Valuation, sentiment, and SP direction

Wednesday, Jun 17 2009 by
19

Detailed discussion of Soco's assets should take place on other threads, but this thread is to discuss the latest valuations both by ourselves and analysts, sentiment (ie will the shares go nowhere because there's not much upcoming news) and likely moves in the share price in the next six months.  How should the shares be valued?  How reasonable is it that any drilling without a firm commitment further than several months away is ignored by the market?

I haven't seen many recent analysts' reports on Soco, but I have one from Cazenove with a core NAV of 1370p and no doubt considerable explo NAV on top of that.  I imagine that's approximately concensus, but maybe with crude rising again these concensus NAV figures will start to rise.  Has anyone any other recent broker estimates?

My view, as stated elsewhere, remains that in the absence of much to get the market excited the shares will wander aimlessly for the rest of 2009.  I've previously guessed that if crude were $65 at Christmas 09, then Soco's SP would be somewhere near £13 then, and I'm still very happy with that guess.  What does anyone else think?

Of course unexpected bids and other events may overtake this, but these sort of events may happen to any company, and perhaps Soco (where management seem unlikely to accept bids since they believe there is considerable value not recognised by the market) is one of the less likely companies to be affected by the unexpected.  The key new news for Soco might be (a) a bid (IMO unlikely), (b) some sort of presentation by management of the drilling data they claim to have that demonstrates a significant strike has been made at E, currently ignored by the mkt, or (c) possibly hitting oil off the Congo.

 

Moderation note: posts will only be deleted from this thread by the site admins or by agreement from at least three of sirlurkalot, emptyend, djpreston and doverbeach.  If three of this list agree to delete a post, the names of those three and the reason for deletion will be noted in a post on this thread so everything's completely transparent.

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


Do you like this Post?
Yes
No
29 thumbs up
10 thumbs down
Share this post with friends



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 »

LSE Price
61.5p
Change
0.8%
Mkt Cap (£m)
244.5
P/E (fwd)
21.4
Yield (fwd)
9.1



  Is LON:SIA fundamentally strong or weak? Find out More »


1317 Posts on this Thread show/hide all

emptyend 8th Mar '13 1078 of 1317
4

In reply to post #71463

It is a very interesting question as towhat the market price should be, given that the divis are coming from a reduction in the nav (oil in the ground).

The divis would be coming from a reduction in cash on the balance sheet. As we know, the general position re TGT is that SOCO would expect to be increasing 2P over the next year or so as recovery factors continue to get proved up for different parts of the reservoir.......so in the coming year or two it is reasonable to expect both NAV increases and profit/divi increases.

Beyond that, of course, there will be a point where reserves will be being depleted on a net basis - but, again, they would be turning a barrel of 2P (valued at c.$20 in the ground) into a barrel of production...which would be worth c.$50 post-tax out of the ground.......so it isn't quite the equation you suggest!

| Link | Share
kenobi 9th Mar '13 1079 of 1317
1

yes of course the divis are coming from cash, but the cash is coming from the 55k of oil per day being recovered.

all the other stuff you mention re increasing reserves is jam tomorrow that may or may not come to pass, and is info available to the market now. So is in the price as much as the market wants to value it. I didn't suggest it was a one to one oil/cash, but taking your figures, if every $50 reduces the value of the asset by say $20, and it's a finite resource, unlike say vodafone who's divis may vary over time but could be considered indefinite, how much of a premium should or would the market give to soco ? (or penalty I guess). Its complex as you suggest, on the one side, you have reducing asset, on the other, potential upside. surely 8% would be too high a yield and the price would correct to recognise this ? but to what level ? 8% at say 370 would be 29.6p, so to adjust to a 6% yield that would be 493. Sounds a bit optimistic to me, but we'll see.

K

| Link | Share
tournesol 11th Mar '13 1080 of 1317
7

Recoverable reserves are determined by how much oil there is in the ground to start off with (STOIIP) and what % of it can be recovered (R%).

Today's presentation states the best and worst case estimates for STOIIP as a consensus between both the external third party experts and from SIA's in-house people (slide 13).

