This thread is intended solely as a place to discuss analysts' notes on SOCO.
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SOCO International plc is an international oil and gas exploration and production company. The Company has oil and gas interests in Vietnam, which includes Block 9-2 and Block 16-1; Republic of Congo (Brazzaville), which includes Marine XI Block and Marine XIV Block, the Democratic Republic of Congo (Kinshasa), consists of Nganzi block and Block V and Angola, which include Cabinda Onshore North Block. The Company's operations are located in South East Asia and Africa. It holds its interests in the Republic of Congo (Brazzaville), through its 85%-owned subsidiary, SOCO Exploration and Production Congo SA (SOCO EPC). It holds its interests in the Democratic Republic of Congo (Kinshasa) through its 85%-owned subsidiary SOCO Exploration and Production DRC Sprl. Te Giac Trang (TGT) field’s Phase I production began on August 22, 2011. Total production net to its working interest from continuing operations, during the year ended December 31, 2011, were 5,437 barrels of oil equivalent per day. more »
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In reply to kenobi, post #586
Given analysts ability to get most things wrong, I am not surprised and frankly dont care.
It will not persuade the director / owners of this business to sell for a low price.
MD
In reply to kenobi, post #586
Followers of the analyst will also note that this is a complete volte face from his previous note of 22nd August and appears to have been issued as a result of him having noticed errors in his model to do with cost recovery. I was also once expecting cost recovery to continue for longer - but I found out in March that it wouldn't, as a result of a discrepancy I noticed between the prelims and a January presentation. Getting it right five months late may turn out to be a theme for this and other analysts.....
Hi ee,
Al Stanton's lowered his target from 450p to 400p.
You're 'on the record' as currently having a target price of 660p.
Was your own earlier not-for-public-consumption 'internal target' around 710p ie do you broadly agree with his calculations re the effect of revised/reduced cost recovery value ? What explanation , if any, did Soco management offer as to how the cost recovery basis came to be (mis)interpreted by so many ? ATB
In reply to extrader, post #589
I have never thought of that number. I'm "on the record" from ages ago as expecting £6-8 depending on whether the whole company is sold etc.......though last year I cut the bottom end to c 550p if VN was sold on its own. In recent months I've come to the view (per connectivity suggestions etc that a number of others have picked up but I haven't had first hand, other than via RNS comment) that the top of the range is more likely than the bottom - hence suggesting that it was likely to be nearer £8 than Log's 420p ...so, say, 660p+.
I don't know what they are, I haven't looked at them and they are irrelevant to me in any case (for calculation purposes). It is clear that Stanton over-estimated the cost recovery (and hence the amount of cash to be generated); I also did that when we were considering the cashflow implications of cost recovery around a year ago......but my views on a takeout price are based primarily on asset values and my expectations for a big uplift in TGT 2P (OOIP, recovery factors, production experience, connectivity etc) arising from the review now underway. From the sidelines, there is considerable uncertainty about the quantum of that - but I'm happy that it will work through to the sort of share price range I talk about above (ie I'm looking for a 2P uplift of 40-100%....though the chances are that the top end won't happen and that potential will only appear in the 3P category).
We'll see soon enough....
ee
In reply to extrader, post #589
Naive question... ee's target is for a trade sale. What does an analyst target actually represent? Is it also their idea of fair value in a trade sale, or is it current fair value (i.e. allowing for sector discount) or is it what the SP might achieve with a fair wind?!
In reply to swanvesta, post #591
Actually that is an extremely good question indeed!
As you rightly point out, my expectations are based on a trade sale. Analysts are NOT estimating the value in a trade sale....at least not now. If and when it becomes obvious that an approach has been made, they might start doing so. The operative word being "if"......if its not too late....;-)
The concept of target price varies a bit. Some I think would view it as a likely sell signal if reached - others might see it more as a fair value estimate. With every analyst, they are looking across the sector trying to assess relative valuations (because really the only thing that is important to them is whether their relative values are right - absolutes don't really matter) but IMO they are to a large degree prisoners of the past, both in relation to recent relative share price performance and in relation to the historical figures that they plug into their models.
