The Investment Column: Stall in oil price makes Soco a miss

Acambis; Aveva
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The Independent Online

Our view: Avoid

Share price: 1,232p + (44p)

Investing in oil companies is a tricky business at the moment. Ultimately, the share price performance of oil stocks depends on where the price of black gold goes. Lord Browne of Madingley, the chief executive of BP and the UK's leading oil man, believes the price could drop to $40 per barrel - about 43 per cent lower than where it stands today.

The past two years have been kind to Soco International. Anyone lucky enough to have taken a punt on the stock in June 2004 has still made roughly four times their money, even taking into account a recent sell-off that has seen the shares knocked back from 1,600p to 1,240p.

Soco has operations in two key regions: Vietnam and Yemen. The latter is in full production while Vietnam is in the developmental stages. Results for 2005 were impressive, with pre-tax profits more than doubling to $33.7m (£18.2m), and the company is undoubtedly operating at the cutting edge of the industry. However, the oil price rise seems to have stalled now and if it does turn in the direction that Lord Browne expects, Soco's share price is unlikely to continue to perform as it has done in the past three years. The group recently became the first mid-cap oil company to raise $250m (£135m) through a convertible bond issue. So the medium-term finances are secure and the company is free to continue its drilling programme without having to worry about running out of cash.

Yesterday's update hinted there is more good newsflow in the pipeline, and the Vietnamese assets certainly look exciting. But the news is in the price and there is still a lot of risk for investors. One well in Vietnam has disappointed, and should another follow suit the shares will suffer. The stock is also relatively illiquid, which magnifies volatility.

By any measure, the shares are not cheap. For those bullish on the oil price, the recent fall will be seen as a buying opportunity. However, in the short term the price of oil looks more likely to fall and if that is the case there will be better buying opportunities. Avoid.


Our view: Worth a punt

Share price: 154p (+22p)

The recent deal between the Swiss pharmaceutical giant Novartis and the UK biotech Intercell for its Japanese Encephalitis vaccine has thrown the spotlight on Acambis's product for the same market. Japanese Encephalitis is a viral disease transmitted by mosquito bites and causes inflammation of the brain, which may lead to permanent brain damage and has a high mortality rate.

The in-licensing by Novartis of Intercell's IC51 product means Acambis, the vaccine maker best known for its smallpox jab, will be competing with Novartis in the Japanese Encephalitis vaccine market. It is regarded as an attractive market, worth $500m.

Brokers at Evolution believe the market is sizeable enough to accommodate both vaccines and Acambis' ChimeriVax-JE is regarded as the more convenient product as it requires only one dose, compared with two for IC51, meaning travellers will need only one trip to the doctor. Also, Acambis and Novartis/Intercell are planning to launch in different markets first - Acambis wants to target endemic countries such as India to get its product on the market faster than if it went for US approval.

Acambis is lagging Intercell in the development of the vaccine and the Intercell-Novartis deal did little to alleviate the uncertainties hanging over the company. It is embroiled in a patent dispute with Bavarian Nordic but even so, Acambis should win at least part of a lucrative contract to provide smallpox vaccines to the US. The shares have fallen recently and look increasingly better value for those willing to take the risk.


Our view: Buy

Share price: 1,048p (+78p)

It's easy to overlook Aveva, previously known as CADcentre, given the palindrome it adopted as its name in 2002 bears a confusing resemblance to the insurance heavyweight, Aviva. But investors would do well to take note of the small-fry technology player that specialises in 3D plant design systems used by the oil and gas, power generation and shipbuilding industries. Aveva argues that over the past 10 years, about 80 per cent of offshore oil and gas projects have used its design technology to build rigs and refineries.

Aveva's exposure to the buoyant oil, power and shipbuilding sectors resulted in impressive results for 2006 and early indications suggest the momentum will continue. The company signed up a consortium of power design institutes in China yesterday in a deal worth $2.8m, further strengthening its position in Asia. The deal, which is large by Aveva's standards, has come earlier than expected. That suggests sales cycles are shortening - a trend that could prove positive. The company has also made strides in the US, the backyard of its key competitor, Intergraph, and a region that Aveva has struggled to break into. Further progress in the US in 2007 would be welcomed.

Last year, Aveva revenues climbed 15 per cent to £66m while profit before tax rose 25 per cent to £13.4m. After yesterday's 8 per cent rise to 1,048p, the shares have gained almost 50 per cent on year. If Aveva keeps performing well, there could be plenty more to come. Buy.