On the next page it gives the best and worst case estimates for the recovery factor - these are given separatelyy for the 3rd party and the in-house view(slide 14)

In the table below I have simply combined both sets of numbers so as to clarify the range of figures that are on the table as far as reserves are concerned. I've ignored gas and just focussed on oil.

    low high  
STOIIP million bbls consensus 470 960  
recovery % 3rd party 28% 35%  
  SIA in-house 32% 50%  
recoverable reserves million bbls 3rd party 132 336  
  SIA in-house 150 480  

In other words opinions on likely recoverable reserves range from a low case 132-150 to a high case 336-480.

Each of the two sets of experts think that the best case they can see is between 150% and 200% of their own worst case.

Taking the worst worst case from the external experts (132) and the best best case from the in-house guys (480) there is a difference of 260%

In other words the in-house best case is almost four times as much as the external worst case.

It seems to me that this range of opinions is unlikely to be helpful in negotiating a deal with a prospective buyer with which both sides can feel happy. So that suggests to me that a deal will probably not occur until the range of opinions has been narrrowed. How long that will take I have no idea.

 

 

| Link | Share | 1 reply
emptyend 11th Mar '13 1081 of 1317
8

In reply to post #71518

In other words opinions on likely recoverable reserves range from a low case 132-150 to a high case 336-480.

Each of the two sets of experts think that the best case they can see is between 150% and 200% of their own worst case.

Taking the worst worst case from the external experts (132) and the best best case from the in-house guys (480) there is a difference of 260%

In other words the in-house best case is almost four times as much as the external worst case.

It seems to me that this range of opinions is unlikely to be helpful in negotiating a deal with a prospective buyer with which both sides can feel happy. So that suggests to me that a deal will probably not occur until the range of opinions has been narrrowed. How long that will take I have no idea.

Just three quite important points on this that will narrow the gap substantially and quickly (ie by mid-2013).

  1. There will be an upgraded full field simulation model by mid-year (per slide 14)
  2. The well on H5 is expected to spud in May (50-150mn STOOIP)
  3. The FPSO testing process is due to take place in the next month (per Ed Story interview quotes above)

 

Come mid-year, they could be in the position of having

  1. raised the STOOIP by 150mn bbls, if successful with H5
  2. raised the production capacity (or at least having solid plans to do so), following FPSO testing
  3. narrowed the range you refer to above, thanks to the revised full field simulation model.
  4. completed the CNV reserves assessment, following the CNV-7P well
  5. finalised the gas sales agreement re CNV

 

This in turn can be expected to lead swiftly on to:

  1. upgrading the 2P reserves numbers for Vietnam
  2. determining how much cash can be returned to shareholders via the B shares and on what ongoing basis

....and, IMO, if they were on the verge of going down the route of issuing B shares in order to monetise a large chunk of the cashflows in Vietnam then they would also be open to receiving offers for SOCO Vietnam at that point.

Accordingly it looks to me as if the remaining uncertainties have a decent chance of being satisfactorily resolved over the next 4-5 months and a bid in that timeframe also seems quite plausible. A range of estimates will certainly remain, of course - but that is always the case whilst fields remain in production. It is certain that the range is capable of being narrowed very significantly over the coming months, due to the factors above.

ee

| Link | Share
kenobi 12th Mar '13 1082 of 1317
3

http://preview.tinyurl.com/ajs8fz5

Chemsa increase holding by more than 1% to 8.71%

| Link | Share
emptyend 12th Mar '13 1083 of 1317
4

Big raise of Chemsa's stake just announced.

An additional 4.5mn shares......taking it up to nearly 29mn shares (8.71%).

Chances are they came from another "connected" holder - but, even so, I'd think quite significant.

Chemsa is the old Maugein family vehicle - which, inter alia, is advised by RdS.

 

| Link | Share
tournesol 14th Mar '13 1084 of 1317
4

I'm a little embarrassed to make this kind of trivial comment but.....

....am I alone in thinking there is a nice slow burn kind of thing materialising now with an almost daily 1% ish kind of gentle increase?

Looks like a get rich slowly kind of situation to me......

:~)

| Link | Share
TomKe 14th Mar '13 1085 of 1317
5

I think the 'game changer' is the commitment from the company to start paying Dividends. As I speculated in late December the low rating of SIA must be for a reason and one reason could have been that the market had concerns that the cash inflow would all be spent on exploration.

