2012 Final results

Megusta on ADVFN highlights these comments:

http://uk.reuters.com/article/2013/03/11/uk-soco-idUKBRE92A08820130311

"The payout, which he forecast would come in summer, will likely take the shape of a scheme of arrangement with B shares, giving investors the option of taking it as a dividend or a capital return"

And....

"Soco and its partners, Vietnam's state oil group Petrovietnam and Thailand's state-run PTT Exploration and Production PTTE.BK, are planning tests on the field in the coming month which could see oil output and thus profitability rise by a third this year, said Story."

And....from here

"Soco plans to test production at the Te Giac Trang fields at more than 70,000 barrels of oil a day, said Chief Executive Officer Ed Story. Now, its floating, production, storage and offloading vessel has a 55,000 barrel-a-day designed capacity.
“We have another, maybe, 15,000 barrels a day of production that is limited by that capacity in the vessel,” Story said in a phone interview. “In the course of doing this test, we will determine what the limitations are.”

....the first of those quotes explains why they aren't rushing to pay out small amounts now!

In reply to emptyend, post #24

I would add that the last of those links also says:

....is seeking to boost pumping capacity at its fields off Vietnam by about 27 percent, allowing it to pay an annual dividend to shareholders from this year.

and a fuller quote from the first link is:

.....planning tests on the field in the coming month which could see oil output and thus profitability rise by a third this year, said Story.

"You saw the profitability in 2012, if we could increase that by one-third, it would certainly impact the distribution to shareholders," Story said.

The payout, which he forecast would come in summer, will likely take the shape of a scheme of arrangement with B shares, giving investors the option of taking it as a dividend or a capital return.

I'm wondering whether the B shares might actually take a similar form to the old LASMO Oil Production Stock, which basically paid an income that depended on the revenue. I wouldn't mind something in my pension fund that paid half the net post-tax cashflow from the Vietnam assets......  ;-)

Note also that this "B shares" plan seems pretty firmly slated for the summer!

"“We have another, maybe, 15,000 barrels a day of production that is limited by that capacity in the vessel,” Story said in a phone interview. “In the course of doing this test, we will determine what the limitations are.” "

You will recall phase 1 was meant to be 55k/day and phase 2 was 95k/day productive capacity.

Has that now dropped to 75 best case (60+15)?

In reply to jseth123, post #26

You will recall phase 1 was meant to be 55k/day and phase 2 was 95k/day productive capacity.

Has that now dropped to 75 best case (60+15)?

Good question. Could be read two ways....not clear whether he is talking about overall production capacity or just the  potential to raise the FPSO production to c.70,000 bopd (55+15).

We should know pretty soon, if indeed they are able to conduct these tests "in the coming month" as indicated.

In reply to jseth123, post #26

You will recall phase 1 was meant to be 55k/day and phase 2 was 95k/day productive capacity.

Has that now dropped to 75 best case (60+15)?

That's certainly a possible interpretation. However, don't forget that drilling is ongoing - currently 16 wells producing, and the current platforms have capacity for over 32, so limitations based on other than the FPSO capacity are an upwardly moving target.

In reply to emptyend, post #25

I'm wondering whether the B shares might actually take a similar form to the old LASMO Oil Production Stock, which basically paid an income that depended on the revenue. I wouldn't mind something in my pension fund that paid half the net post-tax cashflow from the Vietnam assets......  ;-)

So....lets just speculate along that line for a minute.

Suppose that SOCO might want to retain $200mn pa in "the exploration company" (based on the $100-165mn capex budgets of recent years, plus a fairly generous contingency). How much might be left to be distributed to holders of the B Shares?

Post-tax operating cashflow for 2012 was $335mn. Suppose (per Ed Story's comments) production, profitability and net post-tax cashflow can be increased by one third (say to $450mn pa, after allowing for the difference between H1 and H2 in 2012). Then keep $200mn back to fund the explo company and pay out the other $250mn pa to holders of the new B shares.

That would suggest that the B shares (which would have a nominal capital value) might pay an income of around 50p per share per year and still leave shareholders (holding the A shares) with a stake in a self-funded exploration company.

I wouldn't mind that approach - and I might even continue to hold a big chunk of the B shares as a pension supplement. Anyone wanting to monetise their B shares (or A shares, of course) could sell them in the market.

