2012 Interims

One thing I'm slightly confused about is the cost recovery. We are used to seeing the slide in the results presentation showing the production profile of 16-1 net to entitlements ramping up to 30kbopd with the explanation being given that during the initial cost recovery stage SOCO's entitlement would be roughly twice their working interest then when cost recovery is complete the field will be producing @c100kbopd and SOCO's entitlements = WI will be 30%. IIRC we were expecting cost recovery to be several hundred $m.

However in today's results we get the following statements:

The Group's working interest share of production during the period was 12,197 BOEPD up from 2,339 BOEPD in the first half of 2011 mainly due to the addition of TGT volumes.  Cost recoupment associated with the Group's cost carry of PetroVietnam on Block 16-1 was fulfilled in the period by receiving higher entitlement volumes totalling 13,682 BOEPD from TGT and CNV.

As costs carried by the Group for PetroVietnam on Block 16-1 were fully recouped during the period the proportion of non-taxable income associated with cost recoupment has significantly reduced compared with 2011, thereby increasing the effective tax rate in Vietnam to a rate approximating the Vietnam statutory rate of 50%.

Where it seems that entitlements was only 112% of WI and that cost recovery has already been acheived. Am I misreading this or was cost recovery a lot less than we (and even SOCO themselves) were expecting?

Danger - yes I noticed that too. It does seem that cost recovery is much less than previously estimated. Some estimates had WI at about 2x until costs were recovered but this is obviously not the case at all looking at the numbers today.

I'm afraid I was rather unimpressed by the results to be honest. As you say about a year ago we were expecting a ramp up to 100Kbopd and a very large revenue stream due to cost recovery but what we actually have received is far lower in terms of production and cost recovery.

In fact the 13.6mboed from TGT and CNV is pretty poor when compared to similar companies with similar market caps and reserve numbers (I'm thinking Coastal here mainly).

Log

http://www.businessweek.com/news/2012-08-22/soco-seeks-to-boost-vietnam-field-capacity-after-record-revenue

'Cagle said the company doesn’t plan to sell its cash- generating project in Vietnam and will possibly consider a special dividend in December.'

Is this news?

Nah not news anteos. Almost certainly wrong and I'm sure emptyend will correct Cagle soon and tell him that a sale of the company is immanent as is a big reserve upgrade and production of 100K/bpd :-)

Log

I think the expectation of a sale is like a search for the "Oily Grail", looking more and more like it isn't going to happen but lots of investors forever hoping it will!

MrX,
That's what they said about Mongolia then Yemen,then Thailand then all of a sudden!!

OK....now back from a trip to London, during which I had the luxury of reading SOCO International (LON:SIA) 's interims on the train without being influenced by what others might think or post. Morein my next post on my thoughts on the RNS, but first I'll comment on some of the comments above:

@ jseth123: I'm not at all sure I view it as a positive that Ophir have walked away from Block V in light of their and Soco's heavily contrasted success rates in Africa!

I thought that the raise to 85% on Block V was quite interesting news, especially as they seem to have paid hard cash for it. I'm not in the least surprised that Ophir chooses to spend its money on other things - they have plenty to get on with in their offshore portfolio!! ;-)  There are a number of possible circumstances that might lie behind the purchase - and whilst some might be negative, I can also think of quite a long list that would be quite positive (or neutral).

@loglorry: Still further delay with cnv separation facilities....Cost recovery also not as rapid as some forecast.

Yes the separator is a surprise/disappointment - though two months or so isn't the end of the world. I'd be interested in the explanation and may well ask....but things like this are rarely as straightforward to start up as one expects. Costs are fully recovered in H1 (except the minority which has been bought out), so no idea at all what you are talking about.

@swanvesta: Log, these results are for tgt production of 33k bopd, on which basis per is <10. H2 production will be nearer 55k bopd, and full year eps maybe 46p for a per of 7.6.

Quite right  - though I've not checked the maths in detail. I was tossing numbers around in my head earlier and figured that they should make nearly $150mn post-tax in H2 - so $250mn post-tax ballpark for the year is a material number.