I think the company is trying to boost the current valuation hence the charm offence with the analysts and the promise to pay dividends. In theory it does not matter the stock market valuation of the assets you buy but for a quoted company if the takeover premium for the purchased assets is too large it could cause concern amongst its existing shareholders that the acquiring company has overpaid. It is in the interests of the company being acquired to reduce that premium.

I see the charm offensive by Management to improve the current valuation as being the rationale action of someone preparing an asset for sale. If they can maintain a Dividend of 40p per year then I am not sure I want them to sell it!. A secure oil backed retirement income would suit me.
TomKe

| Link | Share | 3 replies
malrees 14th Mar '13 1086 of 1317
2

In reply to post #71651

Since the announcement about dividend/B shares, I can't be alone in thinking Soco is now a very good share to accumulate in a pension fund. Potentially a very good annual return causing me to make it the largest percentage share in my portfolio by a margin.

| Link | Share
emptyend 14th Mar '13 1087 of 1317
7

In reply to post #71651

If they can maintain a Dividend of 40p per year then I am not sure I want them to sell it!. A secure oil backed retirement income would suit me.

Yes -  I can't argue with that. And as one whose full pension doesn't kick in for a few years yet, I'd have to say that it would suit me too.

More importantly, it would also be likely to suit the excecutive management, who are a few years down the track relative to me.

Whilst I continue to think a sale is probable, I've never lost a moment's sleep over continuing to hold the shares. My pro-rata share of the profits at 2013 levels is more than I ever earned from full-time work....and, as long as they maintain capital discipline (and I see every sign that this is indeed being strictly maintained) then those earnings will come back to shareholders in one way or another in the fullness of time.

ee

| Link | Share
kenobi 15th Mar '13 1088 of 1317
1

In reply to post #71651

I see the charm offensive by Management to improve the current valuation as being the rationale action of someone preparing an asset for sale. If they can maintain a Dividend of 40p per year then I am not sure I want them to sell it!. A secure oil backed retirement income would suit me.

Could be,  or a company wanting to have the price of the company higher for another reason,  perhaps because they are considering some corporate activity involving SOCO paper,  and the higher the value of the paper the better.   Or maybe some of them are thinking about retirement or semi retirement and they might want to cash out some of their shares leaving a good chunk to pay themselves divi's in the future ?

I wonder if they are still considering floating off the vietnamese unit as a route to monetisation ?  this might be another reason why they would want the share price to be higher too, (because if soco is priced at £4 and floats assets at a value of 6 or 7 pounds their might be more demand for soco and less for soco vietman production,  for example), 

all speculation of course,   The only downside of the investment as a pension is that when there's a recession or oil prices fall then divis would naturally fall too.   The other side of the coin is that over time you might expect the oil price to rise,  so until production starts to fall,  the investment is index linked.   Of course when the licences run out in 20 years or so,  that part of the investment (ie excluding africa and any other bits),  falls to zero value,  but as ee suggested,  you get more out, double or more by producing the oil than selling it to the next man.  Of course you need to balance that against what else you would do with the money over the same time period, 

I hope that the unknowns start to be reduced over the next few months, as we are hoping, 

K

| Link | Share | 1 reply
extrader 15th Mar '13 1089 of 1317

Hi kenobi,

Interesting set of scenarios opening up !

Not sure that I'd want a chunk of pension monies over the next 15/20 years subject to these specific operational/commodity price/currency, interest rate and political risks (to name but a few !) though.....

ATB

| Link | Share
TomKe 15th Mar '13 1090 of 1317
2

In reply to post #71667

Hi kenobi,
Points well made but there is risk in everything! My expectation is that the oil market will tighten and its price increase. I subscribe to the 'Pealk Oil' view put forward by the late Matt Simmons and so I would hold in the expectation of higher rather than lower oil prices.

http://en.wikipedia.org/wiki/Matthew_Simmons

If I am being sensible then I should prefer the sale option as I am over invested (gambling!) in Soco and I should diversify or di-worsify as my previous attempts at diverification should more correctly be called. I think it unlikely that the company will turn into a 10/15 year income stream but I am quite relaxed holding the shares on that basis.

