reposted with link (was in a rush to get to the pub and forgot the link lol)
FAR LTD
Additional Well In Gambia Well Increases Option Value
We have revisited our valuation for FAR Ltd (FAR, Company) due to new information that has come to light recently. NSX listed African Petroleum Ltd (Code: AOQ) has indicated that it is likely to drill a well in its Gambian licence as early as Q4 2011. The lead prospect in the inventory is estimated to contain 558 million barrels of recoverable oil, ~20% of which may spill over into one of FARs Senegal licences.
This additional well increases option value for FAR as there are now two bites at the cherry in the near term, with the drilling of the 448 million barrel Kora Prospect expected to commence later this month. The other key difference in the calculation of the option value is the assumed percentage that FAR retains in its Senegal licence under different scenarios. For example, if Kora or the Gambian well is successful, then it may make more sense for FAR to retain its 75% share in the Senegal licences (assuming that Ophir exercises its 25% option to farm-in). Under these scenarios, FARs leverage increases significantly over the huge potential on its large acreage position in Senegal.
The option value calculation is set out in more detail on Page 2. Based on these assumptions, our valuation has increased from $226 to $432m, or 20cps.
Kora Security Decreases Visibility, Late June Spud Still Expected
The recent farm-in by Noble Energy Inc contained detail on the timing of the spud of the Kora well, indicating a late June target. Given this, we assume that rig handover has occurred and mobilisation to site should begin any day now. We understand that the Joint Venture Partners have opted to take a high security approach to the drilling of the well, meaning that data (including GPS tracking of the rig) is unlikely prior to spud of the well. As this is the first ever deepwater well in this area, we consider this approach to be prudent, if somewhat conservative, given our perceived low level of risk of piracy in this part of the world.
Kora is a 448 million barrel prospect in which FAR has an 8.8% working interest. Joint venture partner, Rocksource Plc, has estimated chance of success at 50% due to the coincidence of a strong controlled source electromagnetic anomaly with the 3D seismic defined structure. The well is scheduled to take 24 days to drill on a trouble free basis. Gambia Drilling Possible in Late 2011 / Early 2012 African Petroleum Ltds (AOQ) latest presentation in March 2011 indicated a possible well offshore Gambia in Q4 2011. Since that time AOQ has finalised a A$250m placement and is estimated to have >A$300m in net cash, so is well funded to undertake this activity. The lead prospect on the Gambian licences identified to date has an estimated mean recoverable resource of 558 million barrels. If this prospect were to be drilled as a success, then FARs net resource potential would be ~84 million barrels (assuming 75% retained interest in Senegal and 20% of the prospect spilling into FARs permit). At A$12 per barrel, this represents $1b in value for FAR or 81cps. The upside for FAR in this instance would exceed this due to the high grading of the prospects on the Senegal licences and the likelihood that FAR would not farm-down its interest, remaining at 75%.
We have upgraded our valuation for FAR significantly and we have increased our price target to 20cps (from 16cps). We also interpret that the risk / reward balance has shifted towards the upside as the Gambia well should limit any downside move if Kora should prove to be unsuccessful
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