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Very interesting article by value the market based on interview with Ed Story
See below
http://www.valuethemarkets.com/index.php/2018/10/29/soco-intls-ed-story-plans-launch-firm-forward-major-progress-egypt-sia/
Again, fitting in with SOCO's low-risk approach, the Merlon acquisition comes with 1,570 square kilometres of acreage with some 70% already covered by 3D seismic. The success rate for new wells drilled on the basis of 3D seismic in this acreage is around 59%. In addition, the wells, as SOCO points out, are of a repeatable format. Basically, low-cost. Incidentally, according to Wood Mackenzie, the average cost of drilling a well in the Western Desert over the last ten years has been US$3.8 million with many coming in at less than US$1 million. So it's not going to be betting the ranch on one well. The acquisition seems to present a lot of low-risk development opportunities.
However, what I really like is that SOCO appears to be moving down, in a technical sense. It's going from technically complex offshore South East Asia to something far more amenable and onshore. If it was taking on a project that was of a different scale and more technically challenging, it would be far riskier. This seems very digestible.
However, the one possible downside I do see is getting paid on time. The Egyptian economy has gone through a huge upheaval since the unrest of 2011. The shortage of US dollars compelled companies linked to the Egyptian Government to hold back US dollar payments to international oil companies. Fortunately, the situation has improved substantially. And, of course, the country was bailed out by the IMF in 2016. So, it seems to be in reform mode. It aims to clear those debts in full by the end of 2019. But even in a worse case scenario, getting paid late is not the same as not getting paid at all.
How can you tell how profitable an oil company really is? With oil prices having made a strong recovery from their 2016 lows, most companies’ profits and margins are rising. That’s good news for shareholders. But over the long term, rising profits don’t always translate into market-beating shareholder returns. You see, oil companies annual profits are driven by operating costs per barrel in their reporting. But the cost of developing oil and gas projects is sometimes greater than the cost of operating them. Only by adding development costs and operating costs together can you understand the full-cycle cost. This all-inclusive measure gives us a longer-term view on profitability. We can use it to estimate whether a company is generating real wealth for shareholders, or whether it simply recycles profits into new projects without any residual gains. An easy alternative Companies don’t always provide their full-cycle costs. But you can get an idea of how profitable a firm’s investments have been using a standard accounting metric called return on capital employed, or ROCE. This compares operating profit to the capital invested in a business, (Then it gives a six year average for the 4 companies he’s covering with a ROCE percentage) Soco International (LSE: SIA) 13.0% Royal Dutch Shell 6.0% BP 1.0% Premier Oil (LSE: PMO) -0.7%
Why I like Soco Vietnam-focused Soco has paid generous dividends for a number of years, while maintaining a net cash balance. It’s no surprise to me that it ranks highly for ROCE. Perhaps by chance, Soco also recently published the full-cycle costs of an asset it’s planning to acquire. Merlon’s El Fayum asset in Egypt’s Western Desert has operating costs of just $6 per barrel, but a full-cycle break-even cost of $34 per barrel. Both numbers look attractive to me, but what’s so interesting is the difference between them. Perhaps this focus on full-cycle costs is why Soco has historically generated a higher ROCE than many of its peers. After recent falls, it is one of the top shares on my oil market buy list.
Unlike the aborted SDX deal to buy BP'S Egypt assets, SOCO's proposed purchase of Merlon Petroleum for US$215 million in cash and shares appears very manageable. Right off the bat, they are similar in terms of production' roughly 7000/8000 BOPD each. SOCO is not going into a completely different league in respect to output. In addition, as Ed Story, SOCO's CEO, recently pointed out in a Malcy interview, they know Merlon's management. There are long-standing relationships. And SOCO goes into the deal with a considerable amount of cash, around US$129 million as of the end of June 2018, as well as substantial and flexible financing totalling US$250 million. It's not taking on a mountain of debt, in relation to the assets acquired. And finally, it has made plain that the acquisition will not impact its dividend policy.
The last bit is very important. Unlike many resource companies, SOCO has a clear policy of distributing its surplus cash flow to shareholders. That's key to its business model. It's not a jam tomorrow stock based upon the promise of being bought out at some point in the future. And, by the way, many of those jam tomorrow resource stocks have Boards syphoning money out of the business from day one using a variety of devices from high salaries through to connected party transactions.
Using mobile version can’t get using theses touch type phones.
Workover Exactly my thoughts. I might look to nibble a few SDX if it drops a little tomorrow. Soco has a stronger balance sheet and can absorb BP Egypt. Maybe Mike, Jan and Ed are already o the phones, here’s me thinking aloud. Ed did point out that if the right asset or deal cane So o’s way and it fitted its profile, Soco would look at growth inNorth Africa.
