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By Gary Newman | Wednesday 8 November 2017
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
As an investor who has always been a big fan of oil and gas plays in general it is difficult not to focus on that particular sector at the moment, given the recovery that we have been seeing there. Some people may argue that the move has already happened and that oil prices might not go much above the $64 level that we have hit this week, and could well finish the year a fair bit lower – certainly somewhere in the high 50s wouldn’t surprise me, although a lot will revolve around the outcome of the OPEC meeting at the end of the month. Whilst that may be the case with the commodity itself, when it comes to equities many have lagged this commodity correction, and given the share price action of some of them, you could be forgiven for thinking that oil was still down in the doldrums and completely unloved.
Recently I have been covering a few companies – mainly producers – where I think an upwards correction is yet to happen, and I think that we can definitely add SOCO International (SIA) to that list, given that it has been trading around the yearly low in recent weeks.
The former FTSE250 company, with producing fields in Vietnam alongside development projects in Africa, has seen a steady decline in its share price during 2017, from around 160p at the start of the year to the current level of 118p and a market cap of around £400 million.
The main focus for SOCO is Vietnam, where it has been operating for several decades and has thus far invested over $1 billion. The bulk of production currently comes from the TGT field, which averaged just over 7,000boepd net in the first half of the year. This was a fair bit lower than the previous year – 10,862boepd net – but the company is taking measures to try and increase production again. The quality of the oil means that an average price of $53.90/barrel was achieved, which was more than $2 higher than the average Brent price during the period – so could now be more than $10 per barrel higher at spot prices.
Further development is also planned at TGT, with approval in place for an additional 18 wells to be drilled and new processing equipment having been put in place to double the amount of liquids which can be handled. The target at the H1-WHP platform where it has been installed is for 30,000bopd of oil and 50mmscfd of gas to be processed daily. The company is continuing to invest in the region, with $35 million of capex expected during the current year, and that includes acquiring seismic data for the offshore blocks 125 and 126, where it has recently announced a production sharing agreement giving SOCO a 70% operated interest in these exploration licences.
Low production costs of just $13/barrel helped the company to a $12 million gross profit for the six months up until the end of June, and a pre-tax profit of $5.6 million. It also remains debt-free – with net assets of nearly $830 million on the books – and had $106 million in the bank ($132 million in liquid assets), as at the last set of interims. The company has also regularly returned funds to shareholders along the way, with a final dividend payment of $21 million, more than double the previous year and equating to 5p per share – when taken alongside the interim dividend of 2p, that gave a yield of around 6% at the current share price.
The Vietnam side of the business certainly looks interesting on its own, but there is further potential upside from the assets in the Republic of Congo and Angola, although there are currently no specific plans in place to develop these licences. Progress in the Congo has been slow given that the Lidongo ST1 exploration well at Marine XI was tested at a rate of 4,800bopd of high quality oil, plus 3.5mmscfd of gas, back in 2014. But a 20 year production and exploitation permit is now in place at the licence, where SOCO has a 40.39% working interest, and alongside its partners it is now looking at how to commercialise the area.
There are risks here given the parts of the world where the company operates, but given how much it has already invested into Vietnam and how long it has been operating there, I think those are largely restricted to the African assets. Neither the Republic of Congo nor Angola are particularly safe places to operate, but they do have large oil reserves, so the potential is there. Amongst the small to mid-size producers, I think SOCO is one of those companies where enough of the value is underpinned by fairly stable production, whilst there is still plenty of further upside potential from the riskier assets. So for me it is definitely a speculative buy and hold from these levels.
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