The important (crucial) difference between my approach and theirs is that they are working exclusively with historical data and announced plans, whereas I am incorporating some (hopefully intelligent) guesswork about the quality, quantity and value of the underlying assets - especially in relation to developments that might reasonably be expected to occur in the coming months. Of course sometimes those expectations prove wide of the mark (especially in relation to delays and most especially where they rely on logical actions by third parties!!!)...but that is the nature of the beast.
ee
In reply to emptyend, post #592
Thanks ee. I'm quite happy with 400p on that basis and I think this agrees with what others have been saying too (Log for example wasn't talking about a take-out price, as far as I know.)
Basic $20/bbl reserve calcs suggest NAV might be 500p or so, with which I believe the main analysts agree, so a 40% reserves upgrade would get us to your range, with a small discount for the buyer.
In reply to swanvesta, post #593
....mmmm not sure about that!
One of the main issues has always been that people are not specific about what their price estimates/guesses relate to. I've always been completely clear that I'm talking about a scenario of a trade sale deal for VN or the whole company - whenever that happens to occur (whether "tomorrow" or later)!
I have been repeatedly told I'm wrong by a smallish group of highly vociferous and personally aggressive people. Some of these people are now seeking to change their tune and pretend that they were saying something different when they were insisting I was wrong.......
Of course we are still a long way away from my valuation in terms of share price - and some time (who knows how much?). But at some point it will all come together and we'll be able to see who really was right about the value of SOCO. Of course I'm guilty as charged in having expected a third party to move in decisively before now....but its a tricky game trying to figure out what suits the agenda of unknown third parties...
ee
so when is the reserve u/g? what else needs doing?
In reply to adam, post #595
so when is the reserve u/g? what else needs doing?
Soon, though of course all we know at the monent is that it's an updated reserves report, you will have to wait and see if it's an upgrade or not :-)! As has been reported elsewhere the work is currently apparently about 75% complete, after which a premliminary report will be given to the company. As I understand it it is normal for it then to go through one or more iterations of being passed back and forth for correction and clarification before completion, so I'd guess anywhere between 3-8 weeks before it's finished, and probably at the long end of that.
Not that it really matters but I think the price I came to was to take the current 2P reserve number and multiple by $20/bbl (given the premium to Brent that Soco TGT crude sells for and the favourable tax) add in the cash but nothing for Africa and discount by about 30% (can't remember the exact number) to be inline with what the market currently discounts this sector to come to about 400-450p/shr. I can't remember the exact workings though but its pretty speculative anyway.
I think I said (but would need to check) that this is a medium term price target and given that Soco trades well below this I feel comfortable holding as any upside is in for free.
I've also said that obviously if there was a big reserve upgrade or a load of oil found in Africa I'd change my stance. Not sure why I take so much flack on this. For now though all the other things are speculation and they can just as well apply to other E&P stocks out there. For example there is good reason to expect an upgrade on Breagh for Sterling Resources given the extra thickness of the sands found in the recent production wells. I'm not going to price any of that in right now though.
Obviouslly if one takes a model where reserves at TGT are doubled, the price of oil rises to $200, M&A activity reduces the discount to NPV etc. etc. you get much higher numbers. In sincerly hope that that happens for all those holding Soco stock but I'm certainly not going to invest at todays price just on that hope. Just as I wouldn't have invested based on the hope that they would have drilled TGD again and managed to get sufficient gas drive to make the discovery commercial.
I think that is all pretty clear really. I expect that most of the analysts out there are also trying to place a value on Soco under similar assumptions. I'm pretty sure there is space here for us all to be roughly correct. What I don't think is fair is to be dumped in the idiot camp, with analysts, for ignoring the ifs/buts/maybes to come up with a conservative valuation still much higher than the current share price.