I hold shares in SDX also ... smaller investment Than I have here. Quite frankly relieved that it didn’t go through! Biting more than can chew springs to mind! SDX should be looking at small producers producing between 1000-5000 and consolidating those not trying to chew up BP Egypt!
Thanks for posting Seven !
Great news ! I have a feeling they may exceed their end of year exit targets!
The oil is very much there ! They just haven’t been drilling due to their partners reluctance to spend cash! Remember when we had multiple rigs operating in Vietnam and consistent drilling we were producing around 16,000 bbls / day!
They recently had meetings in London with Vietnamese to discuss 2019 CAPEX plans ... hopefully they can agree to spend a little more !
SDX has announced that the discussions with BP re a significant package of assets have been terminated by ‘mutual agreement’ and the suspension of the shares has been lifted. Paul Welch, CEO said he was ‘clearly disappointed that the transaction had not materialised’ and that ‘we are screening potential deals all the time’. He added that, ‘we know that there will be others to fast track our stated goal to be a North African focused E&P of scale and that we will continue to build value from our existing business ‘.
From twitter: SOCO International plc ‏ TGT- 16AP Well flow test results: choke 34/64”, gaslift 1.0 mmscfd, oil 1,202 BPD, water 7 BPD, gas 1.27 mmscfd, THP 691psi, BHP 1798psi, THT 46 degC At this rate and an oil price of $85/bbl payback of well costs is effectively less than 4 months. I would’ve have thought they’d RNS this today as well as tweeting.
I see public !
You were referring to Egypt! It’s definitely not export routes because they are currently trucking their production. I think it’s most likely due to development plans to be finalised. As a minimum an FDP and funding must be in place before contingent Resources can be moved to 2P reserves..
I’m fairly confident that those numbers in Egypt are just for starters and over the next few months we should see significantly improved figures ! Specially when we have 3-4 rigs operating...
Thanks, workover. I should have been more specific in that I was referring to the 37mm 2C that they are claiming comes with the Egyptian acquisition. In the recent Malcy interview, Storey says something about moving the 2C to 2P (he may have said "we can", but I don't remember exactly). So I was wondering why it's contingent. Maybe it's as you said (referring, I assume, to Vietnam) that some oil fell out of reserves when prices dropped. If it's just a matter of price I hope that SOCO gets a CPR for Egypt asap, as $80 Brent should make a big difference. If SOCO can claim 40-60mm in 2P for Egypt, that makes the acquisition look very good.
https://total-market-solutions.com/2018/10/15/malcy-talks-oil-gas-part-v/
Public
Soco had 125mill bbls 2P reserves before the oil price collapse. Some of that was downgraded due to oil price, licence longevity, current production rates etc. The oil price is up now and they have resumed drilling (with more to come in 2019) so production should increase.. they have contractual licence renegotiations coming up ... after they are signed off, we should have an upgrade in reserves but probably a years or so away ...
Broker updgrade for SOCO. https://www.proactiveinvestors.co.uk/companies/news/206774/soco-international-tipped-to-rise-thanks-to-recent-deal-making-206774.html
Can someone please tell me the reason for the contingency? Difficulty of extraction? No current export solution?
For those looking for more background on the company, yesterday's Malcy interview with Ed Story, the company's CEO, provides much food for thought. Unglamorous it may be but SOCO has paid back substantial amounts to shareholders. Unlike some oil companies of a similar size, it does not appear to be on a quest simply to produce more oil. It distributes excess cash flow via dividends. From 2006 to 2017 it dispensed some US$476 million. Not only is it committed to this model but it's in the throes of expanding via a strategic acquisition in Egypt that should open up even more opportunities.
https://www.youtube.com/watch?v=uieCFpFdGCs
Very undervalued cash rich and asset rich play.
I agree at this sort of price point it’s a no brainier! Egypt alone was apparently valued years ago at 400 million! Which is the same as the current SP. Vietnam thrown in for nothing at this price !
Cheers Seven ! I recon CEY is he best London listed gold co! Specially after the RRS takeover !
This just has to be undervalued with the current POO & Soco low cost base- Ive been invested since earlier this year and have been suprised by the share drift downwards (looks like i got in a tad early) - more than happy to hold though and add when I can - great divi's too. Just needs a catalyst to lift things here, I was expecting a rise to 135 earlier in the year and im still expectant of us returning to that sort of level shortly (3-6 mths) - which would be a 50% + rise from these levels.
Workover A cracking interview by Ed and to the point...”There will be more to come, but they will be done prudently”...Plenty of upside to come, hopefully. Off the topic, your entry looks well timed for CEY and looking really promising. Good luck with all your investments.
Thanks for sharing Seven !
Very good interview! SOCO management need to be more visible !
Ed Story interviewed by Graham Malcolm Wood on Core Finance TV.
TSCO is a little left field lol ... I also have some none oilies to balance the risk..