SOCO International plc (“SOCO” or the “Company”)
SOCO, an international oil and gas exploration and production company, today announces its preliminary full year results for the year ended 31 December 2016.
Ed Story, President and Chief Executive Officer of SOCO, commented,
“With our disciplined approach to capital allocation, we performed well against our peers during the prolonged oil price downturn and continued to return cash to shareholders, with a recommended 5p dividend announced today. Following the improved macro environment, we are increasing our efforts to provide material growth to the Company. During the extremely low and volatile prices, asset or corporate transactions were difficult to secure. However, at current, more stable prices we are seeing a window of opportunity which we intend to take advantage of in order to grow the portfolio and create more value for shareholders.
After nearly two years of very limited investment on our prime asset, we are now able to address the lack of drilling and the liquid handling restrictions on the TGT producing field. With development drilling recommenced at the end of 2016 and with an approved updated FFDP, we expect to arrest the performance decline and grow production.”
2016 FINANCIAL HIGHLIGHTS
- Robust balance sheet, zero debt, solid cash flow, low cash operating costs
- Year end cash balance of $100.3m (2015: $103.6m) and no debt;
- $150.5m as of 22 March 2017 following receipt of the remaining proceeds ($42.7m) associated with the disposal of our Mongolia assets
- Revenue of $154.6m (2015: $214.8m)
- Average realised crude oil price of $45 per bbl (2015: $54), a premium to Brent of over $1 per bbl
- $46.0m generated from operations (2015: $80.3m)
- After tax loss of $18.3m (2015: $33.8m loss)
- Cash capital expenditure of $40.1m (2015: $92.4m), fully funded from existing cash resources
- Vietnam $13.9m
- Africa $26.2m, including cost savings achieved on the MPS well
- Low cash operating expenditure of $11.70 per bbl1 (2015: $10.06 per bbl); operating cash flow break-even oil price per bbl1 still in the low $20s
- Year end cash balance of $100.3m (2015: $103.6m) and no debt;
- Recommended dividend of 5 pence per share (approx. $20.6m)
- Dividends to shareholders during 2016 of $17.5m via two 2p dividends (2015: $51.1m)
- $455m returned to shareholders to date.
2016 OPERATIONAL HIGHLIGHTS
- Net production of 9,883 BOEPD (2015: 11,976 BOEPD)
- Resumption of TGT development drilling in November
- Approval of the TGT updated FFDP
- New ventures negotiations for Blocks 125 & 126, offshore Vietnam, near conclusion; the execution of a PSC is expected 1H 2017
- Marine XI Lidongo Permit Production Exploitation Licence application has been approved by authorities granting 20 year rights; renegotiation of PSC commercial terms are near positive conclusion
- Group year-end 2016 commercial reserves 33.3 MMboe (2015: 37.3 MMboe) following production
OUTLOOK FOR 2017
- Continued focus on value creation, sustainable returns and capital discipline
- Heighten the pursuit of growth and rationalisation of our portfolio, with Mike Watts and Jann Brown, former FTSE100 directors, spearheading business development efforts
- Blocks 125 & 126, offshore Vietnam, PSC formal signing expected in the first half
- Production Licence applications to be considered for remaining discovery areas on Marine XI in Congo
- 2017 capital expenditure of approx. $50m to cover the development drilling and infrastructure upgrade on our existing Vietnam assets, purchase of seismic data for our new venture Blocks 125 & 126 in Vietnam and PEX bonuses in Africa on Marine XI
- Production guidance of 8,000 to 9,000 BOEPD for the full year 2017
SOCO International plc
Roger Cagle, Deputy Chief Executive and Chief Financial Officer
Antony Maris, Chief Operating Officer
Tel: 020 7747 2000
Tel: 020 3772 2500
NOTES TO EDITORS
SOCO is an international oil and gas exploration and production company, headquartered in London and traded on the London Stock Exchange. The Company has field development and production interests in Vietnam and exploration and appraisal interests in the Republic of Congo (Brazzaville) and Angola.
1 See Glossary
CHAIRMAN AND CHIEF EXECUTIVE’S STATEMENT
2017 marks the Company’s 20th anniversary. During the intervening period, the industry has experienced the highest ever oil prices and one of the most significant oil price downturns, but throughout, because of our disciplined approach to capital allocation, we have been able to deliver significant and sustainable value to shareholders.
A bright future, built on a solid past
With only one small equity fundraising subsequent to the IPO, bringing total equity raised since inception to $231m, we have built shareholder value; returned over $455m through capital returns, share buybacks and dividends. We have achieved this by recognising opportunity, capturing potential and realising value.
