Long Weekend Tweet...., page-204

Hi Rolling/Whisky/et al,

I believe Blackrock are spot on in taking a position in CNE, whose currently popularity is in the lower part of the perception and mkt cycle = substantial lower entry risk for those with a 2-5 yr framework. But they are, IMHO, not doing it just for the Senegal value which they probably rank third behind existing assets. Just astute buying (fundamental and semi-counter cyclical).

But I digress a bit. I have two points I like to put on the discussion table.

Firstly the CNE/FAR relative value equation. On any empirical measure, CNE currently comes out ahead of FAR. Not by much but certainly on most/all risk-adjusted EV basis. But in the circumstance of a T/O or acquisition, FAR's empirical metrics form only a part of the value to an acquirer. As I've mentioned before a couple of months ago, the non-empirical value has everything to do with project control/votes. Control of a project votes are easily be worth anywhere between 10-15% of a project's value and all the big boys know this. I've been in JVs where a minor party has had the swing vote and so much is wasted on politics and compromise (sounds pretty much like the Aust Senate, lol!) that to pay 10-15%% project value premium to get rid of them is a huge relief to all.

So in a $3-5b project, I'd expect somewhere between a $300-$500m control premium to be attained.

The second discussion...so very speculative...has 3 parts: when, by whom and how?

When? No one knows but in this low OP environment, I think its doubtful a transaction will occur prior to the appraisal program. Simple fact is, all coys, majors and minors (COP/CNE) are in "risk down', "spend-off' mode. COP's 2015 global exploration and appraisal budget for 2015 is US$1.8b. Given that about 60% of this is focussed on their GOM assets, its very unlikely VP exploration would risk putting a 6,7,8,?00m acquisition to the board ahead of any appraised 2P reserves. That's just how the big boys work...even more so in a low OP world.

However, nothing's to stop COP/CNE (although much more likely to be CNE style/culture) to take a strategic position in FAR ahead of the game. $50m for an option on control is very reasonable.

Who? As future operator, the logical choice is COP and this would give them 50%. But they wouldn't want to do this unless they had a really good relationship with Petrosen, who could easily swing their 10% with CNE to match vote strength and possibly counter any COP proposal. But this also depends on how Petrosen's rights have been protected within the original contract which we are unlikely to know at this stage. However, I personally favour CNE as it would be the classic JV/chess move to have 55% and give the $1b ant (CNE) a lot of leverage over a $76b elephant (COP).

How? Well, first not without the express approval of the Senagalese Govt. Lets be clear here; this is (very likely) going to be the single most important asset to Senegal and I very strongly doubt any of the JV partners want to start upsetting the progress of a very sensitive, nascent industry within an unproven developmental and operating framework. The reason why I mention this is that the normal transaction favoured by the big oil is direct asset acquisition, not T/O: it usually avoids a lot of public mess. However, we have now seen several countries chase and close loopholes that allow taxable profits to escape on permit transactions. Quite frankly, its pissed many of them off and I'm sure the Senagal JV partners don't want to risk opening a debate on tax before the full development agreement is in place.

So if there is any corporate move before the appraisal program outcome, I feel it is more likely to be a small foothold (<20%) on FAR, with a full take-out following appraisal but before project go-ahead/FID.

Either way; any discussion of T/O and timing should also consider the sensitivity of the Senaglese Govt trying to open a new industry within a totally unproven legal, fiscal and operating framework.

Analogy?...just try upsetting your wife whilst she's in labour for the very first time: she will not be happy, she will not forget and you will not get far (groan).

Cheers as always,