Vietnam Assets

Regarding Merrill's comment below:
Importantly, management believe recovery rates of 45-50% are ultimately
achievable. This is based on experience of their own and other producing fields in
the basin, thus potentially adding a further 110mmboe to reserves.

Although the RNS says:
The field is early in field life and without a directly comparable field analogue.
http://www.investegate.co.uk/soco-international-%28sia%29/rns/operations-update/201302130700107400X/

So, how do these two comments fit together since the TGT field has no direct comparable field analogue!

Possibly not the clearest bit of text in the RNS, particularly when viewed like that. However, my understanding is that the first bit of the quote is based on actual recoveries achieved on intervals of TGT and by Peremco on the same sands in the adjacent licence, where apparently they exceeded 50%.

That doesn't prove that recovery rates will be that high throughout, but it does provide pretty hard evidence of what may be achievable.

In reply to loglorry, post #297

The idea that management think the RNS was misunderstood is pretty laughable. Maybe they should have been a bit clearer in what they mean then they certainly had months and months to write it.

I would guess that the full report runs to several hundred pages and is pretty complex - so summarising it in a few unequivocal paragraphs is difficult. I have seen very much more simple RNSs be completely misinterpreted despite the best efforts of those writing them, so I'm not particularly surprised in this case.

As I understand it, the main element of context that was missing is that the report only recognises potential recovery from the parts of the field that have been drilled and production tested to date (including those wells planned for the coming year). So, to give a simple example, if only enough wells to drain 60% of the OOIP estimated have so far been drilled and tested, then even a 50% recovery rate on those areas will give you only a 30% recovery in relation to the total OOIP. In other words, as more wells are drilled during the field life, recovery rate estimates will certainly rise.

What is new in this report is that the top-end estimates of OOIP and recovery actually exceed the long-standing guidance numbers that the company have given for their estimate of ultimate recovery....and the only thing that is going to close that gap is the passage of time - and more production and drilling.

It is clear to me that many of the concerns have been misplaced, even if some of the top-end hopes for 2P will take time to realise. That may yet turn out to be someone else's project to execute - and I still stick by my deal price range, FWIW, even if the timing is as uncertain as ever.

ee

My thoughts on yesterdays RNS:

http://boards.fool.co.uk/bit-of-a-surprise-12748445.aspx

Unwise

I think with hindsight getting an auditor to accept a 50% recovery factor on a field thats barely started production,no matter what analogues was not a realistic goal,despite it being possible in managements minds.
They have done well to get the current range given that recovery to date is likley in the single digit %.
It may well be that the 50% will never make it to a CPR,but be a piece of factual information in the field's old age. I had thought equity in TGT was 28.5% +2% opeco=30.5% The other thing that was left to interpretation in the RNS was what the definitions of the range for STOIIP. The range has been assumed by many of us to be P90/P10, but it could reflect the end points (P99/P01). I did wonder as the quoted range is a big range for STOIIP so there must be geological uncertainty to create that range.

Given STOIIP is simply = Gross rock volume*(1-Sw)* porosity/formation volume factor and that Sw and porosity and FvF are likley well constrained,the variable is probabaly the gross rock volume and may reflect the connectivity argument.

They also discuss this in the context of being "discovered STOIIP",by stating additional undiscovered STOIIP subsequently. EUR and STOIIP are not really the same as categorised reserves (Read PRMS guidlines). At the end of the day you still need a well to recover the oil,and cleaning out all the STOIIP calculated geologically may not be economic (As pointed out by EE earlier)

In reply to flyinghorse, post #310

I think with hindsight getting an auditor to accept a 50% recovery factor on a field thats barely started production,no matter what analogues was not a realistic goal,despite it being possible in managements minds.

I never thought it was personally - but I obviously wasn't conservative enough (was thinking c.40%). The key point is that not enough wells have been drilled to observe performance across the whole reservoir - therefore, with 55 different bits of the reservoir, it stands to reason that 16 wells (even with each one penetrating 3-4 different bits) wouldn't be sufficient - and so unless they could observe directly production info supporting 45-50% they wouldn't read across from one bit of reservoir to another. If it was all clearly one homogenous reservoir, then it would have been different.

It may well be that the 50% will never make it to a CPR,but be a piece of factual information in the field's old age.

Thats the rub, of course. It may be too early now......but at some point it also becomes too late in field life. There's no point being certain when the last drop has been produced - a buyer would simply need to take a view, based on their own experience and the full data set. I'd guess it is quite possible that some would think 45-50% achievable, based on experience in the basin.