@Weeck: That's what they said about Mongolia then Yemen,then Thailand then all of a sudden!!

Yes thats about the size of it. Still, I'm very happy to see certain people carping about the results and selling out. Unfortunately for the mark-to-market, some people can see no further than their face.

As for the Business Week & Bloomberg article, I'm not surprised by anything in there and regard matters as remaining fully on track!

ee

(more in an hour or so)

In reply to emptyend, post #39

Right......the RNS:

My copy of the RNS now has a few annotations - the most prominent being on the first page  and reads....

TWO ELEPHANTS IN THE ROOM:

No mention of:

a) Reserves

b) Communication at TGT

When are they targetting to publish reserves update?

Now......I'm not surprised that there was no reserves statement with the results. These things will happen only when sufficient data has been acquired - and it is clear from the text that they are still playing with the wells, and may do so for a while.

Similarly, I'm not surprised there was no talking up of the potential for communicating reservoirs at TGT (despite there being conjecture at the AGM and at various other points in recent months)......

.....but I do find it of some potential significance that neither aspect is mentioned at all, partly because my base position has always been to expect a deal to be done at or before the time when a major reserves announcement is issued.

It is interesting (very interesting) that they continue to hold their fire on these points.

Working through the RNS I notice:

a) 60,500bopd peak to date through the FPSO. .......It is evident (from the press interviews) that they think that c.65,000bopd can be achievable with the current configuration. And there is capacity for 75,000bpd of water-handling....most of which they now think will not be needed - so, once they have tested the various wells for water-cut etc, I would think that a conversion of the FPSO could raise practical capacity to around 100,000bopd. There is no doubt that the "fiddling around" over the coming months will clarify that plan.

b) Block V DRC stake now 85%. The circumstances of this are unclear. Was SOCO able to buy "on the cheap" as a result of non-performance by Dominion/Ophir......or was it effectively a forced purchase? Small beer in the scheme of things whatever the case (for now).

c)"Re-evaluating the projects in the current portfolio" - I take this to suggest that Marine XIV is on the way out.

d) HLJOC close to agreeing gas sales deal for 20+mcfd from TGT. That is news to me - and welcome, though modest. I wonder if there is a link to the CNV delay re separation?

e) "..the Directors have decided not to pay a dividend at this time". Next to that statement I have annotated: "muddies the waters for a H2 sale if they were to do so?". Remember here that my basic view has been that they will never actually pay a dividend, but will sell first. Note also the comment in interviews that a Special Dividend will be considered in December.....because that leaves a handy window of three months for a bidder to get their act together.

f) "TGT.....four-well infield development drilling (starting early July)" ...next to which I have written "Targets??"

g) "In May...term contract to sell a total of 40,000 bopd to three purchasers"........That's a lot - and shows they had very good confidence in Phase 2 even back in May. It is more that their Phase 1 production and 10,000bopd more than the minimum I'd assumed recently on ADVFN. Confirmation of the $6.60 premium is also good, especially since spreads have reportedly narrowed since.

h) Delays to the CNV separator not explained. Why not?

i) "Vandji  Formation is missing in certain areas" - suggests that they are going for a last shot on Marine XI too. No target sizes given for Likeda Marine East 1.....but it would be interesting to know the significance of the various stacked plays as spud date approaches towards year-end

j) Cabinda North - first wells likely to be on the Dinge discovery. Would be good to know the thinking there too.

k) Lower gain to fair value re Mongolia. Small beer but suggests that the expected date for reaching the 27mn bbls trigger may have been pushed back.

l) PV carried costs at TGT now fully recouped. I also note that they are expensing finance costs rather than capitalising them. This is one of half a dozen items in the report (including the purchase of minorities etc) that are indicative of a pre-sale cleaning-up of the assets and the way the assets are reported.

