Analysts reports

In reply to kenobi, post #551

They do say that the "shares are hardly expensive at nine times projected earnings"......

"Good to see that the Chronic hasn't lost its touch."

I hate to say it but they were actually pretty good on their last call. I suspect they were right for the wrong reasons but they did call the share price much lower then and it did indeed transpire to go lower.

Just saying that's all !

I should perhaps mention here that JPMorgan yesterday produced by far the best and most comprehensive note on SOCO International (LON:SIA) that I've ever seen from them. The note runs to 12 pages of discussion about valuation and covers all the various valuation points that I have been banging on about for years.

Amongst other matters it discusses the read-across from Conoco/Perenco and (importantly for the sceptics ;-)) lists 10 potential reasons why the market might ignore the implications. It also discusses the various corporate finance alternatives for unlocking value.

I'm not going to quote extensively from it, as I think the whole note deserves to be read by anyone interested (but I am not in a position to provide copies - so please don't ask). However, here are a few snippets:

Value of Vietnam obscured by reinvestment strategy -
asset restructuring + return of capital potential solutions

We highlight the large mismatch between the implied value of SOCO
(392-679p) using the transaction multiple from the recent ConocoPhillips /
Perenco deal ($20/boe), and the market valuation of SOCO (329p). We
also consider whether a Cairn India style partial IPO of SOCO Vietnam
and a return of capital could rerate the shares. Using a 2012E EV/EBITAX
multiple of 5.9x would imply a core NAV of 547p. We acknowledge that
SOCO suffers from a lack of exploration catalysts in 2012 and TGT
reserves uncertainty; it also faces bureaucratic challenges in Vietnam. We
believe the valuation is attractive and corporate finance solutions exist to
address the discount. Thus we retain our overweight stance.....

....we believe the (Perenco) transaction underscores that
Vietnamese assets can crystallize value far in excess of relatively conservative NAV
estimates which typically drive share prices in the UK E&P sector. Even assuming
the lowest reserve guidance of c250 mmboe, results in a higher implied core NAV
than ours when based upon the $20/bbl transaction multiple (392p). At $20/bbl, the
implied core NAV ranges from 392p to 679p, based on the low and high case reserve
scenarios for TGT of 250-500 mmbo (gross, conservatively not giving any value for
the sales gas which is expected to peak around 30 mmscfd)......

....we believe SOCO's valuation remains compelling
on all metrics - NAV, transaction read through EV/boe metrics and cash flow
multiples.

Either things will play out along the lines that I (and JPM, more recently) have been expecting, or they won't......but we will find out in the next few months IMO.

ee

Good to see this kind of note from brokers,

Interesting suggestions re the Cairn IPO issue, I wonder where they would float SOCO vietnam, Is vietnam an option ?

Good to see there are other options if a compelling sale price cannot be achieved. A reserves upgrade would make the potential price range narrower, but I know you've speculated this might not happen until a deal is done,

K

In reply to kenobi, post #555

Interesting suggestions re the Cairn IPO issue, I wonder where they would float SOCO vietnam, Is vietnam an option ?

Singapore most likely - but I think that is purely hypothetical/conceptual for now. I'd view it very much as a Plan C possibility, with much less than 10% likelihood of happening.

You are right about the importance of the reserves assessment. I think there are good grounds for optimism, for the reasons that have previously been discussed to death.

ee

ps....JPM's discount rate assumption is 12% - and even they say  We suspect that an industry buyer would apply a lower discount rate than 12%

yes probably right, good to have as an option plan c though, I'm worried that there won't be enough interest to get a good price or that PV are positioning themselves to get SOCOV for a snip, (or maybe just being conservative for their own reasons), and this meaning we can't get the best price for the Vietnamese assets.

I have been giving this production thing some thought, I can understand that PV are concerned about overall recoverable rates, that's all well and good. I could understand if the debate was about whether to produce more quickly from the same zones, but if it's about opening up new zones, (and we only have 7 out of 50+ producing), I cannot understand the argument about not perfing the other zones gradually ? Surely this would in effect be reducing production from the current zones and helping keep pressure higher ? and therefore eventually higher recoverability rates ?

K

In reply to kenobi, post #557

I'm worried that there won't be enough interest to get a good price or that PV are positioning themselves to get SOCOV for a snip, (or maybe just being conservative for their own reasons), and this meaning we can't get the best price for the Vietnamese assets.