In reply to emptyend, post #29

...lets just speculate along that line for a minute.

Suppose that SOCO might want to retain $200mn pa in "the exploration company" (based on the $100-165mn capex budgets of recent years, plus a fairly generous contingency). How much might be left to be distributed to holders of the B Shares?

Post-tax operating cashflow for 2012 was $335mn. Suppose (per Ed Story's comments) production, profitability and net post-tax cashflow can be increased by one third (say to $450mn pa, after allowing for the difference between H1 and H2 in 2012). Then keep $200mn back to fund the explo company and pay out the other $250mn pa to holders of the new B shares.

That would suggest that the B shares (which would have a nominal capital value) might pay an income of around 50p per share per year

It seems my thoughts here are pretty close to the mark. This is what the RBC analyst had to say in a note circulated after the analysts' meeting:

Annual payment to exceed 50% of free cash flow

 

Capital distribution: SOCO’s plan to return cash to shareholders from H2/13 is a ‘commitment’, and the 'tax efficient' payment is intended to return over 50% of free cash flow to shareholders.

Variables: The level of pay-out depends upon a number of variables, including: spending in 2013 – management’s budget of $165m appears to be a stretch target and includes new ventures; production from TGT – a flow test in March could help unlock processing capacity totalling 70,000b/d, leaving plenty of ullage for Talisman’s (15,000b/d) third-party volumes; TGT H5 result – a successful appraisal well would lead to further investment in the TGT field through 2014; the oil price – SOCO does not currently hedge its oil sales; and the draw down of cash-in-hand, of $320m or $0.96/share.

Timing: Clarity on the above variables could come this summer and we expect a decision soon after the company’s mid-June AGM.

Guidance: We forecast that Soco can generate $330m of post-tax cash flow at current plateau production levels and realisations; and, assuming annual spending of $150m, we calculate that the company could pay an annual ‘capital distribution’ of over $0.30/share (20p), a yield of over 5%.

Outlook: With investors focusing increasingly on strong balance sheets, and capital discipline, SOCO should find an audience, and management is marketing extensively through London this week.

Of course the analyst's numbers don't include any production uplift - and he is still looking at free cash flow of $180mn being distributable. So (ballpark) we certainly seem to be looking at $150-250mn pa. being distributable - and 20-50p pa being passed back to shareholders via the B shares. Exact numbers will depend on the results of the drilling and production testing in the coming months, and on the outcomes for capex budgets and contingencies, but I think that 20-50p should cover the outcome comfortably.

In reply to jseth123, post #26

>> Has that now dropped to 75 best case (60+15)?

I don't think the 95k was ever slated to go through the fpso, I recall for many years now, they've suggested that there might be a bach ho tie in, or some other form of getting this production up.

but we also need to consider that contractually talisman is allowed to use upto 15k of the fpso capacity, so when their production starts up, even if we can get to 75k, (which is the upside ), then only 60k of that will be our capacity.

The company is going to do this fpso optimisation and H5 drilling before committing to a solution, so they know how much extra capacity is needed before embarking on a solution. This doesn't seem so far away now, H5 drilled in may, although not sure if that will give us enough info on it's own or if there will need to be more development drilling.

My fear is that tgt stage 1 isn't capable of producing 55k, you will remember that it wasn't until stage 2 came on line that we got to 55k, and that stages 1 and 2 are not capable of producing 95k either.

Perhaps it is, perhaps it isn't, I've not seen any evidence that it is, other than statements from the management, and to be fair, they only had test results to suggest this.

The best result will of course be a gangbusting H5 result, which makes a pipeline to Bach Ho a no brainer, and then fpso constraints can be removed as an issue.

K

In reply to kenobi, post #31

I don't think the 95k was ever slated to go through the fpso, I recall for many years now, they've suggested that there might be a bach ho tie in, or some other form of getting this production up.....

....My fear is that tgt stage 1 isn't capable of producing 55k, you will remember that it wasn't until stage 2 came on line that we got to 55k, and that stages 1 and 2 are not capable of producing 95k either.

