My Largest Oil Holding Is On A P/E Of 5

Published in Company Comment on 14 June 2012

... and the management is hoping to interest a buyer.

My largest shareholding by a long way is Soco International (LSE: SIA), a small oil explorer that has been transformed into a medium-sized producer thanks to some spectacular discoveries off the south-east coast of Vietnam.

Yesterday I attended Soco's annual general meeting (AGM), as I have done for most of the 11 years since I became a shareholder. As per usual after the official business, Soco's boss Ed Story -- a larger-than life Texas oilman with over 40 years' experience in the industry -- gave a presentation, which was followed by a question-and-answer session.

Why small oil companies

When most people think of oil companies, the first names that usually come to mind are the supermajors such as BP (LSE: BP), ExxonMobil (NYSE: XOM.US) and Royal Dutch Shell (LSE: RDSB). The oil companies that many private investors like myself are much more interested in are smaller companies like Soco whose share prices can rocket (or collapse) depending upon their drilling results.

A relatively small discovery, such as a 100-million barrel oilfield that produces at 10,000 barrels per day, is chicken feed to a supermajor that is already producing several millions barrels a day. But to a minnow, this could be a company-transforming find that sends its shares into orbit -- and this is exactly what has happened to Soco.

What is Soco?

Soco was floated on the stock market in 1997. In the early days its main interests were in Mongolia and Yemen, but it's the discoveries off the coast of Vietnam that have been the real company maker.

Soco is well known among the community of Fools who specialise in oil shares, and some of us are still holding onto shares that are currently worth between 10 and 40 times what we paid for them. While the last four years haven't been too kind to Soco as its share price has fallen from a peak of almost 600p in 2007 to 282p, those of us who got in early can have no complaints, especially if we've taken some profits along the way.

Currently, Soco is exploring for oil in Angola, the Republic of the Congo and the Democratic Republic of the Congo. But the main interest to investors is Soco's stake in the Vietnamese oilfields and the substantial amounts of oil that it is now producing means that it is no longer seen as a pure exploration company by the market.

It's no secret that Soco, or at least its Vietnam interests, will be sold at some stage. Currently, the management is focused upon proving up the reserves and generating sufficient production data to interest a buyer. Soco is a company where the directors and related parties own a very big stake, so their interests are closely aligned with those of their shareholders. There aren't too many companies for which the same can be said.


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TGT = Loadsamoney

Soco's primary asset is a 30.5% stake in the Te Giac Trang (TGT) oilfield, which is about 100 kilometres off the coast of the Vietnamese city of Vung Tau. Production from TGT started last year and is expected to reach 55,000 barrels per day (gross) by the end of September.

Soco's other Vietnam interest is in the Ca Ngu Vang field (CNV), where it owns 25%, which is currently producing at 8,000 barrels per day (2,000 net to Soco). It is anticipated that production from CNV will rise by somewhere between 3,000 and 5,000 barrels per day in the next 12 months.

Based on the current oil price, I estimate that Soco's price-to-earnings ratio for 2012 is around 5. Soco doesn't pay a dividend.

Small oils are not for the nervous

Soco is a textbook example of a small oil company that's come good. Any investor who gets nervous if their shares fall by 10% should steer well clear of this sector as movements like this are par for the course. It's not at all unusual to see a small oil company's shares rise or fall by 50% in a week purely on the basis of good or bad drilling results.

This level of volatility comes with the territory, and virtually every private investor who has spent some time in this sector can tell you a horror story where they've lost somewhere between 50% and 99% of their investment.

For every Soco there are several companies like Frontera Resources (LSE: FRR) and Nighthawk Energy (LSE: HAWK), both of whose names cause a shiver to run down many investors' spines. My gains on Soco, my other big success Dragon Oil (LSE: DGO) and several other companies like EnCore Oil are many times what I've lost on small oil companies as a whole. If they weren't, I'd have long since given up on the sector.

AGM gossip

Shareholders were expecting a lot of news about the level of production from TGT, and the directors did not disappoint us. Ever since production started at TGT, there have been concerns in the market that the gross production target of 55,000 barrels per day was no longer in reach, and these have cast a shadow over Soco's share price.

It turned out that the bottleneck was because the technical team at Soco's joint venture partner PetroVietnam had capped production at 40,000 barrels per day. This was due to their lack of knowledge regarding this type of oilfield (the technical details about reservoir engineering mostly go over my head) and a hangover from Vietnam's communist past where people were strongly discouraged from beating their targets.

This dispute has now been resolved and the output from TGT should reach 55,000 barrels per day by the end of September. Production should then move on to higher levels; perhaps 65,000 and maybe even as high as 75,000. There is a four-year development programme that involves more appraisal drilling and higher production targets, so if Soco Vietnam isn't sold, then its shareholders still have plenty to look forward to.

Let me finish by adding higher-risk shares such as Soco can provide superb returns -- if things work out! If small oil companies interest you, then I feel you'd also like this special report:"Ten Steps To Making A Million In The Market". The report is free and is for ambitious investors only!

Further investment opportunities:

> Tony owns shares in Dragon Oil and Soco International.

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AChembi 18 Jun 2012 , 2:21pm

Hello Tony
Glad you are back in writing. Unfortunately some people do not really know how to pick Good shares. It is not ' Luck ' that determines the choice. A sheer hard work and understanding of individual shares to some extent contributes what is important in making a choice. For so long I had been recommending Dragon Oil as a Safe investment. We cannot deny facts and figures. The truth is Dragon Oil is a good counter.
Thank you

TonyTwoTimes 19 Jun 2012 , 10:05am

Hi AChembi,

Thanks. Yes, investment often requires hard work (ploughing through accounts, thinking about the prospects for the business, etc.) though it becomes easier over time with experience.

I took a week off writing for TMF because I had a tough Open University exam to revise for (Physics).



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