The JPM note addresses those sorts of points head-on, noting that Government approval of the Conoco sale should allay concerns on that score (previous sales have also been approved) -and allay any tax concerns too.

Furthermore they say, re the Perenco purchase, that:

we understand that Perenco was not even the highest bidder.

In addition, the Conoco purchase was Perenco's entry into Vietnam and JPM comment:

Given Perenco’s strategy, as defined below, in our view it is actually a natural buyer of SOCO, were it to be sold

ee

In reply to emptyend, post #448

Just for the record, I've had a look on FT.com to see what the consensus forecasts are from the analysts.

The FT records the consensus forecasts of 16 analysts as:

Earnings: 2012 f/y      78.72 cents per share (range 38 -161)

Revenue: 2012 f/y     $619.42mn (range $373mn - $912.47mn, 12 analysts only)

So.......two months on, what has happened to the 2012 forecasts, from the same source, with 18 analysts?

Earnings: 74.03 cents per share (range 38-161)

Revenue: $581.13mn (range $373mn - $852.17mn, 15 analysts only)

...........And for 2013??

Earnings: 81.98 cents per share (range 46-135, 15 analysts only)

Revenue: $691.88mn (range $442mn - $1074.54mn, 13 analysts only)

Interesting to note that analysts seem more certain of 2013 earnings than of 2012 - but the opposite is true of revenue. Not much change though.

Lets see if the events of the next few weeks cause them to rethink at all........

ee

http://www.sharecast.com/cgi-bin/sharecast/story.cgi?story_id=20020654

Soco International: Nomura cuts target from 400p to 392p, buy rating kept.

no more detail, anyone seen the report ?

cheers K

In reply to emptyend, post #559

Lets see if the events of the next few weeks cause them to rethink at all........



Sorry, I've been away for a while.

What's happening in the next few weeks?

In reply to nigelpm, post #561

TGD decision, annual report publication ....and possibly matters like CNV gas resolution and TGT production plans...and who knows what else?

The 100% bonus issue is a non-story while directors own so much of the stock. Never nice to see them pat themselves on the back while not actually delivering on targets they set themselves and while the stock price languishes. However the stock price falls will hurt them a lot more than clipping their bonus by 20% as ee suggests.

The market is obviously concerned that there are problems at TGT and to be honest there may well be despite prominent posters here stating all is well. I don't think the market will like it if we are looking at 2-3 years before TGT is up to full steam and to be frank there isn't much else to get that excited about.

Log

In reply to loglorry, post #563

The market is obviously concerned that there are problems at TGT and to be honest there may well be despite prominent posters here stating all is well

Fortunately you don't have to take my word or anyone else's outside the company on that. This is what the AR says:

TGT is a highly complex field with three main
reservoir horizons – the upper and lower Miocene
5.2 and the Oligocene “C” – with approximately 55
individual producing intervals. Well performance to
date has demonstrated the ability of all wells to
produce oil at high rates with minimal drawdown
and field productivity from the reservoir intervals
perforated to date has met or exceeded predevelopment
model prognoses. Stable flowing
pressures of the initial producers indicate a strong
level of aquifer pressure support, importantly
deferring the need for water injection. Similarly,
initial interference tests confirm a high degree
of connectivity within the main sands.....
Commencement of production at TGT means that
we have more opportunity to enhance shareholder
value than we have ever had before. We are
confident that TGT is a world class field. There is
no doubt that it will be a significant contributor to
operating cash flow. Whilst geologically complex
and a multi-horizon reservoir, the field is
demonstrating excellent performance and recovery
characteristics.

Note the word "recovery", because some sections of the field have been indicating recovery potential of 50%+ - and that will have implications for reserves and for field valuations.  Note also the reference to connectivity (which I suspect may be one important reason for the extended delay in ramping up - even though it is positive for NAV).

ee

Hi ee
Yes I saw that and I do feel the market has been a little unfair and priced the stock down but that's life really. I don't expect too many people to see through the words in the AR and spot the opportunity. They see words like "complex" and assume the company is making excuses for lack of production ramp up.

I have found that when a company fails to deliver the mustard in terms of promises it has made no end of reasonable, or otherwise, excuses can help the stock price. What will make a difference is an RNS stating increased production or a field upgrade. Until then I'll be buying dips.

Log

In reply to loglorry, post #565

I agree with all that. I don't expect to see either of the events you refer to until after the fact.