Tom

| Link | Share | 1 reply
adam 15th Mar '13 1091 of 1317
2

A tithe from the Mr & Mrs Cagle.

| Link | Share
kenobi 15th Mar '13 1092 of 1317

In reply to post #71673

Tom,

I think we're on the same page, I too believe in peak oil, however there are changes coming and here, that might effect the peak, and it might not be the predictable bell curve that hubert or simmons predicted. I say this because I think unconventional oil might turn out to be a game changer that moves peak oil significantly. And who's to say there won't be other advances regarding getting oil or liquids or gases in other ways ? So where I once thought that we might get a crunch, well by now, I'm thinking it's moved some time into the future, and that perhaps if there is an economic crash or world recession, (which is inevitable at some point ?), we might well see $50-$60 dollar oil for a while, at that point the divis wouldn't look so good, we have yet to see how the world would tollerate say $200 oil ? at the moment I guess it would cause a crash, if we are all driving hybrids and electric cars in the future perhaps we'll be less susceptible to oil price changes. And at that point the divi's would be looking very good indeed. I like you am over invested in soco, so I would be looking to reduce at some point in the futures if it turns into soley a income stock. I am wary now, as to whether the management will be able to get enough data to convince a potential buyer of their recovery estimates. But I speak from relative ignorance, so perhaps they will. I would be cautious of betting on that. Having said that, if they deliver on production increases via the fpso, and H5 does the sporting thing and turns out to be a big find, (not to mention some luck down the road from the gorillas in virunga, then with hindsight this might look like an excellent investment at this level.

In summary, I agree there is risk in everything, however taking cash now at a buy out level means you can either stay in cash or decide to re invest however you choose. Most people here were no planning a 20 year payback period, although that is of course one of the options !

cheers K

| Link | Share
adam 26th Mar '13 1094 of 1317
1

 

Looking at the time the recent price decline started, it was March 20th.

This was the date the latest South China Sea incident occured


http://uk.reuters.com/article/2013/03/26/uk-vietnam-china-idUKBRE92P0A520130326

A statement posted on the Vietnamese government's website said the trawler was chased away and came under attack from Chinese ships near the Paracel islands on March 20, calling the incident a breach of international maritime law.

Vietnam's state-controlled newspapers showed photographs on Tuesday of what they said were the charred remains of the ship's cabin.

"This is a very serious case, violating Vietnam's sovereignty," the Foreign Ministry said in the statement posted late on Monday.

| Link | Share | 1 reply
emptyend 26th Mar '13 1095 of 1317
5

In reply to post #71963

Looking at the time the recent price decline started, it was March 20th.

This was the date the latest South China Sea incident occured........near the Paracel islands

Complete coincidence.

The Paracel Islands are well-known to be a highly-disputed area and are well over 300 miles from any operations. See the very clear slide 7 in SOCO's results presentation for a map.

| Link | Share
adam 27th Mar '13 1096 of 1317
1

Vietnam is in dispute with China, the fact that the disputed zone is a modest distance from Soco operations is tangential to whether it has a bearing on the risk premium of Soco equity. All Vietnamese assets will be affected by the rising risk premium of the possibility of a military conflict with a super power. Indeed the whole region.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9950791/The-dangerous-drift-towards-world-war-in-Asia.html

| Link | Share | 1 reply
emptyend 27th Mar '13 1097 of 1317
8

In reply to post #71997

There is no substantive difference between the situation now and the situation at any poinin the last 5-10 years. Popping up every time there is a skirmish or an article that has an eye-catching headline really doesn't change the fact that the situaton has rumbled on for decades and is quite likely to rumble on for several more yet. Or alternatively, the latest skirmishes may actually prompt an interest in settling the issue once and for all.

Whatever the outcome, it won't have a bearing on SOCO's assets (because it affects other areas in Asia) and it won't affect the price of oil lifted from the fields (other than perhaps positively).

And, by the way, the whole focus of the article you link to is actually on China's dispute with Japan - not its claims in the South China Sea which are disputed by half a dozen nations!

| Link | Share

Please subscribe to submit a comment



 Are LON:SIA's fundamentals sound as an investment? Find out More »





Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis