A new strategy at SOCO

Earlier this year, shortly after it rebuffed a reverse takeover attempt by Kuwait Energy, SOCO doubled down on a pledge to “build a growth-oriented E&P company of scale”. And to put it plainly, investors needed some hope. In recent years, the Vietnam-focused oil company has written down assets and overestimated its stewardship of capital. Although the group talks up its cash returns, it has also been largely run for cash, leaving investors wanting a clear strategic direction. Indeed, over the past year the shares have failed to match the appreciation of both the oil price and the dollar.

But the narrative has changed. Last week’s interim numbers were accompanied by a proposal to acquire Merlon Petroleum, an Egyptian oil producer with 6,500-7,000 barrels of daily output, low operating costs and a historic exploration success rate above 50 per cent. SOCO says the deal, which is expected to complete in the first half of 2019, will be “immediately accretive” to operating cash flow per share, and significantly improve its exploration prospects. As well as  $136m (£103m) in cash, Merlon’s private equity backers have accepted 66m as part payment in a vote of confidence in the combined entity.

The opportunity to double group production, and possibly increase Egyptian output to 15,000 barrels a day in five years, should not be underestimated. In recent years, by the admission of executive chairman Ed Story, the company was following a strategy of “depleting [the] resource base and paying it out to shareholders”. But now it has acreage in a prolific oil-producing region with operating costs of just $6 a barrel, access to cheap rig rates to expand the resource base, and an experienced operating team in Egypt who have elected to take shares in SOCO.