A final FAR Mention.., page-19

Hi all,

after the trading community has moved on to more speculative playgrounds causing some collateral damage while leaving the house I would like to sum up my view of the situation and add to what bunclefester and others have said. (Caution: Long post!!)
The statement by FAR yesterday morning said it all. Well outcome was perfect and exceeded pre drill expectations.
For now the traders perceive that the "predictable" news flow will have a break, so they left. The advantage of the "purge" is at least twofold:

• Remaining shareholders should now be reduced to the ones who are patient and understand that the company has a fantastic outlook.
• Volatility should be reduced, I am tempted to say we have seen a new low yesterday, but time will tell.

Indeed timing of coming news flow is difficult to judge. There are a number of things to be declared/explained to shareholders:

1. Detailed Well results: This has been discussed in many posts on the board. Basically indication will be that in particular SNE-1 has discovered a large, productive, economic, standalone field in an ideal position, able to supply oil to all markets in the Atlantic Basin. It is closer to European and American markets than other producing nations further down the west African coast like Nigeria or Angola.
   There will also be an update on FAN-1 results. Doing them with an Ann. each would fill the gap in the news flow quite nicely.
   We are lucky if we get one or both before X-mas otherwise Q1 2015.
2. Update on resource estimate post drill: This is self evident. Significant resource upgrades to be expected and derisking of the large number of yet undrilled prospects and potentially new ones. Probably Q1 2015.
3. Appraisal and exploration planning for 2015: In my mind the location of an appraisal of SNE-1 should not be too difficult to pick. The main objective must be to prove lateral extent and thickness of oil filled Albian sands i.e. to prove up reserves. I assume that the FAN discovery will be appraised at a later point in time. Probably SNE appraisal will be followed by explo. drilling of one of the buried hill structures. This seems to be indicated in todays Ann.:“FAR looks forward to working with the Government of Senegal and our joint venture partners in finalising follow up appraisal and exploration drilling plans.“
   So appraisal first and expl. thereafter. It would have been excellent when CNE could have secured Cajun Express but it is going to CNR for a year from Dec 2014 to Dec 2015 and dayrates are even higher than we currently pay (See Transocean Nov. 2014 rig status report). CNE should be able to secure a cheaper rig which certainly is in shareholder interest. In case there is still discussion about the allocation of cost for the unplanned maintenance during FAN-1 drilling I would expect that CNE goes for another Transocean rig. This gives some room to maneuver for both parties to negotiate "face saving" dayrates.
   The word "finalising" seems to indicate that an Ann. is not too far away, so hopefully prior to X-mas.
4. Financing of the upcoming appraisal cost: It is difficult to see what the timing of next CR will be. It will depend on how much cash they burn on the way, how Kenya FO is handled, how extensive the Senegal appraisal and exploration program is going to be, when it starts etc. Ideally they could finance everything through to and including successful SNE appraisal. CR would then be well taken by instos and hopefully retail investors with an almost dead certain economically viable field in the pocket, i.e. CR in Ann. together with SNE appraisal results.
   Alternatively FAR does a CR with update on the resource estimate post drill. From FAR´s point of view using the resource update would probably be less risky, because it cannot "fail". The SNE appraisal could be dry in case there is no sand present.
   One important question certainly also is, when FAR will be required to commit to the appraisal program, how much of it is fixed how much is optional depending on well results generated etc. So a lot of known unknows in the equation today.
5. Kenya FO update: This is going to be an interesting one. It will tell a lot about whether FAR will be setting priorities, sell out of Kenya completely to cash up or whether it will maintain its presence in East Africa. I would prefer to maintain a good share in this very prospective acreage. If things go well we will see an Ann. prior to X-mas otherwise Q1 2015.
6. Take Over approach: I have to come back to the risk of takeover. The SP has fallen so much despite significant discoveries that it has become very tempting for potential suitors to make a bid for FAR. In this context the non Senegalese holdings may be playing a crucial role. As has been mentioned before, takeovers are more difficult cross border as more partners have preemption rights, governments get involved etc.. Should FAR decide to focus on Senegal only, the door for a takeover would be opening further. That is why I definitely prefer to maintain the spread in assets as is.
   
   I think with a market cap of just some 300 Mio. A$ FAR is very vulnerable at the moment, considering the portfolio with the just unfolding Senegalese story. (Actually I thought CN should have done a simple Ann. with a wording like CNE´s, less precise, less optimistic to fly under the TO radar as long as possible. The positive tone did not stop the traders from leaving anyhow). I would hate to be robbed of future value increases. Every major looking for reserve replenishment in an area with large upside will be doing its calculations right now. I would be very surprised should FAR not be approached in the near future. Capital markets are awash with cheap cash pumped up by QE. There are medium size oil companies with huge credit lines but no meaningful projects. Should a HTO approach materialize I would expect competitive bidding.

To conclude: From FAR´s point of view this is a vibrant situation. I am convinced that the amount of information which is going to be released to the market in Q4 2014/ Q1 2015 will reflect the intense work being done by partners and will clearly show that Senegal is a once in a lifetime opportunity for a company like FAR and its partners. Also for CNE this is the jewel in the crown of its ongoing new activities.
FAR will do the utmost to speed up the appraisal and further exploration and I sincerely hope that we will be able to ride the wave of success in Senegal for at least another 2 yrs. with FAR.

Comments appreciated.

Happy to continue holding and looking forward to exciting times ahead!
Cheers
R1

P.S. The running traders will regret having left to soon! They will most likely pay back today´s collateral damage through a higher price to get back in.