Meanwhile cash is being thrown off rapidly. Merrill see the cash pile increasing by $400mn this year (based on current plans and policies) - which is around 75p per share.

ee

Hi ee,

>>>>Meanwhile cash is being thrown off rapidly. Merrill see the cash pile increasing by $400mn this year (based on current plans and policies) - which is around 75p per share.>>>

A payout of a third of cashflow, say 25p, would make a lot of PI's a bit more 'gruntled', I feel !

It would leave plenty of room for business contingencies, whilst being a meaningful earnest of management's intention to return value.

Let's see what happens !

ATB

Re your post 280, I do not often disagree with you ee, so here goes. You posted;

"Put companies and director into two camps: those who seek to exaggerate and talk up their assets to the market and those who try their best to play a straight bat. I would agree that the former should always be treated with caution. And, ex-post, one can point to loads of examples where directors appeared to be giving a straight story - but events have turned out disappointingly for investors.
There is an easy explanation for this - which is NOT that they set out to mislead........ It is that, even if directors make their very best guess with 100% honesty about what will happen, circumstances, events, acts of god, random happenings, contractors not doing what they are paid for, contractors screwing up (eg TGT-2X), geology, data errors, pure luck and a whole bunch of other things can conspire to make it appear that they were being misleading.
I don't think that directors are any better at foretelling the future (for that is what it is, unless you have 100% control over events - which is something that non-majors never EVER have!) than anyone else - but I DO think that most of them try to give a pretty straight story on the way things will develop."

My reply;

Two AGMs ago, Ed told us to expect 95,000 barrels per day within a year. So what are the circumstances, events, acts of god, etc that apply here? 

Even more important to me; where is the return of cash to investors, or dividends? If  we do not get jam tomorrow, or rather jam on the 11th March, I will not invest anything in "Son of Soco."

We cannot feed our families on hopes that an African gamble might succeed one day. May I suggest that all who agree with me here, send personal letters saying that, and send them to all the Soco directors, well before the 11th March. 

A lot of letters does work; in 1996, I organized a campaign that got 2 million protests into the House of Commons, log jammed the postal system there, caused a public climb down by Tom Sackworth the minister,  and defeated the government. 

MadDutch

In reply to MadDutch, post #313

Hi MD

Two AGMs ago, Ed told us to expect 95,000 barrels per day within a year. So what are the circumstances, events, acts of god, etc that apply here? 

I imagine the company failed to see the extent to which PV would drag its feet. Perhaps they should have done? What I don't doubt is that ES was absolutely correct in his assumpotion that the filed is technically quite capable of those production rates.

Even more important to me; where is the return of cash to investors, or dividends? If  we do not get jam tomorrow, or rather jam on the 11th March, I will not invest anything in "Son of Soco."

I don't remember the company ever committing to cash return, so I don't think has much to do with your argument of being mislead. I (as of last week) am now of the view that the company is going to have to address the issue of cash soon. A special div, or a div must be high on the list of possiblities - though as they always made perfectly clear, they are also looking for new opportunities, so it's possible they may have other uses for the cash. It's no surprise that no mention was made of the issue on the Ops update, that's hardly where you would put it, but between now and the finals I'd expect some more info.

You should though bear in mind that Soco has always been 100% clear on it's "no dividend now" policy, so if you bought looking for a dividend you may have made a mistake. Bear in mind also that you have achieved very significant capital gains since you first bought, and so cash can always be raised by a sale.

Certainly as someone with a significant holding in the company a campaign to jam the postal system at Soco is one which I would be very unhappy to see anyone proposing, as you appear to be. I pay management to get on with the difficult issues of maximising the value in VN (primarily) I don't want them wasting their time on a postal campaign from PIs who appear not to understand the nature of company they have chosen to invest in.

I was initially somewhat dispirited by the recent RNS. I'd been kind of expecting an announcement of a major reserves upgrade accompanied by a big cake covered in candles with a soprano* inside leaping out to deliver an aria to signal the start of the last act in the extended opera. And of course we didn't get that. In fact my initial reading was that it was all a bit of a non-event. And a not brilliantly communicated non-event at that.

But I've reflected and I've read what some analysts have made of things and I have come round to the view that it's more a case of poor expectation management than of failure. It seems to me that the triggers for a rerating and/or a bid are the reserves restatement, the raising of production and the resolution of the inter-connectivity question. I had expected 1 and 3 with progress on 2. What we got was really just a holding statement to the effect that all 3 remain work in progress. That's disappointing. But it's not failure. In fact the review of reserves provides support for Soco's views of OOIP and extractable reserves. Particularly if you consider the fact that the views expressed were effectively based on work completed tp date. For me that's the crux of the thing. Soco management are effectively looking forward. The reserves auditors are effectively looking at the state of play today. That's the difference between them.

