Malcy's Update

Not sure if this has been posted yet - apologies if it has; I'm on the road.

gh.

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FAR Limited
Readers will know that I have been planning a piece about FAR that addresses some of the points I am regularly being asked about regarding where FAR goes from here, how the ConocoPhillips ‘exit’ has affected them and what options they have from here. It looks to me that COP has effectively driven a coach and horses through the letter of the law and certainly the well accepted behaviour of partners in a joint venture  as it exits Senegal. The deal with Woodside appears to have been done almost as a ‘fait accompli’ and whilst FAR has tried to understand the terms of their pre-empt rights (after all, they were offered these rights from COP), they have been frustrated at every turn. Attempts through the usual official routes have appeared to have so far failed despite the fact they have signalled that they have the necessary funding (with a partner) to exercise their pre-empt option should they wish to do so. I understand that the Senegal Oil Minister fully appreciates the situation and understands that FAR are going by the book but share in their frustration. They also must understand that FAR could if they wanted make life a lot more difficult, for example by enacting international arbitration and thereby bringing the issue under the spotlight of the international community, which the Government of Senegal certainly does not want for their first, large oil development offshore. With the Government also wanting the project on-stream as soon as possible (at present by 2021/22), and elections looming before that, FAR are in a strong moral and legal position.

In my view FAR might be better served, and keep its excellent relationship with the Minister, by stepping back and accepting Woodside as their new partner thus ensuring a more stable future. Senegal, as indeed is a good deal of the West African coastline, is fast becoming one of the most highly prospective and desirable areas in world oil, something that has been recently proved by BP farming in with Kosmos to the North and this special relationship with the country is to be valued. Indeed, if by maintaining such a favourable relationship with the Ministry led to a possible, nay favourable chance in upcoming offshore licence awards, then it would all have been worth the while. With Cairn holding 40%, and I am not at all convinced that they are keepers of this stake, and of course at some stage may have to pass on the operatorship of the licence to Woodside, then all is up for grabs, at which point FAR’s 15% comes into play. Who is to say that these two stakes might suddenly become a much more tempting stake, valuable to the marauding major to whom 50% or more is needed, less is not….

By accepting that, with the passing of time, the pre-empt is lost and Woodside may be a healthy bed partner, I take it that FAR will not lose their right to take COP into arbitration and go for damages. Reading the Chairman’s comments in the annual report today, it certainly seems as though all options are in front of the board.

Did anyone notice by the way that COP indemnified Woodside against any losses incurred as a result of this deal going pear-shaped? Woodside have a money back guarantee – did COP have to offer this to get the deal across the line? One ponders whether this constitutes one of the terms of the deal that COP were not sharing with FAR.

As I see it FAR’s options are as follows:

They could keep fighting for the COP stake as is their partner pre-emptive right but this would ultimately lose the goodwill that has been built up with the oil Minister and of course ahead of the Presidential elections.

They could accept Woodside as a partner, things could be worse and I understand that relationships between the two companies are good which would be a bonus as development gets under way. With the blessing of the Ministry, which would be likely under this scenario, I can see FAR getting a decent shout in bidding for upcoming blocks, not to be sneezed at.

The final option, the ‘Kingmaker’ option so to speak, as indicated above would be to offer the 50+% stake held by Far and Cairn to a major if such a substantial offer was potentially on the cards. If such a deal was available, and it would have to be significantly above what is reflected in FAR’s current share price, this end may justify the means. With a new Senegal exploration process to look forward to, with fresh acreage and new, more trustworthy partners and a healthy bank balance to boot maybe this is the best way out for FAR.

The operatorship card is also interesting, as I understand it Woodside are expecting, as per the original –rather ill defined  agreement between Cairn and COP, to take over after the exploration phase and before FID. However, if Cairn is planning to sell to a major and maybe with FAR to offer a bigger stake then it would be well advised not to hand over the operatorship lightly…Woodside could hardly complain about this given the way they got into the licence to begin with.

My valuation of FAR is still 25c, I strongly believe that one way or another the current share price has not taken into account the appropriate value of what the company has in Senegal and will do so before long.