m) $47.8mn of the convertible is now classified as short term debt (due 16/5/13). I'm minded to think that they haven't yet exhausted the possibilities to repurchase some of this, especially as the time to expiry starts to approach 6 months (because there are plenty of substitute 6 month investments available relative to 6-12 months)

n) "SOCO completed.....Lizeroux......cash consideration of $95 million....to be satisfied...upon receiving instructions from Lizeroux" . IMO this is one of the most interesting bits in the report, because it states that the deal has been "completed" AND YET they still haven't paid the cash over to Lizeroux. Now perhaps this might be because of some tax/timing issue for Lizeroux....but it is very unusual to not pay up on the date of completion of such a deal. There may well be some angle here that would be very interesting to know (though of course there may also be a typo in the RNS).

o) Still expecting to add one or more projects......apparently

In sum, this is a company in the departure lounge, being cleaned up and prepared for sale. I take the comments about a dividend in December with a pinch of salt and I think that a reserves announcement and/or a deal will be done very soon after they can get some certainty over the connectivity issue. Of course they are going out of their way to dissuade any unwelcome premature interest (hence the not for sale comments) until such time as the reserves/connectivity points can be clarified - but, going back to my opening comments in this post, those issues are two massive elephants in the room - and as soon as the Company decides that it can actually talk about them with confidence then it will be "game on" IMO. By that point, however, it may well be too late for anyone who has stepped out of the shares in the meantime on the basis that nothing much seems to be happening.

ee

So just to clarify ee you think the comments from Cagle where he reportedly has said Vn not for sale was just to "put off unwelcome premature interest" before a) and b) are sorted out.

I just don't understand why he would do this. He doesn't have to sell unless he wants to there is enough insider control to stop a cheeky bid anyway. Couldn't it simply be that the Vn assets are not for sale?

Log

In reply to loglorry, post #41

I just don't understand why he would do this.

Really? Blimey!

The company and management have said countless times that everything is always for sale at the right price. They plainly don't think that the right price will be obtainable at present given the data they have been able to give the market to date. This strongly indicates to me that "the right price" is somewhat higher than I have been expecting until very recently.

Couldn't it simply be that the Vn assets are not for sale?

Have you ever imagined what your priorities might be when you get to be 69 or even 65?

Presentation on the website, in case you hadn't noticed.

The slides on VN add nothing new, but slide 11 gives details of the Likeda East target:

Est’d mean predrill recoverable resources c.70 mmbbl in primary target Sendji formation
COS 40%
Est’d mean upside recoverable resources c.60 mmbbl in secondary formations

...so estimated total mean recoverables of 130mn bbls (40.39% WI) and a handy CoS of 40% for the main target.

Slide 15 also suggests that a new area of focus for new ventures would be the Middle East (FWIW).

ee

The company's PR guy has earned a pat on the back, getting a piece from* Roger Cagle into The Telegraph's new "Good News" section of their financial news. Unfortunately it says nothing new for anyone here - but I guess it doesn't hurt and might encourage some investors to look beyond the FTSE100 in their search for earnings.

*more likely written by the PR guy - but its the thought that counts ;-)

In reply to WeeEck, post #38

Exactly WeeEck. It looks like a negotiating position to me.

In reply to emptyend, post #40

TWO ELEPHANTS IN THE ROOM:

Perhaps they are there for the directors recreation?

http://www.youtube.com/watch?v=ULXlzV6BCA8

Being a patient type, I'm reasonably content to wait for Soco. Barring market meltdown or some VN disaster, the sp seems to be "solid" at this level with the prospect of steady uplift driven by cashflow, irrespective of whatever else the company might do regarding reserves upgrades, communication within TGT, African exploration, etc.

I still believe no action is likely on the takeover front this year, but who knows...........

Redhill

In reply to redhill, post #46

Yes - good line there, Redhill  :-)

I've just made a comment on ADVFN regarding relative value which I'll copy here:

SOCO International (LON:SIA) 's enterprise value (£1.06bn) is approximately 43% of the EV of Premier Oil (LON:PMO) (£2.44bn), whose results are out this morning......and yet SOCO's H1 post-tax profit is $97.2mn, compared to Premier's $145.8mn....which is exactly two-thirds, in fact.