Perhaps it is, perhaps it isn't, I've not seen any evidence that it is

FWIW I've already enquired on these points and will report any clarification obtained. The FPSO was only ever slated for 55k - and the question then became how they would produce the additional capacity generated by H4 start-up. It remains unclear how big the capacity constraint actually is - and jseth123's fundamental question above remains very pertinent.........if field capacity really remains at 95k bopd and they can agree a way to produce at that level, then that would materially impact valuations.

In reply to emptyend, post #32

OK.....clarifying:

The 15k reference is only to the FPSO capacity.....so, if debottlenecked, the thinking is that FPSO capacity could be raised to 70-75,000 bopd. Above that, TGT has "substantial excess capacity" (as we'd always thought)......so, once the FPSO is properly tested, they can make a properly-informed assessment of whether other options (such as additional FPSOs or producing via Bach Ho) are cost-effective.  IMO it is premature (given the H5 plan) to try to figure out the actual total production capacity of TGT - but the important point here is that there might be significant production upside over and above a 15k increase.....

Also, the point about the reservoir simulation model is key for the independent auditors. The present model is relatively clunky (my word) and the aim is to get something more sophisticated, reflecting the interactions between reservoirs (and connectivity, I assume) - and that could materially impact OOIP and recovery estimates (positively, I'm assuming!).

Results statement revisited......

Chatting with another shareholder earlier today, I reminded myself that frequently investors miss important words and nuances in RNSs like today's.....so I attempt below to pick out a few pieces and offer an indication [ ] of why I think they might be significant:

Cash, cash equivalents and liquid investments at 31 December 2012 were $258.5 million
(8 March 2013: $320 million) ........[increasing at nearly $1m per day].......

Consolidated the Group's interests in South East Asia portfolio with the $95 million acquisition of the outstanding 20% interest in SOCO Vietnam Ltd.......[not the "Vietnam portfolio", note - which implies other countries in the region are to be added?]........

Sustained capacity test on TGT FPSO pending.......[crucial to potential near-term production increase and essential for medium term production capacity planning post H5]......

The TGT field is currently producing from two 16-slot platforms (some of the slots are designed to handle two wells) with 16 producing wells.........[ie there is room to at least double the number of wells across these platforms - again this has implications for production capacity planning, given that there is already substantial excess capacity at TGT that cannot be produced across the FPSO, even if it is debottlenecked to 75k]

SOCO sought and received independent confirmation of the potential of this field [TGT]. At the same time we aggregated further interests in current projects that we believe have significant further potential.....[ie TGT and Block V DRC]......

Connectivity and reserves assessments:

During the year, the Company retained RPS Energy Consultants Limited (RPS), a professional consultancy specialising in petroleum reservoir evaluation and economic analysis, to begin an independent assessment of its Vietnam assets. With limited production history from the H4-WHP and only the TGT development activities planned through 2013 considered, RPS estimates TGT's Stock Tank Oil Initially In Place to range from 466 to 958 million barrels of oil (MMBBLs) with recovery factors ranging from 28% to 35%. Additional Prospective Resources of 53 to 152 MMBBLS are attributed, in particular in the undrilled southern-most fault block, H5, which will be drilled as a step-out appraisal well in the first half of 2013. Whilst this independent view confirms upside potential in the TGT field, SOCO believes that additional drilling and longer term production will continue to de-risk the field and impact positively on both the total number of reserves and recovery factors. We believe we can achieve recovery factors of 45-50%, as has already been demonstrated in several producing intervals and in line with similar producing horizons in other producing fields within the same basin.............[the RPS work continues to be a "work in progress" - and the revised/upgraded " reservoir simulation model", due in the summer, is likely to be pivotal , leading to further revisions to estimates of OOIP and recovery factors. IMO this may be where the north-south connectivity found in 2012 eventually comes into play!]........

Based on the evaluation of the results of the reservoir pressures from the 2012 drilling programme, depletion has been identified in the upper part of the Miocene reservoir sands. This indicates lateral communication in a north-south direction, complimenting the lateral communication identified from well testing, in the east-west direction. Although still early in the field life, this lateral communication is a positive indication that will allow the operator to more accurately predict sweep through the individual reservoir sands and design reservoir management plans that will target high recovery efficiencies.......[the fact that this arises from the 2012 drilling programme strongly suggests that this north-south communication was found when they started to put the H4-WHP wells onstream. Does this imply communication in some of the more productive reservoirs between the H1-WHP and H4-WHP wells?? If so what are the implications for OOIP and reserves? Note carefully that the current RPS assessment is based on a reservoir model that treats each productive horizon as if it were a discrete entity, unconnected to any other reservoir!!]

