Soco International (SIA)


Edmond Jackson's Stockwatch: SOCO International

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Strong preliminary results for 2012 from this FTSE 250-listed, international oil and gas explorer and producer underline its capability for project investment without the need for capital raisings that often dilute shareholders in this type of firm. "As we look forward into 2013, SOCO International (SIA) is now poised to take advantage of more substantial future growth opportunities."

Reporting in US dollars, post-tax profit on continuing operations is up 134% to $207 million (£139 million) on revenue up 166% to $621.6 million. Higher production and oil prices mean a 271% increase in operating cash flow to $334.8 million and already this year, balance sheet cash and cash equivalents have grown from $258.5 million  to $320 million as of 8 March. There is no dividend, however, and while the results statement posits a "2013 return of capital" this could conceivably involve an extension of the buyback policy of ordinary shares and convertible bonds. $34 million was spent this way last year with 2.2% of equity cancelled.

SOCO International - geographic information
Revenue is determined by destination of oil or gas sold
Revenue ($ million)
Australia 144.10
South Korea
Vietnam 87.862
China 20.554.9
Japan 025.9
Other 41.331.2
Total 621.6234.1
Non-current assets
($ million)
United Kingdom
Democratic Republic of Congo
Other - Africa

Progess has been helped by bringing forward additional production at the Te Giac Trang (TGT) field in Vietnam; and group cash flow enabled various project interests to be aggregated. After a difficult mid-2010 to 2012 period for the shares which saw the price nearly halve to 255p, SOCO has recovered progressively to 400p by early 2013, currently 385p after these results. Twenty-twelve basic earnings per share of 62.7 cents equates to about 42p hence a price-earnings multiple just over nine times. Forecasts vary but the consensus is for flat profits in 2013 with a modest improvement in EPS enhanced with buybacks.

The real interest however is potential step changes to value enabled by this strong cash position and busy activity. The most significant undrilled fault block on the TGT field is due to be drilled in April, which makes SOCO worth watching in the near term. A relatively high recovery factor of 45-50% has already been demonstrated and average gross production from TGT is now over 50,000 barrels of oil equivalent per day.

Elsewhere, offshore Vietnam the Ca Ngu Vang (CNV) field is to see an additional production well drilled, exploring the south-western corner. The East Lideka well in the Republic of Congo is planned to be drilled this summer, to test a structure of stacked plays and an up-dip from an oil leg encountered with a previous well. And in Angola, drilling the 20-6 and 20-7 exploration wells in the Dinge area is expected to start mid-year. At least one further, high-profile exploration project is targeted this year.

While valuation targets are sketchy and the shares must overall be viewed as speculative, SOCO's strong financial profile is making them look a better quality bet than in past years. They have yet to break out of an overall sideways trading range in the last five years but underlying progress like this makes it more likely. SOCO has suffered in the past from an image of exposure to risky countries but Angola has been reduced and Vietnam become more stable with its economy performing well - especially the automotive industry which bodes well for long-term fuel demand.

The principal risk would appear to be wider macro: say if tax increases and spending cuts weigh on the US economy and this triggers a fall in oil prices; then lower energy demand spreads to final destination countries where SOCO sells its oil andgas. Commodity prices also tend to follow an inverse relationship with the US dollar which may rise amid perception of being "less worse" fiat money than many other countries' devaluing to boost trade competitiveness. But oil prices can flare up anytime with political risk and the Middle East is chronically unstable.

So long-term investors should not fret over modest change in oil prices; SOCO's financial and development profile looks poised to generate ongoing value. Indeed SOCO shares could now be taking shape as a classic "momentum play" both intrinsically and in their price chart.

While the gross margin has slipped from 29.0% to 25.1%, the small aspect of administrative expenses - $12.3 million - helps make operating profit sensitive to revenue changes. Net finance costs are similarly a negligible drag, so the income statement profile also facilitates profit growth.

Within an overall strong balance sheet I should note that deferred tax liabilities have risen from $37.5 million to $113.3 million in context of $1,176.6 million net assets.

The directors own substantial shares, especially the chairman with 10.9% of this £1.3 billion (capitalised) company and the chief executive with 3.9%. While it has taken some years and shareholders' patience to get SOCO into a financially strong and promising position, their equity ownership should remain an incentive for the future.

A non-executive director has just spent £191,836 before transaction costs, buying 50,000 shares at £3.83672 per share to own 450,000 shares in total, so clearly he believes in the kind of momentum I describe and implicitly value.

So despite the aspect of speculation required, on drilling and oil prices, this therefore looks an interesting tuck-away growth share - especially for an ISA or SIPP - to follow.

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