Over the past 10 + years the single factor that has made me more money than anything else is that analysts and those who depend on their work tend to look at history, the present and a very, very short stretch of the future. Often as short as 12 months. I have been able to look further ahead than that and take the longer term into account and it has paid off.

i reckon that Soco management have a reasonable handle on things. I think there is a reasonable chance that they will pull it off. I expect a solid upgrade in reserves and a decent increase in production. As for inter-connectivity - that has always only been a possibility but it would make such a difference that anyone other than a very short termist would want to see it explored. I was disappointed that it was not mentioned. But I'd rather have a lack of mention than an annoucement of a disappointing outcome. I'm presuming that the thesis remains unproven either way at present and that is far from being the worst case outcome.

So, my position remains that I am holding 30% of my investible assets in Soco. I have not fallen in love with the share and I do not think that management are entirely above criticism for mismanaging expectations. But I think they are honest and competent guys trying to land a very big fish. And when you're doing that things do not always proceed according to a pre-conceived plan.

I think it was General Moltke who said "a battle plan does not survive the first contact with the enemy". In other words you can't figure everything out ahead of time, you have to adapt and change. You have to be resilient when things go awry. Of course that doesn't mean carrying on with a failing strategy. But the key thing here is that SOCO, as reported in the RNS, has not failed. It just hasn't won yet.

I'll wait a while longer and see what happens.

* ie a fat lady, not Tony of that ilk.

In reply to peterg, post #314

Thanks for your reply Peter.  

I imagine the company failed to see the extent to which PV would drag its feet.  That is my worry; there is no guarantee that they will not still be dragging their feet in 10 years time; if their political faction remains in power, they will continue to block production increases. At the last AGM, Ed told us that "the old communists who wanted to keep the oil in the ground, for the benefit of future generations" had been removed; it now looks like that was not correct. My interpretation is; they or people who share their views are still in charge and likely to remain in charge. That is why I want our share to come our as regular dividends or similar.

What I don't doubt is that ES was absolutely correct in his assumpotion that the filed is technically quite capable of those production rates.   Oh yes? Are you telling us that Soco did not know the FSPO capacity was more than a third less than the 95,000 barrels per day we were lead to believe would be achieved by August 2011? 

This is why I am insisting that we must have a cash return or dividend; it is the way responsible directors show they appreciate the support of their shareholders. Assuming the American senior directors pay American tax, they had a golden opportunity to do as I have asked in December; Many American firms made a large special dividend or equivalent, to avoid an increase in tax due to the fiscal cliff. I was expecting Soco to do the same. Then there is British CGT for their directors domiciled here. Capital Gains Tax has been 40% for as long as I can remember until recently; but is currently 28%. We have a Government desperate for cash; CGT could revert to its mean, 40%, at any time. We have always assumed that our interests have been aligned with the directors; Today, I am not so sure. I want them to convince me I am wrong on the 11^th March

Of course i did not buy Soco to get a dividend; that is an absurd idea. My first Soco purchase was in 2000, my first dividend request followed 10 years later. Furthermore it is wrong to believe that several hundred letters could jam any postal system, my illustration was directed at anyone who believes that writing letters is pointless because they are ignored. Write the correct letters in sufficient volume and it will influence the recipients. I mention 1994 to prove my point. 

PIs who appear not to understand the nature of company they have chosen to invest in.  We understand the nature of Soco as well as you do, Peter, and I am surprised you think otherwise. For myself, I understand the risk of my share of the $400 million dividend money not coming to my family, but being blown in an African wildcat casino. Furthermore one which even if successful, may or may not pay out in 2023, and especially so if there is no track record of payments to shareholders in 2013. 

MD

Hi MD,

What I don't doubt is that ES was absolutely correct in his assumpotion that the filed is technically quite capable of those production rates.   Oh yes? Are you telling us that Soco did not know the FSPO capacity was more than a third less than the 95,000 barrels per day we were lead to believe would be achieved by August 2011? 

There is no evidence the capacity is less than 95k bopd, in fact there is plenty of reason to think it might be. What there is evidence of is lack of interest by PV in testing the full capacity, plus apparently issues relating to insurance. These can all be overcome, and hopefully will. Yes, as I said, the company could perhaps be criticised for not being clear enough about the potential road blocks in the way at the time, but I see no reason to suppose that the FPSO may not be capable of near to 95k once all the various parties get their fingers out.