.....the evaluation was limited to the plans contained in the approved Full Development Plan (FDP), which was originally submitted in 2010 and assumes both a lower STOIIP than currently calculated and fewer wells than are planned to be drilled over the next three to five years. The JOC is in the process of updating the FDP for the results of the wells and performance to date.....[in other words, RPS's analysis hasn't included all the latest STOIIP increases]

......The independent assessment will continue, factoring in new data from the additional wells in 2013 and from the gas sales agreement that is close to finalisation.....[ie the gas sales agreement will have an impact on reserves treatment, presumably because it will allow additional liquids to be booked. The scale of this was previously estimated as an additional 2,000 bopd gross liquids at CNV - so 500 bopd net]......

.....(at CNV) ....traditional reservoir properties and STOIIP calculations are not straightforward and a further well will be required to allow assessment of the revised full reserve potential of this field..... [if that well should happen to fail, then I think a write-down of CNV reserves is likely, notwithstanding the gas sales impact]

Note the completely new statement on project criteria:

The essence of our strategy is to identify under-exploited opportunities in hydrocarbon prone regions. That means that we will not typically enter new regions or open up new, unproven geological areas. Equally, it means a cautious approach to popularised but untested regions with significant commercial risk. Moreover, we avoid the commercial risk of projects that lock in capital for overly long periods of time. Whilst oil is SOCO's main focus, the Company would not avoid an opportunity where gas could be commercialised locally.

Finally, we seek opportunities that offer materiality to the Company. The benchmark for entry into a new country is a project that has multiple play types, but the primary target should have the potential of adding 50 million barrels net to the Company's interest.

[note the special mention of gas]

A return to shareholders is now firmly planned, with talk in interviews of an issue of B shares in the summer:

the Board expects to recommend a sustainable return of capital to shareholders during 2013, the level of which will be determined pending Hoang Long and Hoan Vu Joint Operating Companies' (HLHVJOC) approvals of a 2013 Work Programme and Budget for CNV and TGT and incorporating results of the upcoming capacity test of the floating production, storage and offloading vessel (FPSO)........ [analysts have clearly been guided to expect a return greaterthan 50% of free cash flow (see RBC note). I would argue that a 20% contingency above planned capex should give adequate headroom so, given the numbers in today's presentation, I think the out-turn return might be closer to 80% of free cash flow. If the FPSO test shows that 75,000bopd is feasible across the FPSO, then I could see a return of c.$250mn being made in Q3 - roughly 50p per share - with similar amounts following annually]

Regarding Block V in DRC:

Preparations are ongoing for the aerial survey, which will be carried out from our logistics base in Uganda and will involve a helicopter flying over Lake Edward and the surrounding lowland savannah area. The security status is being assessed on a continual basis and we will only proceed when the assessment is that it is safe to do so.  [in the presentation it is suggested that they expect to do this survey in May or June, now that the security situation seems to be easing]

Re Cabinda:

SOCO announced that it had entered into a conditional agreement (the Disposal) with Quill Trading Corporation (Quill) wherein the Group will sell its 80% majority interest in SOCO Cabinda Limited (SOCO Cabinda) to Quill, the holder of the remaining 20% interest. .....Quill has paid a non-refundable deposit to the Company for the option to acquire SOCO's entire shareholding in SOCO Cabinda. The Option expiry has been extended and the final terms for closing are under negotiation...... [the presentation notes that closing of this (two-stage) deal is expected by the end of March. The assets are in the books at around $32mn - so potentially another addition to the cash pile is in prospect.]

