Soco Seen as Next Target After Coast Energy Bid: Real M&A

Soco International Plc, an oil explorer operating off of Vietnam, is turning into the next takeover target for Asian energy companies as PT Pertamina’s bid for Coastal Energy Co. accelerates the race for energy assets.

Pertamina, Indonesia’s state-owned oil firm, confirmed this month that it approached Coastal Energy in a bid to grab an explorer that produces oil in Southeast Asia and generates cash. Soco, a London-based company with its largest production project off the coast of Vietnam, shares these attributes, increasing its allure for other state-owned Asian energy firms looking to secure reserves, according to Jefferies Group Inc.

With proven oil deposits that produced record revenue in the first half of the year, Soco generates more cash flow for shareholders than 88 percent of oil and gas explorers valued at more than $1 billion, according to data compiled by Bloomberg. Potential buyers may include state-owned energy firms such as Vietnam Oil & Gas Group, according to Guinness Atkinson Asset Management Inc., while Royal Bank of Canada said independent companies such as Talisman Energy Inc. also could be interested in Soco. Numis Securities Ltd. estimated that the $1.8 billion company may fetch a premium of more than 53 percent.

For acquirers, “there does seem to be a bias towards companies that have low exploration risk, that have assets where reserves are proven and ideally where there is also some production in play,” Will Riley, a London-based fund manager at Guinness Atkinson, which oversees $750 million, including Soco shares. “Soco is in good shape from that perspective.”

Sovereign Supply

When asked whether Soco would consider selling itself or has been approached by suitors, Deputy Chief Executive Officer Roger Cagle said that while the company collaborates with other producers and routinely talks to others in the industry as part of its business, Soco “is not for sale.”

“Obviously as a public company, if someone makes an approach, then you are obliged to act or react in a certain way and of course, as a public company we would do that,” Cagle said in a Nov. 17 phone interview. “But clearly the for-sale shingle is not out on this company.”

Soco produces oil from two blocks off the southeast coast of Vietnam in which Vietnam Oil & Gas, known as PetroVietnam, and Thailand’s PTT Exploration & Production Pcl also have stakes. Soco also has exploration ventures in Africa.

Shares of Soco climbed to 365 pence, the highest level in more than a year, on Nov. 8, a day after Pertamina said it submitted a bid for Coastal Energy, a Houston-based oil exploration and production company with interests in Thailand and Malaysia and a market value of C$2.3 billion ($2.3 billion).

Today, Soco shares rose 2.8 percent to 359.80 pence at 3:32 p.m. in London.

‘Significant Production’

Soco also could attract national oil companies because, like Coastal Energy, it has “significant production and cash flow,” Laura Loppacher, a London-based analyst at Jefferies, said in a phone interview.

Soco had $224.4 million in cash and equivalents, and no debt as of June 30, according to data compiled by Bloomberg. The company’s free-cash-flow yield, a measure of how much cash from operations a business generates relative to its share price, is 7.3 percent, while the average oil and gas exploration and production firm valued at more than $1 billion has negative free cash flow, the data show.

While production at Soco’s Te Giac Trang fields off the coast of Vietnam trailed targets during its ramp-up in 2011, the company boosted output in July to 55,000 barrels a day from 42,000 previously. Production reached more than 60,500 barrels a day earlier this year, and was tested at 58,867 barrels a day on Oct. 30, the company said in a Nov. 1 interim statement.

Proven Reserves

The company may increase its estimate for oil and gas resources by the end of the year following its expanded operations in Vietnam based on accumulated data from the fields, Cagle said Aug. 22.

Paul Mumford, a London-based money manager at Cavendish Asset Management Ltd., said Soco’s cash flow and improving results in Vietnam offer a potential buyer the chance to gain access to oil reserves without the risk that comes with searching for them.

Soco “has a good level of production, which is always quite useful,” Mumford, whose firm manages about $1.2 billion, including Soco shares, said in a phone interview. “It can often be much cheaper to buy a company rather than to explore for oil and not only have the hit-or-miss chances of success but also the time limit to actually get that all on stream. In the case of Soco, much of the hard work has already been done.”

Oil Assets

Oil companies in India and Japan, as well as PetroVietnam, could be interested in acquiring Soco to boost their oil assets, said Riley, co-manager of the Guinness Atkinson Global Energy Fund, which oversees $110 million.

Representatives for PetroVietnam didn’t respond to phone calls and e-mails sent after normal business hours seeking comment on whether the company would be interested in purchasing Soco.

State-run energy companies have been pushing to lock down more oil reserves, according to Simon Lockett, chief executive officer of Premier Oil Plc, a London-based oil and gas explorer.

PTTEP, Thailand’s biggest publicly traded oil and gas explorer, won a bidding war in July for London-based Cove Energy Plc, while Petroliam Nasional Bhd., the Malaysian state-run producer known as Petronas, offered in June to acquire Calgary-based Progress Energy Resources Corp. While the agreement was rejected by Canada, Petronas signaled that it’s open to negotiating with the government.

More Deals

Cnooc Ltd., China’s largest offshore oil and gas explorer, agreed in July to buy Calgary-based Nexen Inc. That deal is also pending Canadian approval.

“Inevitably we will see more of that as major national oil companies try and secure reserves and production for their home countries,” Lockett said in a Nov. 15 phone interview.

Talisman, which is based in Calgary and has operations in Vietnam, could also seek to acquire Soco to expand its presence in the area, said Al Stanton, an Edinburgh-based analyst at RBC.

“People who are already big in Asia, who would feel comfortable operating in Vietnam” are the most likely suitors for the company, Stanton said in a phone interview.

Phoebe Buckland, a spokeswoman for Talisman, didn’t respond to a phone message and an e-mail seeking comment on whether the company would be interested in purchasing Soco.

Soco management’s willingness to serve the interests of shareholders may signal an easier path for any buyer seeking to do a deal, Stanton said.

Building Value

Soco said in its Nov. 1 statement that the company’s directors “continue to examine all avenues” for building shareholder value.

“They have an eye for doing deals,” Stanton said.

Stanton estimates a buyer could pay 450 pence to 490 pence a share to acquire Soco, at least a 29 percent premium to last week’s closing level. Sanjeev Bahl, a London-based analyst at Numis, said the company could fetch more than 534 pence a share in a takeover.

Buyers could hold off on pursuing a deal with Soco until they are more confident in the company’s ability to meet its output projections at its TGT fields in Vietnam, Bahl wrote in a Sept. 25 note to clients.

“Additional production history is required in order to get comfortable that TGT plateau production rates are sustainable,” Bahl wrote.

Still, while output at the TGT field has the potential to come in on the low end of projections, it also could exceed them, said Guinness Atkinson’s Riley. With the company valued “reasonably cheaply” versus its proven reserves, now may be the time to do a deal, he said.

“It’s a stream of reasonably cheap oil that could be bought today with a reasonably good reserve life of around 10 years,” Riley said. “You could see this as a kind of potential upside for a buyer -- someone could buy these assets now and in fact, the reserves could end up larger than the current valuation” is pricing in.

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