One to Watch: Drilling for a bargain

NEWS flow from SOCO International should pick up from the second quarter this year as appraisal drilling commences in Vietnam and wildcat exploration follows in the Democratic Republic of Congo (DRC).

Progress in Vietnam would help confirm the value of the SOCO's Vietnamese portfolio. We believe management's medium-term objective is to sell its the portfolio and return cash to shareholders.

SOCO generated few headlines last year and the stock underperformed its peers. Consequently, it is now one of the cheapest stocks in our FTSE 350 universe – the shares trade at a 28 per cent discount to net asset value, well below the 16 per cent sector average discount.

We expect this discount to unwind as SOCO embarks on the appraisal drilling campaign off Vietnam.

Step-change growth could come in the third quarter, from a high-risk, high-reward exploration drilling campaign in the DRC, where management has mapped three large prospects. Even assuming SOCO brings in a partner to finance the drilling programme, we estimate the three-well campaign could add 740p to our sum-of-the-parts valuation.

January's 100 million placing addressed our financial concern – the early redemption in May of SOCO's $250m convertible loan note. We also believe the market has now priced in the technical issues at the CNV oil field in Vietnam that are causing production to be reined back.

Significant sector out-performance probably depends upon a successful wildcat exploration drilling campaign in the DRC. Therefore, the key risk to our recommendation is exploration failure.

Investment markets and conditions can change rapidly and as such the views expressed should not be taken as statements of fact nor should reliance be placed on these views when making investment decisions. Past performance is not a guide to the future.

Paragon

145p -7.9p

Broker says BUY

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ProStrakan

110.5p -0.5p

Broker says ADD

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