Key developments in Vietnam that will help establish OOIP and reserves:

we will continue appraising the TGT field, with the most significant undrilled fault block, the southern-most H5 fault block, to be drilled as soon as the winter monsoon season ends in Vietnam, likely at the beginning of the second quarter. With the outcome of that well and significantly more production data from the field, we should be able to further progress our assessment of the potential of the field. ......[rig is firm but timing indicated only as April/May spud at present]

Also in Vietnam, we expect to drill an additional production well on CNV, which will allow us to access the thus far undrilled south-western corner of the field. The outcome of this well, with some production history, should enable us to update the reserves position in the field. ....[crucial well for CNV reserves - but the reserves impact won't be immediate....maybe year-end?]

New ventures:

We seek to build shareholder value first and foremost through the portfolio. We expect to add multiple  new ventures to our portfolio in 2013, including at least one more high profile exploration project in an area where we already have a footprint.........[I read this as indicating probably two new projects in Asia, including one in Vietnam (see presentation); there is £36mn budgetted capex for 2013 re new ventures].......

the Company has pursued new projects in regions where SOCO already has a presence and continues to evaluate other projects in new areas of interest. SOCO's primary focus has been on oil projects in hydrocarbon prone regions that can be commercialised within reasonable time frames to enhance its asset portfolio......[remember the gas reference above!]

I think the next 3-6 months could be really quite interesting.......

ee

FT report

http://www.ft.com/cms/s/0/6e95c368-8a61-11e2-bf79-00144feabdc0.html

A successful test would pave the way for Soco to begin paying a dividend

[To start paying a dividend] we’re looking to have a level of free cash flow that is sustainable into the future. The crucial part of that is the test on the [FPSO] vessel and how it performs,”

Production has increased rapidly since it begun in July, averaging 42,126 bpd overall in 2012. That translated to 12,618 bpd for Soco. But Mr Story said the company was targeting 16,000 bpd of equity production before paying dividends.

 

Really?

From Bloomberg....

http://www.businessweek.com/news/2013-03-11/soco-plans-to-expand-vietnam-field-output-27-percent-allowing-dividend

“We have another, maybe, 15,000 barrels a day of production that is limited by that capacity in the vessel,” Story said in a phone interview. “In the course of doing this test, we will determine what the limitations are.”

“We are looking to do an annual distribution going forward depending on the rates of production and cash generated,” he said. “There will be a distribution no matter what.”

Also the FT report states

 

That would require overall output of just over 55,000 bpd from the field operated by Soco, although additional capacity is needed for Talisman Energy, which has the right to produce up to 15,000 bpd from an adjacent field through Soco’s FPSO.

 

Again. Really?

I thought Talisman now have their own facilty?

http://www.talisman-energy.com/operations/asia-pacific/vietnam.html

In December 2011, Talisman sanctioned the HST/HSD development project in Block 15-2/01. The development, which will be tied into the adjacent Block 16-1 facilities operated by Hoang Long JOC to the south of Block 15-2/01, is progressing on schedule and on budget, with two jackets now installed and the drilling rig on location at HST

Did I miss something?

Needless to say, but I am going to say it any way!

I am very pleased with all the news and constructive comment over the last 2 days.

MD

In reply to emptyend, post #34

[analysts have clearly been guided to expect a return greaterthan 50% of free cash flow (see RBC note). I would argue that a 20% contingency above planned capex should give adequate headroom so, given the numbers in today's presentation, I think the out-turn return might be closer to 80% of free cash flow. If the FPSO test shows that 75,000bopd is feasible across the FPSO, then I could see a return of c.$250mn being made in Q3 - roughly 50p per share - with similar amounts following annually]

On reflection overnight this might be a bit toppy, mainly because TGT capacity will need to be ceded in the summer to Talisman, whether or not the FPSO test successfully demonstrates that 70,000+bopd can be handled.

In the bigger picture, it may not matter much whether the FPSO test succeeds or not, because a lower capacity would just raise the likelihood that other plans would be made to raise production (especially if the H5 well succeeds). Production via Bach Ho or an additional FPSO remain on the table. And, since the FPSO is on an intital 7 year lease, hiring a second FPSO that would allow production to run at (say) 90-100,000 bopd for 5 years (or more) may be an attractive option.

However, it will all take time to sort out, so there may be some mid-year constriction on 2013 production - and decisions will need to be taken first on the way forward before they decide on the level of payout that would be sustainable. So I'd say 40p per share may be closer to the mark for 2013.

ee

In reply to adam, post #35

The Talisman call on capacity (which will be quite short-lived) has been known about for over a year. They paid for part of the FPSO.

