With our AGM now looming (can't see date on website), I thought it timely to look at where FAR sits on the risk curve compared with 12 months ago. The recent - and seemingly sustainable (thank you insaf) - rise in our SP suggests the market judges the risks are reducing. On a random sample of one - usually Mrs OOO but in this case my broker - that would seem to be the case. "The stock is looking a lot better these days," he said as I placed a large order with him back in December.
Well it's certainly looking even better now, with the (scant) results from SNEs 2 and 3 and the RISC-approved reassessment of SNE1 having been released since. But back to the risk analysis.
Appraisal risk, SNE
Twelve months ago this was a massive risk. All very well to know there is oil down there; quite another to prove how much and whether it will flow in commercial quantities. Many a past discovery has foundered on these tests and we faced that same prospect.
200 million barrels was judged to be magic commercial threshold, a not inconsequential ask given that our 2P at that point sat at just 330 million. Happily, our first two appraisal wells could hardly have gone better - a constrained flow at SNE2 that Cath now says could have gone 30,000 barrels a day with horizontal drilling, and a double-the-expected flow rate from the thinner sands of SNE3 and the as-yet unconfirmed intimation that oil volumes, too, exceeded expectations. Also throw in that independent reassessment of SNE1 that saw FAR up its 2P estimate to a more-impressive 468 million.
According to both FAR and Cairn, the 200 million commercial threshold has now been reached. Cath says FAR is also of the view that flow rates are commercial. All that remains, then, is connectivity, with gauges now inserted in SNE3 the first step towards that final confirmation.
These first two drills have performed astonishingly well and gone a long way towards taking appraisal risk off the table. Compartmentalisation is, I suppose, still possible across a field now measuring 350-odd square kilometres, but it seems unlikely to prevent a DOC.
In short, the work of the past four months has almost taken this risk off the table.
Operational risk
A month and therefore $US10 million ahead of schedule after two wells. Could this have gone any better? Hats off to the ORA and its hard-working crew.
But op risk by its nature never goes away. Accidents happen, unforseen obstacles arise, objectives fail to materialise. Thankfully, none of that has happened to date. Fingers crossed it continues.
Market risk
Had I been writing this two months ago, the story would have been markedly blacker, with Brent (seemingly) reaching its nadir of $27 in late January and talk of it plunging to ten bucks (talk admittedly inspired by those arch-shorters at GS). Since then, the price has rallied by more than 50 per cent and at one point last night was trading at >$42 before easing. With OPEC - sorry, the Saudis - sitting down with the broader world next month, there are now real hopes of a sustained recovery back to reasonable levels.
That plunge in crude, whilst carrying short-term pain for HC jocks hanging on daily share prices, ironically proved one of FAR's biggest boons as rig prices joined the price plunge right on the eve of our appraisal program. Those reduced costs were further helped by the combined frustration and largesse of COP, which having drilled two dusters off the African coast provided its new-age ocean rig Athena to the JV at half an already heavily discounted day rate. FAR is currently paying its 16.5 per cent of a daily rate of just $US330k compared with the full rate of $675k; COP is picking up the tab - possibly the only time you will ever get a free meal from a Texan!
More prosaically, on the ASX front things have not been so rosy, with FAR appearing to be subjected to the modern-day curse that is robotically programmed share trading. Although, happily, FAR says it sees no evidence of malice aforethought emerging through its register, someone - somebodies? - is creaming off trading profits through what appears to be manipulative stacking of the buy/sell spread. How does one evaluate this situation in terms of risk? In terms of frustration, it's big, but the real risks are twofold: firstly that a predator might be acquiring a pre-emptive position (which FAR can't see at this point), or secondly that the SP is held at such a low level that shareholders might be wont to sell out to a lowball offer. IMO, the register itself heavily mitigates against this, with the top 20 holding 39-odd per cent of shares and highly unlikely to succumb to hamfisted tactics.
Fiscal risk
FAR's board is well on top of this. Despite the Chicken Littles on HC incessantly cackling 'capital raise', the company is fully funded through this first three-well program plus sundries such as the recently shot seismic. Now the board might well choose to raise again pre the conclusion of that program, but the point is that it doesn't have to; it can choose to take the SP risk on a Bellatrix duster and aim to raise at much higher prices off the back of an appraisal program that to this point has been wildly successful to the point that even the cappers have not been able to prevent a 50 per cent surge in the SP.
The chance of FAR not being able to attract capital is, IMHO, non-existent. It raised at 11 cents during more buoyant market conditions and again at eight under darkened skies; with 2P of 468m barrels in the bag and 'more to come', raising capital is the least of our problems. We are rapidly reaching the point where we can pick and choose how to fund the venture from here.
Geopolitical risk
Goodness, assessing this is like throwing shite at the town hall; it's a big target and some is sure to hit. Senegal itself seems stable and sensible. Australia and the US, too, once seemed this way but the advent of a Mad Monk or an unforseen Trump card can quickly change that. Cheap joke, yes, but African countries only ever seem one election away from the rise of new leadership that can quickly cancel out years of economic sense. So far, so good on that front in Senegal.
Elsewhere, goodness, take your pick. The threat of WW3 has eased but northern Africa remains a powderkeg. The fool in charge of North Korea claims to have a nuclear warhead the size of a match head. Economically besieged Europe needed a million refugees with dodgy papers like it needed a hole in the head.
One could go on forever, but in essence I don't feel we are in a worse position than 12 months ago, so let's give this one a tick.
In summary
In my view FAR is much less risky than 12 months ago. It has lots of oil that flows at commercial rates. There seems lots more to come. Its partnership is working, although under the strains you would expect. Its share price is finding support at increasing levels (thanks insaf). Oil seems to have left its darkest days behind it. Broader markets and commodity markets are inching higher.
What would we like to see from here? If I had three wishes: 1. Bellatrix to prove up the Buried Hills play (the bonus of which Cath speaks). 2. Cairn and the JV to relax the THP just in time for ... 3. A re-rating of the energy index that would see FAR elevated to the ASX200 in the next review.
Ironically, our SP at the 2015 AGM was 9.4 cents. You might recall the typo that showed it as 94 cents and Cath's rejoinder: "That's next year's price." Well, not quite - pulled up just 83.5 cents short. Hard to believe really that an investment that is heavily rerisked from where it sat 12 months ago is today judged to be worth just 10 per cent more. Hats off to our capper: That's a pretty good achievement.
OOO
FAR Price at posting:
10.5¢ Sentiment: Buy Disclosure: Held
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