2015 was already shaping up to be a disappointing year for investors in oil producer SOCO (LSE: SIA), with the company’s shares falling heavily since the turn of the year in line with a weak wider oil sector. However, this morning’s 16% drop means that they are now down by 51% since the turn of the year and, looking ahead, the company’s shares could come under further pressure.
Of course, today’s production update is the catalyst for the aforementioned share price slump in the current trading session. Since the turn of the calendar year, SOCO has produced an average of 12,000 barrels of oil equivalent per day (boepd). As such, the company has revised its full-year production guidance from 11,000-12,000 boepd to 11,800-12,000 boepd, mainly as a result of the earlier start-up of the H5 wellhead platform in Vietnam.
H5 commenced production on 10 August, which is ahead of schedule and ahead of budget, with it currently producing from five wells. Despite this, current H5 production is below expectations at 9,000 boepd, with the Oligocene wells being the cause as a result of lower reservoir permeability than expected. Work is ongoing to optimise H5 performance from current wells and SOCO believes additional production potential exists in unperforated intervals, with the scope for this due to be identified in future.
Clearly, SOCO has been a poor place to invest this year and, looking ahead, its shares may continue to disappoint in the short run. That’s because the company is expected to post a fall in its bottom line of 28% in the current year. This has the potential to hurt investor sentiment in the stock and, with the price of oil seemingly set to remain near to its current level over the coming months, investors in SOCO may fail to benefit from a positive external impact. In fact, it seems prudent to assume that the oil price will not rise at a significant pace in the short to medium term, thereby keeping investor sentiment in the sector somewhat downbeat.
Despite this, SOCO could prove to be a sound long-term buy. That’s because the company is forecast to increase its net profit by 110% next year and, while such guidance may be subject to change, SOCO’s valuation appears to offer a relatively wide margin of safety. This is evidenced by a price to earnings growth (PEG) ratio of just 0.3, which indicates that there are strong growth prospects on offer at a reasonable price.
Certainly, the oil and gas sector is a highly volatile space in which to invest at the present time and, as SOCO’s share price shows, major declines remain a very real threat to investors. However, with the company moving in the right direction regarding its production potential over the medium term, it could prove to be a logical purchase at the present time.