The FT is (yet again!) wrong that to state that a successful test is needed to make a payout. The results of the test will be important in deciding the size of the payout - the capacity increase would be worth something like $80mn post-tax to SOCO. But a payout will occur in any case.

DJ Soco International PLC Director/PDMR Shareholding

RNS Number : 7738Z

Soco International PLC

12 March 2013

SOCO International plc

("SOCO" or the "Company")

Notification of Transactions of Directors/Persons Discharging

Managerial Responsibility and Connected Persons

The Company announces that on 11 March 2013, Mr Robert Cathery, a Non-Executive Director of the Company, became interested in a further 50,000 SOCO International plc ordinary shares of GBP0.05 each ("Shares").

The Shares were purchased in the open market at an average price of GBP 3.83672 per Share by The Cathery Family Trust, a connected person to Mr Cathery.

Following this transaction, which represents 0.02% of the issued share capital of the Company, Mr Cathery is interested in 450,000 Shares, representing 0.14% of the issued share capital of the Company.

Contact:

Carol Fan

SOCO International plc

Tel 020 7747 2000

This information is provided by RNS

The company news service from the London Stock Exchange

END

In reply to emptyend, post #29

>>I wouldn't mind that approach - and I might even continue to hold a big chunk of the B shares as a pension supplement. Anyone wanting to monetise their B shares (or A shares, of course) could sell them in the market.

Not sure I understand how this would work, if the b shares got the divis, but the a shares are for the company, how could the market value the shares , when you consider that the company might cut off the divis due to the sale of vietnam at any time ? would the b shares effectively represent vietnam assets and cashflow ? unless they find something in africa, the rest might be valued at cash or less.

K

In reply to adam, post #35

I thought Talisman now have their own facilty?
http://www.talisman-energy.com/operations/asia-pacific/vietnam.html
In December 2011, Talisman sanctioned the HST/HSD development project in Block 15-2/01. The development, which will be tied into the adjacent Block 16-1 facilities operated by Hoang Long JOC

block 16-1 is tgt,  so the above is saying that they are going to tie into our fpso,  not their own facility,

K

>> The Talisman call on capacity (which will be quite short-lived) has been known about for over a year. They paid for part of the FPSO

Thanks for this info ee, any idea what is expected re the talisman capacity and how long for ?

I assume this will add a level of complexity too, with tgt being able to produce some of this capacity when talisman is not producing so highly and scaling back other times. I guess they'll sell the oil jointly somehow, and just distribute the cash dependent on where the oil came from.

I guess the issue is when can the oil that isn't produced due to lack of capacity be produced ?

Assuming they just live with the fpso then the answer is when peak capacity would have fallen below max capacity, were it not for the untapped oil. Which might be a few years away. or another way to look at it might be that it pushes back the need for additional drilling to increase capacity.

Of course if we assume that an additional method to produce with be found, either another fpso or some sort of tie in to bach ho, (I can't even write this without feeling a tap on the shoulder from davjo saying, don't take for granted that this option is practically possible !). Then the answer is that it is when this extra capicty is bought on line, and depending on how quickly it can be produced then, that period of time. either way it moves the cashflow years down the line line I would guess. Of course oil prices may be higher then and it might be a blessing in disguise.

No point sweating this point too much until we know a bit more about both the capacity we can get the fpso to, and the amount of oil/ productive capacity from tgt including whatever we find at h5.

I think it is fair to assume that there might be some issues with getting our partners to spend money to increase capacity whichever way this goes, although PV might be keen to utilise the bach ho facilities if they are running under capacity, (??)

H5 must surely be the next big issue,

K

In reply to emptyend, post #33

The 15k reference is only to the FPSO capacity.....so, if debottlenecked, the thinking is that FPSO capacity could be raised to 70-75,000 bopd. Above that, TGT has "substantial excess capacity" (as we'd always thought)..

ee,  I read elsewhere that there were issues with the fpso in so far as getting permission to operate beyond boiler plate spec,  which required permission from the lease company and the people who had financed it, and a third party who I don't recall.   Was this mentioned ?  has this been resolved ?  presumably they would be working with the company that did the initial conversion ?

K