This is why I am insisting that we must have a cash return or dividend

As I said, I suspect you will get your wish. However, the company have over the years added considerably to value, including the current value of your shareholding, through exploration, and they have also made it clear that they are currently considering investment in new opportunities. So don't be too surprised if some of the cash currently in hand or being thrown off does not make its way to your pocket via a dividend.

Would I welcome that? It would depend on what they buy into, and what they spend on it. However, I made a decision some years ago that I thought management overall knew what they were doing, and added value. They have always been prefectly clear about how they go about that so my view is if I don't like that then I can take my (considerable) profits and go elsewhere. What I certainly do not feel qualified to do is to make judgements about the best way forward for the company - if I felt my views were more valuable than management's I wouldn't be invested here - so I remain firmly not in favour of a campaign to persuade management to pay out cash. They are perfectly well capable of deciding on that by themeselves.

In reply to peterg, post #317

Thank you Peter, for adding to my knowledge. Also, I am glad to see that we have reached a consensus after a useful debate.

Mike

Hi peterg,

I'm not sure I agree with you on the FPSO capacity point : I seem to recall from the AGM and post-AGM discussion that (a) there was a nameplate capacity of 65,000 bopd and that (b) some capacity was earmarked for another co (Talisman ?) in consideration of their contributing for the cost of some other tie-in work........?

I may have been dozing at the back of the class (or flicking ink-balls) but that's my understanding , anyway.

After further reflection (and assimilation of the learned arguments here and elsewhere), I've partly rebought the trading positions sold off after the last RNS : like you/MadDutch, I think there's a more positive consensus than I initially felt.

Time (most imminently 11th March) will tell......!

ATB

In reply to extrader, post #319

I'm not sure I agree with you on the FPSO capacity point : I seem to recall from the AGM and post-AGM discussion that (a) there was a nameplate capacity of 65,000 bopd and that (b) some capacity was earmarked for another co (Talisman ?) in consideration of their contributing for the cost of some other tie-in work........?

The nameplate capacity is 55kbpod, which is what it is being run at. There is also 70 or so kbopd of water handling capcity that is currently heavily underutilised. The argument put forward was that it is technically possible to convert some of this handle additonal oil. We don't know for sure that is possible at the moment, as no one has tried. My point was that there is no evidence that it is not possible, and there is clear evidence that the failure try to raise production so far above 55kbopd has nothing to do the FPSO.

As for taking some oil from Talisman, you are correct (probably 15kbopd at peak I believe) but that wasn't the point I was making.

Also bear in mind that PV are in the process of building a new larger refinery and probably do not want any increased production until that comes on line. They are playing a much longer game than SOCO.

They are playing a much longer game than SOCO.

That Soco and PV may have different agendas regarding timescales of production would appear to be an important risk for Soco shareholders. Ultimately, if PV drag their feet or refuse to agree to accelerate production is there anything Soco can do about it? My impression is that Soco have little or no power to force the issue, should they need to.

Curious that my post, which I thought raised a reasonable question and concern, has just been given a "thumbs down" by someone.

Would that person care to explain their reasoning rather than remain anonymous?

In reply to redhill, post #323

Hi Redhill,

I'm not the one who did it, but I can assure you that a "thumbs down" doesn't necessarily mean that someone disapproves of what you wrote.

I've had "fat fingered syndrome" a few times where my mouse has slipped when I've been meaning to give a thumbs up and it's hit the thumbs down. It's quite easy to do when your hand-eye co-ordination is impaired, especially after you've had a few (as I have had at this moment after an excellent day at Taunton races).

When this happens I find previous posts from the same poster and give thumbs up to two posts.

re. Soco we're at yet another stage where PetroVietnam's agenda might not be all that closely aligned with Soco's, so the oily business becomes more politics than engineering..

Old-timers like me (first purchase back in 2000) are used to this!

You're right of course JD, I've actually done that myself with clicking the "wrong thumb" so should have thought of it! Thank you, appreciated.

Re: the Soco/PV different agendas point, I'd be interested if anyone can comment on whether they think my concern is unjustified, or is it something Soco shareholders just have to accept and hope doesn't become a serious drawback to extracting value?

O&G is is one of the Vietnam's biggest foreign currency earners, and taxes paid by PV amount to around 20% of Vietnam's budget. Meanwhile PV are  agressively increasing their reserves and Vietnam's oil consumption  is steadily increasing.. so I would say that PV clearly have a similar - though perhaps not quite as urgent- agenda to Soco.