A recovery in the oil price has yet to be reflected in the shares of oil and gas producer Soco International (SIA), so get in quick before the market realises this anomaly.

We think the improved commodity price environment, under a new executive team, can help switch focus from several years of managing decline to a renewed focus on growth, backed by an extremely strong balance sheet.

In the last three months Soco’s peers Cairn Energy (CNE) and Premier Oil (PMO) have advanced 25.9% and 37.8% respectively and even sector juggernauts BP (BP.) and Royal Dutch Shell (RDSB) have posted double-digit share price gains as oil prices have firmed to two-year highs above $60 per barrel. Over the same period Soco is nearly 5% lower.

Why? Investors seem to have lost patience as Soco’s production from its flagship TGT field in Vietnam has tailed off due to a lack of development drilling. The table illustrates how production has declined over recent years.

However, in 2017 activity has been ramped up with five development wells drilled and new capacity being brought on stream which should lay the platform for production growth over the coming two years.

Peel Hunt forecasts 10,000 barrels of oil equivalent per day (boepd) for 2018 and 14,000 barrels of oil equivalent per day in 2019. Guidance for 2017 is for between 8,000 boepd and 9,000 boepd.

Significant appointment

This week’s appointment of Mike Watts as managing director (MD) could be significant. He was among the architects behind Cairn’s successful exploration strategy in India which for a time propelled the company into the ranks of the FTSE 100.

Backed by net cash of $132m, Watts and fellow Cairn alumni Jann Brown, who is Soco’s joint-MD and chief financial officer, may add some exploration upside to the portfolio through acquisitions.

The company said two months ago it was ‘vigorously reviewing… growth opportunities and options to maximise value from its current assets’.

On 30 October the company announced that it had secured a 17% interest in two exploration blocks offshore Vietnam which it had been chasing for several years although any exploration drilling will have to wait until 2021 at the earliest.

Earnings and cash flow are likely to be constrained by investment next year but a free cash flow yield of 16.6% and price-to-earnings ratio of 6.3 times based on Peel Hunt’s 2019 forecasts is attractive for those prepared to look that far ahead. (TS)

‹ Previous2017-11-16Next ›