Early on, we recognised the significant opportunity in then under explored Vietnam. By initially focusing on the under-regarded basement plays, we acquired two blocks, Blocks 16-1 and 9-2, offshore southern Vietnam at the turn of the millennium. With basement exploration yielding results in Block 9-2 with the discovery of the Ca Ngu Vang (“CNV”) Field in 2002, emphasis on Block 16-1 changed to more conventional targets, delivering the discovery of the Te Giac Trang (“TGT”) Field in 2005. Our investment in Vietnam has been significant, but unquestionably fruitful. TGT and CNV together now comprise one of Vietnam’s largest producers, generating strong and stable revenues for SOCO and its partners throughout the commodity price cycle adding by continued low operating costs.
Through a series of 13 separate transactions, the Company internally funded a significant development programme in Vietnam and pursued new exploration ventures, primarily in West Africa. Since TGT production came on stream in 2011, not only were we able to continue to fund internally our ongoing development and exploration efforts, we were also able to commence sustainable cash returns to shareholders.
The challenge that comes with oil prices being at extreme lows or extreme highs is to sustainably deliver on growth without exposure to high risk and high cost exploration. However, as oil prices have recently recovered to a fairly stable mid-price range, we see a window of opportunity to deliver the growth aspect of our strategy for building shareholder value. Towards this end, in early 2017, we added two former FTSE100 executives to co-head a newly formed business development function. Dr Mike Watts and Jann Brown have the experience, track record and industry knowledge to add the next leg of growth to our stable and high value producing assets.
SOCO’s balance sheet remained robust throughout 2016 with zero debt, solid cash flow and low cash operating costs. The Company finished the year with no debt and over $100m in cash, cash equivalents and liquid investments after fully funding its operating and capital expenditure programme and returning $17.5m to shareholders through two cash dividends.
Overall net production was 9,883 BOEPD (2015: 11,976 BOEPD). Levels were slightly below the lower end guidance of 10,000 BOEPD due to a lack of development drilling for almost two years in TGT. This was primarily as a result of our joint venture government partners experiencing cash constraints, as well as unexpected additional production downtime due to pressure-testing on CNV, along with production stoppage to allow for rig positioning and down-well intervention work.
Capital expenditure in 2016, fully funded from existing cash resources, was $40.1m (2015: $92.4m), a significant reduction for the second year resulting from reduced or postponed spending on capital equipment that had little bottom line impact. Actual capital expenditure for Vietnam was below the $17m budgeted amount at just under $14m. This included long lead items for the anticipated resumption of TGT Field development drilling and new venture costs associated with Blocks 125 & 126. Capital expenditure for 2017 is for the infill drilling costs, costs associated with a water handling facilities upgrade following Full Field Development Plan (“FFDP”) approval and costs to complete drilling activities on the TGT-14X appraisal well. Capital expenditure for Africa exploration operations was $26m, reflecting cost savings achieved on the Mer Profonde Sud commitment well, drilled offshore Congo (Brazzaville) in Q1 2016.
Net cash generated from operations fell to $46.0m in 2016, from $80.3m in 2015, reflecting lower oil prices and the decrease in production described above. An average crude oil sales price of $45 per barrel was realised during 2016, representing a premium of over $1 per bbl to Brent and generating revenues of $154.6m (2015: $214.8m), against low cash operating expenditure of $11.70 per bbl (2015: $10.06 per bbl). SOCO’s full operating cost break-even oil price per bbl remains in the low $20s. The Group posted a loss of $18.3m (2015: $33.8m loss) in the period after taking account of taxation. There has been no impairment of our producing assets in the period (2015: nil).
In December 2016, SOCO received $10.0m as partial payment for the $52.7m Subsequent Payment Amount associated with SOCO’s 2005 sale of its Mongolia assets. The full remaining unpaid amount of $42.7m was received in March 2017. Group year-end 2016 commercial reserves were 33.3 MMboe (2015: 37.3 MMboe), down from year-end 2015 primarily due to yearly production.
Operations on the TGT and CNV Fields in our core business area offshore Vietnam were centred on optimising production efficiency, and preparing for and beginning the next phase of development of the TGT Field aimed at a halting the production decline resulting from almost two years without drilling activity on TGT, which remains not fully developed. The 2016 TGT development drilling programme commenced in the latter part of 2016 in advance of formal approval of the updated FFDP in February 2017, signalling a positive realignment amongst partners.
Production averaged 9,883 BOEPD net to SOCO’s working interest (2015: 11,976). SOCO’s production guidance range for 2017 is affected by the additional shut-ins on TGT planned to accommodate rig moves, as well as the extended shut down for the installation, hook up and commissioning of the equipment for additional liquid handling capacity, and the FPSO maintenance shut down. Thus, full year production guidance for 2017 is presently anticipated to average 8,000 to 9,000 BOEPD net to SOCO’s working interest.
Block 16-1 – TGT Field – Development Drilling and Optimisation
(30.5% working interest; operated by Hoang Long Joint Operating Company (“HLJOC”))
Well intervention work carried out in 1H 2016 included perforations to six wells and a water shut off liner on one well. The impact of the interventions exceeded expectations by adding approx. 2,200 BOEPD to gross production.