Surely what is important here is to come up with a good lower bound or conservative price target and invest on that basis and treat anything positive on top of that as icing on the cake. I've used the same methodology for quite a few investments and it has served me very well.
Good luck to you all especially ee because if he is right i'll make a lot of money rather than just a little bit. He has good grounds to expect the parameters of his model to come to fruition but none of them are hard facts yet.
Log
A few thoughts re potential TGT reserves upgrade :-
Yes, there is plenty of geological scope for a bumper upgrade but there is lots of evidence from past performance to suggest that the numbers might turn out to be a lot more conservative than hoped. Take Mongolia, for example, where popular BB opinion was pointing to maybe 200m bbls recoverable. Soco sold on the basis of the final payment due on 29m barrels having been produced. A long time since and still waiting. In Yemen, popular BB opinion was that reserves were understated yet when I contacted KUFPEC, a partner, they confirmed to me that they thought Soco's stated reserves were pretty well in line with theirs.
The thing is, reserve additions tend to move in a conservative fashion, bit by bit. Rarely do you get a massive upgrade from a development in its early stages. With TGT, the connectivity issue, accounting for most of the potential, cannot be confirmed without further drilling in the intermediate blocks between north and south, hopefully next year. Furthermore, drilling H5 is the only means of establishing booked reserves there. That clearly limits the scope of increasing booked reserves via the independent review, albeit there should be something from improved recovery factors etc., but again, more production history is likely to be needed to firm up.
There is also the question of what amount of increased reserves can be booked as a result of the CPR. They surely can't recommend an upgrade without an agreed development plan in place. My feeling is that Soco have initiated the CPR to convince PetroVietnam to engage in an increase in production facilities. Soco's CPR objective is therefore most likely to be to get the plan in place and book additional reserves later as a result.
I think it's important to recognise that TGT from the very start was a 40k bbls/day scheme in PV's eyes and that's the level at which the programme has been engineered...allowing for 15k bopd to be accommodated from HST/HSD next door. Stepping up from that is a very significant commitment in terms of capex and as said above, one assumes Soco's CPR objective is to convince PV to that end. One musn't underestimate PV's political advantage in letting the reserves angle run beyond licence expiry.
At the end of the day, I think Soco's objectives are twofold. Firstly to convince PV on enhanced production facilities and secondly to add value through drilling next year re the connectivity issue and verifying H5 reserves...or otherwise. Hence, it is entirely possible that a third party might pay up in the meantime but I think it's much more likely that they'll stick in there and see how it pans out next year before considering selling out.
Just my opinion. Apologies if any of that is jumbled...hic ;-)
In reply to davjo, post #598
Thanks, I find your post interesting, educational and sensible. You offer a more realistic view then anyone else imo.
In reply to davjo, post #598
I can't recall any such expectations re Mongolia, though I certainly recall that the final terms disappointed almost everyone. The additional payment is triggered when the cumulative total hits 27.8mn bbls incidentally - which compared with a total of 29,000 bbls produced in the pilot programme in the first four months of 2005. 27.8mn was at the time the booked P1 reserves.....and the P2 was 42mn bbls.
In terms of where the Mongolia asset was in the production cycle, there was relatively little proven, virtually zero production - and quite a bit of capex required. And, of course, there was a very limited range of buyers who would be interested in making the necessary investment to convert P2 into P1.
Re Yemen, IIRC, the price achieved was within about 10% of expectations - though again there would have been quite a restricted list of buyers, given the security issues etc.
The situation with the Vietnam assets is different:
Certainly it is true to say that reserves additions move conservatively. However, there is now plenty of production data to support:
....so, yes, the connectivity theory and the H5 potential won't be definitively proven (to P1 standards) withough further drilling and work - but a fair slice of P2 (or at least P3) should be available. The bottom end of my 40-100% range is primarily based on being able to raise the assumptions about recoverability, based on observed production experience.