GS sector note today, upgrading SOCO International (LON:SIA) to a buy.

Interesting to see that they are latching on to one of the valuation aspects I've been battering on about re the M&A theme, commenting on their screen criteria:

Our analysis suggests that large, oily assets are attractive to NOCs that are willing to pay premiums to equity market valuations. Buying companies with significant value in these types of assets therefore offers exposure to an NOC / equity market discount rate arbitrage

....ie......NOCs cost of capital is way below the rate at which equity markets discount future cashflows (a point made many times previously and worth a substantial premium on its own). They have 94p in their 472p price target for:

a valuation of the company with its TGT asset valued at an 8% discount rate to reflect our view of the strategic nature of the asset.

....which still factors nothing in for reserves upgrades, it would appear.

Even though they downgrade their price target to 472p as a result of updated assumptions re the TGT production profile, they say:

we believe the risk/reward on the stock is skewed to the upside with the recent share price weakness providing an attractive entry point. Since our last sector update dated December 6, 2011, Soco has underperformed the E&P sector c.20%, which we believe has in part been driven by the slower than expected ramp-up of the TGT field offshore Vietnam and the company’s low levels of exploration activity confirmed for 2012 versus its peers. Despite this, we believe Soco screens attractively on a core value basis, offering 42% upside. We remain positive on the TGT asset and see no reason why the field cannot ramp up to forecast rates later in 2012 which we believe will have a positive impact on the shares.

For those who like ratios, they have a forecast PER for 2012 of 4.1x (3.1 for 2013) and a FCF yield of over 20% in both years.

ee

ps....reading the details further, it seems that it was Goldman who have hitherto had the 2012 EPS forecast of $1.61 per share (per the FT lists above somewhere). They now go for $1.09, having recognised that 2012 production will be capped by FPSO capacity.

While the NPV discount rate is compelling because a NOC can borrow more cheaply (unless they are Greece :-) ) I think it is a mistake to change the discount rate in this way and they argue that stock A is cheaper than stock B on a discounted basis.

Since the industry standard is NPV10 then we should apply this to all stocks before comparing them on a value basis. It makes little sense to make an NPV8 calculation for say Coastal Energy and then use NPV10 for Soco. Since it is comparative value is what matters since a NOC can spend its dollars on a choice of companies to fulfil its future oil requirements it is important to keep a level playing field.

In any case it isn't just NOCs that can borrow money cheaply. Large integrated oil companies like Shell, Total, BP all have access to money markets at very low borrowing costs at the moment.

Log

In reply to loglorry, post #568

What GS are arguing is that a discount rate of about 8% may be applicable to TGT because of what they regard as the strategic nature of the field - presumably size, position etc. That doesn't apply to all fields, or companies, so I think you can make a perfectly good case that a one size fits all discount rate may not be the best way to work out what a company, or asset, may be worth to someone else. Those that may appeal to NOCs may be appropriately rated at a lower discount rate.

Analyst comments quoted in the Grauniad if you want a chortle  ;-)

I'm interested to see a couple of actual reports. In particular, Numis...who say:

SOCO announced today that it has entered in to a conditional agreement with
Lizeroux to acquire the 20% minority interest in SOCO Vietnam (currently owns
80%) for a cash consideration of $95m. We had valued SOCO's 80% stake in SOCO
Vietnam at $3.04bn, implying a $610m valuation for a 20% interest. However,
adjusting for SOCO's carry recovery (approx $155m remaining) and the time value
of positive cashflows net to the minority (SOCO was already receiving 100% of near
term TGT/CNV cashflows) we believe that deal is accretive to NAV - combined with
recent buybacks we upgrade our NAV by 22p/share.

.......which is interesting because, as most of you know, my own estimate of value in VN was virtually identical!

After this deal, it now looks to me like the post-deal VN total is worth $3.6bn........and, based on some delayed AGM gossip that I only picked up today, I could see the H4 production results potentially pushing this up to as high as $4.5bn. It is somewhat too early to count the chickens on that - but.......if there should happen to be a bit of production data to back up those thoughts and consenting adult reservoir engineers can agree on the interpretation ......perhaps a deal can be done sooner than some think?

I am also interested to see that the ML piece on the deal headlines it as an "opportunistic acquisition of distressed stake" ......which goes a long way to explaining the things which seem to be confusing some posters elsewhere.

ee