Not only that but (after bringing H4 onstream at the start of July) field production at TGT will rise from the H1 40,400bopd (derived from the 10,019bopd reported working interest) to 55,000 bopd - and SOCO's entitlements production from TGT will rise by around 4,450bopd in H2...which should add around $40mn (or a bit more, allowing for gas sales etc)to post-tax profit in H2 - so I reckon that there is every chance (with higher product prices too) that SOCO's H2 post-tax profit will be c. $150mn.....and yet the company is currently valued at less than half Premier's market cap.

Sure there are reserves differences - but that will doubtless be addressed quite shortly.....and SOCO's reserves are predominantly oil.

Even without a clear plan to raise production at TGT (which will certainly arrive in the next few months), SOCO International (LON:SIA) looks set to be making $300mn pa post-tax going forward.......rising towards $500mn post-tax once production handling changes are made (probably to the FPSO water-handling, I now think) to allow the field to plateau at c. 90,000 bopd (or more?).

And then there is the question of reserves. If meaningful connectivity exists then that is likely to mean that the field can sustain a higher plateau for longer - and that will be reflected in a big reserves uplift.

It is probably a waste of time and money trying to rush out a reserves upgrade in August when half the market is on vacation....but watch out for news on both reserves and production plans - both can't be very far away, even if guessing the exact timing is (as ever) a mug's game.

I don't think all the news will arrive at once either (unless there is a bid)....there is a process to be managed for the company to get the market from A to B.

ee

In reply to emptyend, post #43

slide 11 gives details of the Likeda East target:

Est’d mean predrill recoverable resources c.70 mmbbl in primary target Sendji formation
COS 40%
Est’d mean upside recoverable resources c.60 mmbbl in secondary formations

...so estimated total mean recoverables of 130mn bbls (40.39% WI) and a handy CoS of 40% for the main target.

Note - although it wasn't made clear in the interims, SOCO raised their stake in Marine XI in June by taking up a chunk of Lundin's stake, after Lundin withdrew from West Africa.....so we now have an additional 11.39% exposure to a prospect that has a Pmean expectation of 130mn bbls. That would be a total of 50mn bbls if it all came in as prognosed.

In reply to emptyend, post #40

ee,

I believe the answer to f) is on slide 7 of the presentation:

2012
 H1.1, H2N, H2, H2S
 2 Infill
 1 Producer
 1 Appraisal
 H3N, H4S
 5 Development

The 5 development wells in H3N, H4S will be the Phase 2 development so the remaining 4 wells will be the H1.1, H2N, H2, H2S ones.

Any thoughts on why the cost recovery isn't as much as expected?

Danger

In reply to MrX001, post #37

Remember what ES said regarding a sale, “When someone else believes what you believe, no need to keep it.”

It takes a value judgement that needs transparency to get that coincidence of belief: the judgement process needs CNV gas v liquids apportionment; determination of TGT reserves; demonstration of maximum sustainable TGT flow capability, and perhaps an indication whether to choose increasing the fpso flow capacity or piping through Bach Ho.

On the last point I cannot see why this has to happen before a sale unless it's needed to demonstrate the maximum flow capability.  It's being looked into and that has to be good in facilitating progress.

All these are being moved on.  Meanwhile cash flow is increasing, the net profit is increasing, and there is some attractive African explo pokes on the short term horizon that will have a lot of data informing them from previous attempts.

fuiseog

In reply to dangersimpson, post #49

Danger,

I'd noted the details on slide 7 but they don't really tell us very much about the objectives, either in terms of potential reserve adds or any link to the connectivity thesis. I've asked for more details (along with other queries) and will comment further if I learn anything useful.

Re cost recovery, PV have been paying their own way since the development licence was granted. There might also have been some sort of side deals done in relation to TGD or whatever, so I'm not sure there is much point in investigating a matter that is clearly "water under the bridge". Feel free to ask though.

ee

I'd noted the details on slide 7 but they don't really tell us very much about the objectives, either in terms of potential reserve adds or any link to the connectivity thesis. I've asked for more details (along with other queries) and will comment further if I learn anything useful.

Nothing useful - other than that they should be completed by the end of October.