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Both SOCO International (LSE:SIA) and Royal Dutch Shell (LSE:RDSA) a David and a Goliath in the Oil & Gas sector released interesting reports this morning which, when given a cursory comparison, indicated the unique situations that companies of vastly different sizes, but engaged in the same business, have to address.
A Little Bit About David (SOCO)
SOCO was admitted to the London Stock Exchange in May 1997 and has a market cap of £1,154 million with 331.9 million shares in issue. It’s turnover is £150.6 million with an EPS of 16.98 and a PE ratio of 21.24. It has a net working capital of £120.7 million and a net debt of £12.73 million. It has net assets of £790.6 million against total liabilities of £110.7 million. Its shares are currently trading at 348.8, up 10.9 pence (3.23%) on the day. The company has interests in Vietnam and Africa. SOCO is a constituent of the FTSE 250.
A Little Bit About Goliath
Shell has a market cap of £80,370 million with 3,738.14 million shares in issue. Its market cap dwarfs SOCO by a ration of 80:1. Royal Dutch Shell sits in the top five companies on the FTSE 100. It employs over 90,000 people in more than 80 countries. Its current share price is 2152.00, up 27.00 pence (1.27%) over yesterday. Shell has an EPS of 320.39 and a PE ration of 6.96. Its working capital is £27,351 million, 215 times larger than SOCO. Of course its net debt at £104,482 million is 8,000 times than SOCO. Shell has working capital in the amount of £27,351 million and net debt of £104,842 million. It has assets of £345,257 million versus total liabilities of £174,254 million.
These are huge differences. Not just for operations, but for investors as well. Shareholders in SOCO gained two-and-one-half times what Shell shareholders gained today. Ian’s £10,000 invested in SOCO yesterday gained him an additional £323. Shivantha’s £10,000 invested in Shell yesterday earned him only an additional £127.
What’s the Point?
If you haven’t figured it out by now, we’re going to have to go back to the basics — not the fundamentals — the basics. The Goliath reported this morning that drops in the market prices of natural gas and crude oil have been killing the company’s profits by 6.3%. The David reported a 400% increase in production.
Now, I realize that these two numbers don’t seem to be related, but they are. The issue in investing in stocks, especially in oil and gas producers, is not the size of the company, it is the potential of the company. One might argue that Goliath has more potential than David. Not necessarily. Remember, I said we are thinking basics. Can you imagine Shell announcing a 400% increase in production? Not very likely. Not without some massive acquisitions. The fact is that were it not for that 400% production increase, SOCO would be crying the same blues as Shell. Their production increase will drive more to the bottom line despite declining commodity prices.
Potential
What do SOCO and Shell have in common? What is it that they are trying to produce? If you said “Oil” or “Gas”, get your money out of the stock market now! You don’t understand. They are trying to produce PROFIT. Oil and gas exploration and production are the means to the end.
The stock market is not rocket science. Whilst I am not making any recommendation whatsoever, the reports issued by these two same-sector companies today prompted me to remind you to keep returning to the basic concept of potential. Sure, look at the fundamentals and do some proper analysis, but do not overlook potential. That means doing more research, including understanding a company’s operational philosophy — not the spin they put on their websites and in reports. Dig deeper. They all say they want to get a generous return for investors – that’s the sales pitch. What we all need to do is forget the sales pitch and pursue the questions of “How do you really expect to do that?” and “Does that really make sense?” Don’t stop until you have enough evidence to satisfy you that the potential is there.
A Final Thought
As an exercise, imagine that the company you are considering is entered in “Britain’s Got Talent.” Would the company be one of the absurd acts that never make it past the first round? Will it be one that has several rounds of terrific performances, but then it just doesn’t have the special stuff to take it to the top? Or does it have what it takes to be a winner? Do you get it now? You get to be the judge on “This Stock’s Got Potential.” Good luck.