There is a "chicken and egg" issue here. It is quite common to produce a CPR which incorporates the assumption (for example) that various capex investments will be made to expand production capabilities. Indeed CPR validation of such reserves potential is usually required in order to obtain investment sanction. What is never the case (and here I think you a little mixed up) is that reserves can be booked in the absence of major capex required by third parties.....so if Bach Ho capacity and the offshore pipelines didn't exist then there would be doubts - because the required investment would be on a scale that was well beyond the means of the company. In this case, however, we know that (worst case) production could be expanded over Bach Ho at a capex cost of a few tens of millions (and, no doubt, some sacrifice of margin due to tariffs).....so IMO there is no problem over whether Plan A, Plan B or Plan C would be selected to produce the reserves.
I think you have to recall the context - which was, at that time, there was the possibility of a further FPSO being required if TGD came in - but nobody knew what size would be needed in that case. In other words, there were options available to expand production - and there still are.....and they don't necessarily need vast capex either [though there is a capex vs opex trade-off that might be a decision best taken by a buyer!]
I think SOCO's objectives are quite clear - which is to get an externally-agreed quantification of reserves. Everything else flows from that.....it is the starting point for the future....but it most certainly doesn't follow that they stick around to try to convert every little bit of P2 into P1 (or P3 into P2) - and in fact there is nothing in their track record to suggest that they will do that, especially if the potential upside is properly reflected in the P2/P3 numbers (which could never have been the case whilst TGD was a live prospect).
rgds
ee
In reply to loglorry, post #597
As I said in #594:
......
No flak would have been dished out, were it not for the fact that you and others were so aggressively dismissive of my views which clearly incorporated the reserves impact arising from the work already completed since 2008.
Analysts and others who are looking only at the existing booked 2P are ignoring the reality on the ground that the work has already been done to justify a big uplift in 2P. Precisely how big an uplift will remain a matter of very considerable (though rather pointless) debate, but I simply don't believe it is in any way a sensible approach (hence my dismissiveness of analysts, especially at this juncture) to ignore the fact that there have been a succession of areas which have produced upside surprises re TGT in the last two years or so - and these will undoubtedly flow through into the CPR.....
....as I said elsewhere, it is a complicated version of an obvious "nick to second slip in cricket" - we are simply waiting for the umpire to put his finger up .....though in this case of course we don't know for sure what the scale of the decision might be....which is why coming up with a good lower bound is the correct approach. My "lower bound" of 40% uplift in 2P is largely based (but not exclusively) upon raising the assumed recovery rates from the low 30s to the low/mid 40s (compared to the c.50% reportedly supported by production data in some wells). The top end is unlikely to be reached, due to a range of factors - some of which were alluded to by Davjo above.....but they may well appear in the 3P numbers if not in the 2P.
As to value in share price terms, one simply has to work though the impact of a reserves uplift to my "lower bound" and multiply by the 2P valuation obtained by Conoco when they sold their assets to Perenco. Those assets, of course, didn't include any of the potential P3 upside that I expect to see in SOCO's CPR as a result of the known existance of the 200mn bbls OOIP prospect at H5 and the connectivity thesis.
These may not yet be "hard" facts......but they are facts, nonetheless!
ee
Maybe of interest to some ;-)
BP agrees $5.5bn Gulf of Mexico sale - http://www.ft.com/cms/s/0/f8c0a5f8-faec-11e1-b775-00144feabdc0.html#axzz25xXIXAPQ
In reply to emptyend, post #600
What is never the case (and here I think you a little mixed up) is that reserves can be booked in the absence of major capex required by third parties.....so if Bach Ho capacity and the offshore pipelines didn't exist then there would be doubts - because the required investment would be on a scale that was well beyond the means of the company. In this case, however, we know that (worst case) production could be expanded over Bach Ho at a capex cost of a few tens of millions (and, no doubt, some sacrifice of margin due to tariffs).....so IMO there is no problem over whether Plan A, Plan B or Plan C would be selected to produce the reserves.