The 2016 TGT Development Drilling Programme recommenced in Q4 2016. Drilling began with two infill wells, TGT-27PST1 and TGT-28P, "batch drilled" on the H4-WHP. The HLJOC partners have agreed to add an additional infill well from the H1-WHP, which commenced on 8 March 2017. Following that a further infill well on the southern H5-WHP, followed by the TGT-14X well drilling into the H5 South fault block, are also planned be drilled as part of the 2017 programme.
The first full draft of the updated FFDP underwent review by all the HLJOC partners during 1H 2016. SOCO utilised the review period to ensure that the FFDP development scenarios match the Company’s performance objectives. The final draft of the updated FFDP was formally submitted to the relevant authorities during 2H 2016. Approval was received during Q1 2017.
Block 9-2 – CNV Field
(25% working interest; operated by Hoan Vu Joint Operating Company (“HVJOC”))
Discussions with the Bach Ho owners are ongoing to establish the most effective means of enhancing performance through modifications at the reception terminal.
Marine XI Block, offshore Congo (Brazzaville)
(Operated, 40.39% working interest)
The Marine XI partners secured the 20-year permit for the area around the Lidongo discovery well in September 2016. The partners will consider submitting three additional PEX applications over Lideka East, Viodo and Loubana prior to the end of the Marine XI Exploration Licence.
Mer Profonde Sud (“MPS”) Block, offshore Congo (Brazzaville)
The Baobab Marine-1 commitment well spudded on 5 February 2016, but was plugged and abandoned after no hydrocarbons were encountered. All parties agreed to relinquish the MPS Block at the licence expiry date of 31 May 2016.
Cabinda North Block, onshore Cabinda, Angola
(Non-operated, 17% working interest)
During 2016, discussions continued amongst the partners and with the authorities to agree the new partnership, operator and activities during the licence extension period to April 2018. The legal documents to complete the changes are now being circulated among the parties for formal approval.
Negotiations are near conclusion for a 70% interest in a Production Sharing Contract (“PSC”) over two blocks, Blocks 125 & 126, in the Phu Khanh Basin offshore central Vietnam. The PSC amongst SOCO, Sovico Holdings Company and PetroVietnam is expected to be executed during 1H 2017.
The Company actively reviewed acquisition opportunities throughout 2016 and is continuing this initiative through 2017 with a newly launched business development group.
During the year, John Norton and Robert Cathery, retired from the Board at the June AGM, after announcing in March 2016 that they would not seek reappointment by shareholders. Marianne Daryabegui stood down from the Board at the expiry of her initial contract in October due to her employer limiting its employees’ participation as non-executive directors. In January 2017, Mike Watts stood down to co-head Business Development for the Group. Rob Gray, the Board’s Senior Independent Director, has replaced Mike Watts as Chairman of the Audit & Risk Committee.
Corporate governance remains a priority and the Company remains committed to its programme of Board refreshment. The Directors will continue to review the balance and effectiveness of the Board with a view to adding independent non-executives commensurate with our size and need.
The Board proposes a final dividend for the year ended 31 December 2016 of 5 pence per share which will be recommended for shareholder approval at the Annual General Meeting to be held in June of this year.
SOCO remains committed to the strategy of value creation for shareholders including through sustainable cash returns and growth of the ongoing business. SOCO’s capital strategy includes retaining a strong balance sheet under all reasonable oil price scenarios and maintaining flexibility to invest organically and inorganically in attractive risk/return profile projects.
The Company’s consistently successful management of its asset and capital base has enabled it to return over $450m to shareholders over the last eight years via dividends, capital returns and share buybacks, and through the difficult market economy of 2016, to deliver a fully funded capital expenditure programme and two, 2 pence cash dividends. SOCO continues to generate solid cash flow, closing the year with over $100m of cash and no debt.
In recent years, significant differentiators have developed between the Company and its sector peers:
- Balance sheet strength, no debt and steady cash flows
- Low operating costs and attractive production economics
- Sustainable cash returns to shareholders
In 2017, our focus will be three-fold:
- Continuing our disciplined approach to capital allocation;
- Arresting the decline of our major producing asset, the TGT Field; and
- Growing the portfolio of assets.
We seek to seize real opportunities as they arise, looking to optimise exposure to upside without jeopardising the Company’s focus on sustainable cash flow generation. The launch of the new Business Development group has added impetus to these efforts.
In the coming months, we expect to announce a new PSC over two blocks, offshore Vietnam, adding to our existing strong presence in the region. For our production assets in Vietnam, development drilling and infrastructure upgrade on TGT remains a priority. Production guidance for 2017 is maintained at 8,000 to 9,000 BOEPD for the full year 2017. Efforts to maximise value from our Africa exploration portfolio will remain a prominent feature in 2017.
Although we do not foresee a return to either the recently experienced low oil price environment or the extremely high oil prices of past years, we remain confident that, regardless of the macro environment, our strategy will deliver substantial and sustainable value to shareholders, as has already been demonstrated in the past.
Rui de Sousa
President and Chief Executive Officer