Bide time on Soco International shares

By Graeme Dickson
Updated: 13:34 EDT, 13 October 2010

The FTSE 100 dropped 20 points, or 0.29 per cent between last Wednesday and yesterday's close to finish at 5661.

In some ways, this isn't particularly surprising after last Friday's worse than expected US Non-Farm Payroll figures, which showed 95,000 jobs lost for the month of September.

Nonetheless there are still hopes that the bad news will in turn trigger the US government to stimulate its economy through additional quantitative easing.

How this will affect the equity markets in the long term is difficult to gauge. But the picture is more clear-cut for commodities, especially when it comes to the price of gold.

The yellow metal historically has an inverse relationship to the dollar and if the US policy makers flood the market with the greenback, the currency is likely to weaken, thereby increasing the value of gold.

The all-time high of $1359.5 was reached last week and although it is quite possible for the commodity to make a correction, it will likely be viewed as a buying opportunity.

As far as the index is concerned, 5600 should act as modest support while 5400 should prove to be a stronger prop. On the upside 5800-5825 should act as resistance, which if the price of commodities continues to surge, is likely to be tested.

Big mover of the week: how you can profit

One of the biggest fallers yesterday also happened to be the biggest loser of the week: Soco International (SOCO). It was down 17.6 per cent on its price last Wednesday, to close at 369.5p yesterday.

The company announced that its TGD-2X well in offshore Vietnam had failed to test oil at commercial rates, causing the FTSE 250 company's share price to plunge and wipe £291 million off its market value to £1.257 billion.

Interestingly, while a couple of brokers were quick off the mark to downgrade the stock, some - in particular RBC Capital Markets - stuck their necks out by saying that yesterday's fall was still speculative risk but that the stock should outperform with a revised target price of 520p (previously 550p).

The company is also exposed to the mineral-rich nation of the Democratic Republic of Congo, where it has two blocks it is exploring. Meanwhile, its Cuu Long Basin block in Vietnam gives the company modest revenues, expected to contribute towards the £82 million in projected turnover for 2010.

If all goes to plan, despite the patchy history not working in the company's favour, analyst projections for 2011 show Soco generating an earnings per share of 24.45p, placing the firm on a fair value of 15.5 times earnings.

The forecasts for 2012 place the company on a price to earnings ratio of 4.8 times, making this a slightly jam-tomorrow story to say the least. But for now, expect the shares to bide their time while events catch-up with the price. At some stage this will probably turn out to be a buying opportunity, but perhaps in the shorter term there are better oil exploration & production companies to trade.

Highlights from the FTSE 350 universe over the last week include:

• Halfords (HFD) dropped 8.72 per cent to 408p after it downgraded its own forecasts last Thursday, showing a fall in sales by three per cent for the second half of its financial year.

• Base metals miner Kazakhmys (KAZ) fell 5.6 per cent on Thursday to 1400p after the chairman Vladimir Kim offloaded a third of his shares to the Kazakhstan government, announced the previous day.

• Man Group (EMG) jumped up five per cent to 249.8p on renewed bid-talk from Bank of New York, rumoured to be at 390p a share, although little credence was attached to the gossip.

• On Friday Kenmare Resources (KMR), the recently promoted FTSE 250 titanium miner in Mozambique, fell 18 per cent to 17.2p after one of its ponds that collects by-products from its drilling broke and flooded a nearby village, causing a young girl to go missing.

• Heritage Oil (HOIL) leapt 7.45 per cent to 346p on talk of a positive drilling update in Kurdish controlled Iraq.

• Household goods and food producer Unilever (ULVR) slipped 1.68 per cent to 1814p on rumours that it was likely to warn again on profits.

• Prudential (PRU) fell a modest 1.26 per cent on Monday to 628.5p after the stock was downgraded by JP Morgan.

• Autonomy (AU.) the software business that recently warned on profits was under further pressure after another downgrade caused its share price to fall by 2.3 per cent to 1485p.

• As highlighted last week, large/mature people clothing retailer N Brown (BWNG) had a good day, up 4.2 per cent to 253p after well-received interims.

• Soco International (SOCO), as highlighted above, fell 18.7 per cent to 369.4p after its drilling update in Vietnam disappointed investors.

• Standard Chartered (STAN) rose just over two per cent to 1908p on loose talk that JP Morgan was to make a bid, albeit the rumour was scoffed at given the substantial size of Standard's market capitalisation of almost £40 billion.