I don't think I'm mixed up at all on this point. You accept there would be doubts if Bach Ho wasn't there but you can't know whether Bach Ho is an acceptable solution. I know Soco have said in the past that it is an option but that's just as likely to be idle talk of the moment without considering what VietSovpetro future plans are for the infrastructure. Clearly, operations have scaled down considerably in recent years with equipment taken out of service. Bear in mind also that all this stuff was Russian built 25+ years ago, no doubt to a pretty crap specification. In any event, producing additional oil via Bach Ho is only likely to involve lowish volumes in the short/medium term. Producing the sort of flows envisaged from your hoped for reserves upgrade will, imo, require new infrastructure. Since PV will be the final arbiter on whether this infrastructure ever gets built within Soco's licence period, I don't see how they can actually book additional reserves without that being sanctioned. I agree that the CPR might provide 2P estimates allowing for further investment but I certainly don't see Soco actually booking such additional reserves until PV sanction of the required capital investment. Who knows, PV might disagree!
One other point in respect of your 40%-100% uplift in reserves estimate. You mention all the positives but you don't seem to account for what Soco describes TGT as a "highly complex reservoir"....resulting from the multi inter-bedded horizons therein. Don't you think such resrvoir demands serious caution when estimating reserves? I'm sure the CPR will address exactly that point as I'm sure Soco will do likewise. Hence, I don't think the CPR will be in your guesstimate range. That's not to say you won't be proved right in the end but I think it'll be way down the road before it's likely to be proved.
As ever, just testing the various arguments ;-)
In reply to davjo, post #603
....mmmm. With respect I think you are.
The point is that the field is not in a virgin basin....it isn't in the Falklands, it isn't in Mozambique, it isn't off the Shetlands! There are no doubts whatsoever that oil will be developed and produced if it is commercial to do so - and that is simply a matter of mathematics (with known inputs), not a matter of logistics or politics! We know that there is ample spare capacity across Bach Ho and we know that they could also get another FPSO. And we know they can raise production to at least some extent by partial conversion of the existing FPSO. We know all of those options have (at least approximately) known costs. They could choose any of them - and the choice merely affects the value of the reserves ($18, $20 pb or whatever), not whether they exist and can be commercialised! There is therefore no doubt over the reserves per se - just over their precise value.
I've previously pointed you to this link:
They have plenty of spare capacity and have made no material new finds AFAICR (and even if they did there would be the thick end of 200,000bopd capacity). They have a clear choice - let it rust or use it. If it needed new facilities to replace those taken out of service than this would merely raise costs and make the FPSO alternatives (even) more attractive.
Fair enough - thats your call. As you know, on balance I still expect a deal before the final CPR sees the light of day. I'm certain that serious caution will be applied - and indeed HAS been applied in the past. At some point such cautions will begin to unwind as a result of hard evidence...... :-)
rgds
ee
http://www.dailypolitical.com/finance/stock-market/rbc-capital-raises-soco-international-to-outperform-sia.htm
The firm currently has a $7.24 (450 GBX) price target on the stock.
probably helps to explain why despite much of the market being down soco were up 10p today,
cheers K
It might be worth recording the numbers currently available on ft.com for analysts' forecasts:
2012:
Revenue: Consensus $580.43mn (range $321mn- $784mn, 15 analysts)
EPS: Consensus 73.96 cents (range 41 cents to 120 cents, 16 analysts)
2013:
Revenue: Consensus $666.34mn (range $383mn- $970mn, 15 analysts)
EPS: Consensus 82.89 cents (range 46 cents to 140 cents, 16 analysts)
FWIW according to the FT's (partial) records, the H1 2012 numbers beat consensus by around 10-12%.