SOCO International PLC (LON:SIA) has been upgraded to ‘outperform’ by RBC Capital, which sees a positive impact from the proposed acquisition of assets in Egypt.
In September, Soco agreed a deal to acquire Merlon Petroleum, taking control of the El Fayum field, for $215mln. It promises to give Soco a producing, free cash flow generating oil operation with tangible development upside from discovered resources.
As well as the Merlon deal, the company has recently exited projects in Angola and the Congo.
RBC believes the company is in better shape in the wake of this round of deal-making.
“Management's recent divestments have jettisoned unwanted, non-core, distractions; and, looking ahead, we expect interest in the enlarged dividend-paying business to increase,” said RBC analyst Al Stanton.
He added: “Merlon adds oil reserves, production and cash flow with growth potential - the combination of an incentivized and well-financed new owner, higher oil prices and an improving outlook for the region should help unlock the potential of Merlon's El Fayum concession.”
The Merlon acquisition’s effective date will be set at to January 2018, assuming it is concluded following a shareholder vote in the first half of 2019, meaning that the benefits are essentially already accruing,
Whilst the addition tops up RBC net asset valuation for Soco, up to 127p from 124p, the broker claims in the business’s new form it is more difficult to justify such a large discount between the asset valuation and the stock market share price.
RBC’s new ‘outperform’ rating replaces its prior ‘underperform’ view, and, at the same time, the broker sets a price target of 125p, up from 115p.
Compared to a current market price of 87p, the new target suggests some 43.5% upside could be available for investors.