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By Gary Newman | Wednesday 14 February 2018
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.
When SOCO International (SIA) announced a possible merger the market seemed to take the news well, but ever since then the share price has been on the slide and it looks like this could be a good buying opportunity.
The announcement in early January that it was considering a possible merger with privately owned Kuwait Energy – which would constitute a reverse takeover - caused the share price to rise to around 130p, but since then it has dropped dramatically and is now trading at pretty much a 12 month low at just over 90p to buy.
Any deal was still very much at the preliminary stage and the announcement was triggered by press speculation, and as yet no details have emerged of exactly what terms a merger would entail. But for it to go ahead it would have to be in the best interests of shareholders. Kuwait Energy certainly looks interesting though, as at the end of 2016 its 2P reserves stood at 810mmboe and it had net daily production of nearly 27,000boepd from its producing assets in Iraq, Egypt, Yemen and Oman. It is though also carrying quite a lot of debt on its balance sheet, and at the end of September 2017 it had a convertible loan of $155 million as a current liability, as well as longer term borrowings of $246 million. It is at least now profitable though, having made nearly $12 million over the nine months prior to that date, and having recorded losses previously.
The size of the reserves, plus the additional potential from exploration and further appraisal, does suggest large future upside potential though, and the company has just agreed a $100 million farm out of 15% of its Block 9 in Iraq to Dragon Oil, reducing its interest to 45% overall. There is little point going into great detail on all of its assets though at this point, until there is further news as to whether a deal is even being seriously considered.
Potentially though it would seem to be a good fit with SOCO, which will be looking to boost its production and is currently debt-free and with cash in the bank – at the end of 2017 cash stood at over $137 million. Production averaged just under 8,300boepd during 2017 from its assets in Vietnam, but isn’t forecast to be much higher during the coming year – although that will depend on further drilling at these producing fields (Te Giac Trang and Ca Ngu Vang) and is enough for the company to continue to perform well in a climate of higher energy prices. It does also have assets in the Congo and Angola but these are still at the exploration and appraisal stage, and although they have plenty of potential any production will be further down the line, especially in light of the recent decision that the Congo is no longer a core priority for the company.
The company is doing well from its existing producing assets, with cash costs of under $14/barrel and having achieved an average sale price of $56/barrel last year, so if the oil price stays at current levels this year should be even better. It has also been paying a dividend – 7p in total for 2016 – and the level for 2017 will be announced in March when it publishes its preliminary results. Any similar sized dividend for 2017 would give a very nice yield given the current share price.
This is the type of company that I would be prepared to take a chance on at the current share price, as even without any merger it looks to offer good value and plenty of future upside. Should a merger go ahead and be on good terms – I doubt that it will be accepted otherwise given that SOCO has the cash and listing, which Kuwait Energy needs – then I would expect things to work out well for holders at the time.
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