The announcement yesterday from Soco International may not have been the one that investors were awaiting, but it was welcome all the same.
The £1.4 billion oil explorer said that it had agreed to sell its sole producing asset, an indirect 16.9 per cent interest in the East Shabwa field in Yemen, for $465 million (£236 million) to Sinochem, of China.
First, that move was consistent with Soco’s long-term strategy to focus on exploration and dispose of producing assets from which it believes that it can wring no more value. Previously it has sold oil and gas interests in the North Sea, Russia, Mongolia and Tunisia. Disposal of East Shabwa, whose ownership by Soco predates its 1997 stock market debut, is very much in keeping with that strategy.
Secondly, an implied value of $15.70 a barrel of proved and probable reserves represents a decent price. It compares favourably with the $7.50 a barrel that Eni, of Italy, paid for Burren Energy recently and the implied $12.40 that Tullow Oil secured last week for its stake in the M’Boundi field in Congo-Brazzaville from the Korean National Oil Company.
Soco’s shares rose more than 3 per cent after the announcement, made through the Stock Exchange. That Soco no longer has cashflow from production ought not to be a concern, given that oil and gas should begin to flow from its newer properties in Asia this year. Ca Ngu Vang, the first of its discoveries in Vietnam, should come on stream in the second half, as should its Bualuang field in Thailand.
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Yet it is the potential of Te Giac Den (TGD) in Vietnam that will determine Soco’s future. Roger Cagle, Soco’s deputy chief executive, describes TGD as the most exciting find in more than three decades in the oil business, and, at an estimated one billion barrels of oil, the field would appear to live up to that billing. The suspense for investors is that, having missed its end-of-2007 deadline to complete drilling - high pressure from the well meant that Soco had to call in more rugged equipment - results are now due within a fortnight.
That makes Soco perhaps the biggest short-term binary bet in the FTSE 250. Success with the drill bit in Vietnam could send its shares beyond £30; disappointment could see them test £15 or below. The lack of a mature gas market in Vietnam means that Soco faces tough decisions on what to do with the output should it succeed.
For those who can stomach the ride, the promise of TGD and the scope for takeover activity makes it worth sitting tight at £20.18.
Wolfson
Company directors are not always the canniest buyers of their own stock. That much is evident from Wolfson Microelectronics, whose chairman and chief executive bought nearly £1.1 million of shares late last year at prices more than 20 per cent higher than last week’s closing level.
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However, full-year results from the semiconductor designer yesterday went some way to reassure that their confidence was not wholly misplaced. Most important, Wolfson has not seen the sort of inventory build-ups at its consumer electronics clients that have hurt rivals recently and led to its profit warning of just over a year ago.
Although the company said that first-quarter revenues would be between $44 million (£22.4 million) and $48 million, against a consensus forecast of $52 million, the implied year-on-year growth of 10 per cent and 20 per cent indicates to what extent Wolfson continues to outpace the 4 per cent growth in its sector. Further, net cash of $90 million – only $9 million lower than a year ago despite two bolt-on acquisitions – demonstrated its cash-generative qualities. Greater encouragement came in signs of progress in its AudioPlus strategy, its plan to boost sales and margins by adding extra features to its core audio chips. Its power management chip, which extends battery life, is being used in Microsoft’s Zune 2 MP3 player.
Wolfson, a member of this year’s Tempus Ten, remains vulnerable to faltering consumer spending, but at 169p, or 12 times 2008 earnings, it has never been cheaper since floating five years ago. Yesterday’s bid forits rival SigmalTel from Freescale gives further reason to hold.
PSPI
Property companies have become accustomed to making writedowns over the past three months as the sector copes with the sharpest falls in capital values.
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Public Service Properties Investments (PSPI), an AIM-listed investor in British and European nursing homes, is notable for avoiding that fate: yesterday’s year-end trading update showed asset values to be broadly the same as six months ago.
Setting aside the prospect of further deterioration in the sector, the issues for investors should be gearing and the outlook for rental and capital growth. PSPI may have £100 million of net debt, but that compares with gross assets of £250 million. All its properties are fully let and 91 per cent of revenue is derived from index-linked leases, with an average lease length of 28 years.
PSPI raised £75 million at flotation last March to expand in Germany, where yields are higher than in the UK, the cost of debt cheaper and the demographics for care homes equally favourable. It has spent €10 million (£7.5 million) buying German assets and more deals are due.
At 94½p, the shares have fallen 37 per cent since the float and trade at a 40 per cent discount to net asset value, which, given a 6 per cent dividend yield covered by rental income, appears too low. But with PSPI one of many AIM property stocks at a similar pass, it is difficult to see what will drive it higher. Avoid.