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Shares in Vietnam-focused oil exploration play Soco International fell some 20 per cent following news last week that long-awaited drilling results on its offshore 'E' prospect failed to satisfy market expectations of evidence for a jumbo combined gas and gas condensate field.
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The company hopes that the inconclusive oil, gas and condensate flows from the well will still be enough to justify the Vietnamese government granting it an appraisal zone around the target, where it can try again with some new wells - technically, its licence to explore this block expired at the end of 2007 but, due to rig complications, Soco was allowed to finish what it had already started.
The harsh fall in Soco's shares reflects the fact that for much of the past two years its shares have been considerably ahead of even bullish calculations of its core net asset value (NAV), based on existing or already-sanctioned developments. The same has been true of Tullow Oil although, conversely, this exploration bet has paid off handsomely as a string of exploration successes in Uganda and Ghana have slowly but surely converted 'hope' value to NAV. Soco's problem was rather that practically all of this 'hope' value resided in 'E' - so when it failed, the backlash was considerable but not entirely unexpected.
Concerns over how the market was valuing prospect 'E' underpinned our original advice to sell Soco at 1,511p more than a year ago (11 May 2007) - we then looked wrong as the price steadily climbed to £24, and remained elevated as the block took a full year longer to drill than anticipated. But the failure saw the shares drop as low as 1,280p - vindicating our strategy, which we previously had to defend through Soco's ascent, of only favouring oil stocks where notional exploration upside largely comes for free or, almost uniquely in Tullow Oil's case, is spread around a diversified group of good-looking plays, independent of one another. In the interim, other aspects of Soco's Vietnamese business have firmed up nicely, with first oil due from its CNV field anytime now. Hence, Soco shares now rate good value at 1,319p.
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-IC-1.5.4a-prod - 31/10/2008 13:11:34 - carlos.princz
