Hi all, Just back from holidays where we purposefully chose to...

Hi all,

Just back from holidays where we purposefully chose to ditch all contact with the outside world. Try it sometime; it's more enlightening than Daisy's yoga poses or Carmelita's caresses (with apologies to the good Drbrooks).

So...A2 deal comes out, and SP goes south despite some stepped up buying by Meridian and and improving OP. The Market is always right (?) so why didn't it appreciate the deal?

1) Visual metrics?

In 2013 FAR farmed out 65% to CNE for approx US$90m or US$1.38m/%. Then about 4 months later they both sold down another 35% for effectively US$100m or US$2.85m/%. (that was a HUGE deal btw). CNE had SNE's 2C 154mmbbls risked at 19%...pre any drilling.

We now have Samo pre-drill CoS at 55% for P(50) of 825mmbbls. Yet the deal was done at US$48 for 40% or US$1.20m/%.

This, at least initially, seems quite light on given all the promotion of proximity/similarities/continuity...and YES, 55% CoS is an extraordinary figure in The Game.

Before taking this further, we need to filter out the oil price. At the time of the CNE/COP deals, the OP was hanging very convincingly to the US$100/bbl level. At that time, the market were generalising O/S all-in costs of US$50-60/bbl. We are now in a completely different world where banks and corporates are using US$50-55/bbl in their risk models (note: not their upside-case models) and all-in costs of US$30-35/bbl. So we now have a US$20/bbl margin world Vs a US$40-50/bbl margin one of 2013.

2) The Difference?

OK Capt. Obvious, so what? Well, this means there's no real comparison as the demand for deep water exploration risk in brand new countries with untried regulatory and corporate frameworks is still an uphill battle.

Big Oil capital allocation is only just being released by the banks for brownfields and some rare greens field developments. It still takes large cajones for the exploration director to call one of his few allowable deep water wells into the Gambia.

Every one knows the Gambia/Samo is a great, justifiable target. Technically. But FAR needed a deal done by this Qtr (to catch some drilling deals) and many of the big boys wouldn't have been able to tick the country box in time.

3) CNOOC first right.

Without seeing the specifics of the FRs in the AMI, these usually detract from an asset's sale or farm-down price given that bidders can readily (but not easily) be gazumped so this tends to attract low-ball bids.

I am also a tad intrigued why CNOOC did not jump in. Management?

4) Understanding CoS - the Seal

Very basically, there are technically 3 components to this: Oil charge, quality of reservoir and, quality of trap/seal. Given all that has gone before in SNE and Fan Sth 1, I suspect the first 2 components are essentially de-risked. This leaves Samo's trap and seal as the biggest risk element. I have yet to confirm it with management but I suspect that the RISC numbers on this may even be slightly lower quality (worse?) than the pre-drill trap assessments for SNE.

This could have shaved a few coins off the offer.

5) Summary

We will always think our asset is worth more than what the market will pay.

And I promise you, that if the well is truly successful, we will not give a rat's are-so-lovely about any of this.

Cheers,