Soco compelling on three fronts

True, investors are less willing to back pure exploration plays in the oil & gas sector than in the past. That's probably good news for Soco since its progress has been based upon production growth, as opposed to what industry insiders call 'high-impact' (ie, riskier) exploration exposure. Nonetheless, though Soco's valuation is now underpinned by a dependable revenue stream, the company's mid-tier status means exploration success still has the potential to deliver lots of upside. In other words, the scale of Soco's existing production and cash flow means it isn't overly exposed in the event that it drills a dry exploration well, yet it isn't so big that a drilling success goes unnoticed.

In the near term, there's a share price catalyst in the offing through an offshore exploration well in Congo-Brazzaville. Drilling at the Lidongo XI Marine-101 well commenced earlier this month and is expected to take 35 to 45 days to complete. The drilling is designed to test how far - if at all - the adjacent Litchendjilli oil and gas find by Italy’s Eni SpA extends into the Marine-XI license block. Soco has yet to make a penny from its West African assets, but the sheer size of the Litchendjilli field gives cause for optimism. If successful, Soco may be tempted to offload its 40 per cent stake in Marine-XI, as the company has a track record of exiting investments on the back of exploration success. It has previously cashed-up on early-stage exploration success on assets in Yemen, Thailand and Mongolia.

Elsewhere, the company's prime focus remains further expansion of production capacity at Vietnam's TGT. The 16 producing wells at TGT pushed Soco's average working interest to 16,694 barrels of oil equivalent per day (boepd) through last year; that's a 13 per cent step-up from 2012.

True, Soco recently revealed that some operational issues had delayed planned expansion work on its producing fields in Vietnam, but its net production guidance for 2014 remains at 14,000 to 15,000 barrels a day. The 2014 TGT development drilling programme is now under way and Soco and its partners in TGT are working towards getting approval for the H5 field development plan. Last year, in testing, the TGT H5 exploration/appraisal well produced over 27,600 barrels a day, making it one of the highest flow rate wells ever achieved in Vietnam. It's projected that H5 will bump up capacity at the TGT field by between 15,000 and 25,000 barrels when it comes onstream, possibly in the third quarter of 2015. True, there are concerns about Soco's over-reliance on TGT, but worries over asset concentration have been tempered by continued drilling success.

Potential investors in Soco also stand to benefit from increased largesse on part of the company. Last October, it returned $213m to shareholders and is committed to returning at least 50 per cent of the previous year's free cash flow each year. That amount will always be sensitive to the oil price and to capital spending, but, for 2013, it came in at $200m (£118m). So the minimum payout is equivalent to 17.8p a share - an implied yield of 4 per cent at the current share price.