reserves area using the 2009 PSDM seismic appears to be way more than double the 2P reserves area based on the 2006 seismic....with a further increment of potential from the 3P estimates. (ps.....note that this 2P/3P increase is purely in relation to the area - which means it relates ONLY to OOIP numbers......any increase in the recovery factor from 30-32% up to 50% is a completely separate, and additional, matter!!!!)

Now....bearing in mind that (as noted above) the 500mn bbls figure emerged in September 2006 (and was therefore based on the 2006 seismic)....and the 2010 slide 8 suggests that the aggregate 2P figure for TGT based on 2009 seismic could be perhaps 20-50% bigger in area, there seems to me to be very considerable potential for a big reserves upgrade for TGT at some point.......

....the question, as ever, is exactly when? It is fairly clear that the full reserves potential cannot be properly assessed until the southern fault blocks have been drilled - but then one has to bear in mind that the deal to realise value in Vietnam is going to need to be presented as a win-win deal for both sides......and IMO that means that a deal will be done at a point when SOCO can announce a big reserves upgrade at TGT at the same time as doing a deal that looks extremely good in relation to current analyst estimates (and the current price of the shares), whilst at the same time leaving the buyer to finish off the development drilling for phase 2 and the southern fault blocks - and to be able to claim further reserves upgrades of their own.

All this seems to me to point to a deal being done this year (though, as ever, it is difficult to say exactly when)....and it also points to a big reserves upgrade.

I suspect that that is a reference to the fact that the deep Oligocene targets that are the subject of the TGD appraisal area are thought to extend northwards and to underlie the shallower TGT. It is certainly true that they haven't been drilled (and are unlikely to be unless they look likely to unlock the TGD fan potential).

Evening ee. Good thought provoking post :-)

It might also be instructive to look at this from a different angle i.e. booked reserves history, starting in 2005 when VN was first credited with 2Ps (in mmbbls) :-

2005 : 68 [CNV]
2006 : 100 [+TGT-1X-2X-3X-4X-(5X)]
2007 : 100
2008 : 125 [+TGT-(5X)-6X-7X]

So, two major revisions. First thing to note is that the 2006 figure for TGT of 68mm (based on gross 225mm) suggests a 36mm downward revision for CNV to 32mm, which seems about right to me. The 2008 figure reflects gross TGT of 300mm with same again for CNV.

A few points. Despite early analysis that the Oligocene held more exploitable resources than the Miocene, it hasn’t lived up to expectations what with only two meaningful results in the C sequence from the seven explo wells drilled and as good as nothing from the D sequence. It seems to me, judging from the timings of the presentations you quote, that the 500mm recoverable figure may have been put forward before they actually concluded that the Oligocene wasn’t going to perform as they thought, hence the 500mm may have been overstated?

It also occurs that since CNV came on production it hasn’t stabilised at the 20,000 bopd as scheduled, hence there is scope for a further downward revision at some point. That’s not to say it will happen but by the nature of the business and potentially fickle nature of basement, I think this is the main reason why they did not increase reserves at y/e 2010, subsequent to development drilling supporting the upgraded TGT PDSM analysis

From where I’m sitting :-

a) the original 500mm is questionable, effectively an early “throw away number” not since repeated in subsequent presentations.
b) CNV downgrade potential puts a brake on any TGT upside revision.
c) the Oligocene certainly contributes to 2P booked reserves. I don’t know by how much but because it has been such an elusive horizon, the reserves outcome could be up or it could be down. Bit of a toss of the coin result which may not come to light for some time down the road.
d) Yes, the PDSM offers good ‘proven’ OIP upside but essentially imo, the recovery factor at 30% to 55% is by far the biggest mover of reserves addition which can only be resolved by actual production.

My own feeling is that if all goes well over the next 12 months drilling and production, the very best one can hope for is about 150mm to 175mm VN bbls net to Soco, or 130mm to 150mm less the minority interest, which at $17.50 pb equates to 420p to 480p per share or at $20 pb is 480p to 550p per share.

Not forgetting these assumptions could prove horribly wrong, particularly if the recovery factor finishes up on the low side, let alone any other nasty!

6th Jul '11

good post dj - and thought provoking too.

I had a long reply in the works but have contrived to lose it, so I'll be briefer:

a) In 2008 I was told before the 6X and 7X wells were drilled that they were designed to test confidence in whether the management estimates of 500mn were justified or whether the range was more reasonably in the 300mn. If you look up the results of both those wells you will see that they were positive (producing over 22,000 bbls between them) and in both RNSs there was comment about the results having given further confidence re management estimates. Accordingly I conclude that in late 2008 it was still management's belief that the reserves were in the 500mn bbls region. This belief can't have been damaged by the subsequent 2009 PSDM reprocessing and its validation by the recent drilling programme.

b) re CNV I'd be pretty sure you are right with this comment: CNV downgrade potential puts a brake on any TGT upside revision. .....although I would think that in practice all it has done is reduce the upside from CNV re the (as yet unbooked) wet gas component that accounts for around one-third of the volumes at CNV.

c) There is no doubt that CNV has disappointed somewhat (though the jury is out on the remedial efforts). However, there is also no doubt whatsoever in my mind that TGT has continued to meet or exceed expectations....and that TGT is greatly more important in the context of a sale.

Accordingly I am sticking by my expectation that reserves at TGT will be pretty close to 600mn bbls when all is done and dusted (though whether we ever get to see such a figure announced pre-deal I very much doubt indeed......something in the 450-500mn area gross may be possible though?)

...ps...as further corroboration of the point I make above in a), look again at slide 8 from the 2010 interims presentation ....in particular, look at the blocks that were drilled by 6X and 7X !! The 2009 PSDM seismic indicates a very much larger area for 2P reserves on those blocks than the 2006 seismic would have done (and the 2006 seismic and later drilling would have been the basis for all the reserves bookings you quote up to 2008)

Accordingly I am sticking by my expectation that reserves at TGT will be pretty close to 600mn bbls

The drawback to that would be the ability to produce within the licence period, which effectively will be approximately 18 years. That translates as 90,000 bopd average throughout the whole 18 years. That's just not feasible imo. As things stand, the anticipated 100,000 bopd peak will be on a declining path 3 or 4 years out. No doubt they could expand the facilities somewhat but they'd probably need to get up between say 150,000 to 175,000 bopd??!! Yes, the 5 year licence extension period could come into play but I can't imagine any buyer paying much if anything upfront for barrels produced that far off because a) they'd have to be massively discounted b) there'd be no guarantee they'd actually get the extension and c) if they did get the extension, they might face stiffer fiscal terms to secure it.

Just saying ;-)

So what’s Soco Vietnam worth excluding TGD?

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Davjo

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