Sometimes it is hard to fathom why a company with strong fundamentals continues to be unloved by the market, and for me that is very much the case with SOCO International (SIA) at the moment, and has been for some time now. Lately the share price has slipped and is now trading at around the 88p level, and whilst it has bounced around 10% from the recent low of 80p that we saw, it still seems incredibly cheap at a market cap of just over £300 million, especially when you consider the current strength in oil prices.
Recently we have started to see all sorts of sky high predictions for where the oil price is heading, and whilst I don’t share that view as some of the figures being quoted are completely unsustainable in terms of maintaining strong demand – as we have seen previously at much over the $100 per barrel level – I can certainly see it remaining at this sort of level. Some will argue that supply and demand dynamics don’t support the current price longer term and the rally has been very much driven by sentiment, there have been periods in the past where that has been the case for a number of years – it certainly was true prior to the most recent crash in oil price. But as long as we don’t see a sustained period of very low oil prices, then I find it hard not to see value in SOCO at the current share price, especially if its future growth plans come to fruition in the way that the company is expecting. It already had strong production at its TGT and CNV fields in Vietnam, averaging 7,748boepd for the first half of 2018, and whilst it has encountered a few problems with additional drilling operations at these fields – delays to rigs arriving and then drilling issues at the CNV-5P sidetrack – which has caused a downwards revision in full year guidance to 7,000-7,400boepd, these are only temporary problems and shouldn’t negatively impact on future production levels. News should be fairly imminent on the outcome of operations at CNV, and this rig will then move onto the TGT field.
Recently the company announced that it is diversifying its production via the acquisition of Merlon Petroleum El Fayum in Egypt, and that will significantly increase overall daily output, as well as adding to its existing reserves. Some will argue that this $215 million acquisition isn’t cheap – it consists of $136 million in cash and the remainder via the issue of 66 million SOCO shares – but the saying ‘you get what you pay for’ usually rings true when it comes to natural resources, and I believe that it is a good long term move for the company. As part of the deal it will also repay the outstanding $22 million of debts that Merlon has. This deal should be completed in early 2019 and is effective dating back to the start of 2018. The crux of the deal is that it will add 24 million barrels of 2P reserves, along with further 2C contingent resources of 37mmbbls, and in 2017 OPEX for this Western Desert asset was just $6/barrel. Last year the asset was producing at nearly 7,900boepd, but there is plenty of potential for that to increase, with over 15,000boepd being targeted by 2023 – so even if the Vietnam fields don’t see an increase in production in that timeframe, it would still mean that SOCO would likely be producing more than 22,000boepd by then. Admittedly that level of production from the El Fayum field won’t be sustainable longer term and will need to exploit the current 2C resources, but it still has a lifespan that should prove to be very profitable for SOCO over the next decade or more.
Once the deal completes it will mean that SOCO has 2P and 2C reserves and resources of 111mmboe, and based upon that I see the current market cap as being cheap, even allowing for the associated risks and discounted future cash flows. Financially the company also appears to be in good shape with a robust balance sheet and plenty of headroom via its reserve based lending facility, even post acquisition, and even based solely on its net asset value of $476 million as at June 30 2018 and ignoring its future potential for growth, it looks cheap. It is also one of the few AIM resource companies that has actually returned a significant amount to investors over the years – more than $500 million to date – and in the last interim accounts it announced a dividend of 5.25p per share (equating to $23.3 million), representing a yield of around 6%, which is very decent for this type of company at this stage. You could argue that I am biased as I do hold some shares here myself, but I find it hard to see what isn’t to like at this share price level – aside from oil price risk, which applies to any company in this sector - and am planning to add to my position.
Filed under: SOCO International, First Derivatives, Versarien, Bowleven, Falanx, Shoe Zone
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