Ann: FAR Receives Acceptances For 37% of Flow Ene, page-2

re: Ann: FAR Receives Acceptances For 37% of ... Frontier Friendly Fastens FAR and Flow
FAR Limited (“FAR”, “Company”) recently announced a proposed merger with unlisted Flow Energy Ltd (“Flow”) via a Board recommended off-market takeover. The deal conditions are consistent with a friendly takeover and include 90% acceptance and material adverse change but no independent expert report is required. FAR will issue 878m shares as consideration, valuing Flow at ~A$25m. FAR has received 37% of acceptances from Flow to date.
Flow has strong management and technical staff that will augment the existing FAR team. Flow Managing Director, Cath Norman, will become Managing Director of FAR with current Executive Chairman, Michael Evans, continuing in his role. Nicholas Limb, also from Flow, will join the Board of the merged entity as a Non Exec Director.
Cashed Up, Diversified Frontier Exploration Company
The deal is good for both companies, with discounted scrip being used to acquire quality assets at bargain prices. FAR provides Flow with a strong balance sheet and a large West African asset portfolio whilst Flow gives diversification for FAR into the hot East African offshore area as well as additional offshore assets in Jamaica and Australia. The Jamaican acreage is large and underexplored although limited historical drilling has provided encouragement. The merged entity will retain A$25m in cash with US$6m in likely receivables, more than enough to fund medium term commitments.
Drilling by Others Offshore Kenya Will Excite in 2012
Flow’s two blocks offshore Kenya, L6 and L9, are the most advanced in its portfolio and are considered highly prospective. Both blocks are located adjacent to Block L8, where Pancontinental, Apache, Origin and Tullow will be drilling on the billion barrel plus Mbawa prospect likely mid-2012.
Flow (60%, operator) is partnered with Pancontinental in block L6 and plans to farmout prior to 3D seismic, which is scheduled to commence in late 2011. Block L9 was recently awarded to Dominion (60%, operator), Flow (30%) and Avana (10%) in a competitive bid round against the likes of BG, Premier and Cove.
Total recently acquired interests in deepwater blocks offshore Kenya from Anadarko, DGA and Cove. At least one well is planned on these blocks in 2012.
Large West African Footprint Remains Core
Whilst there have been delays to the grant of extension of FAR’s Senegal licences, we remain confident that this will occur. The pending election (Feb 2012) may result in further delays; however, given global market turmoil this is not considered to be a negative. FAR’s strong balance sheet affords patience.
The decision by Ophir on whether to exercise its farm-in option in Senegal is due by the end of Sep 2011; however, we understand that the technical review of the Kora well will not be complete by this time. It is possible that Ophir may ask for an extension to its option. In any case, we consider it a 50/50 proposition at best that Ophir will farm-in. The decision will not impact our view of the prospectivity of the assets one way or another, so if there is market weakness on the back of a decision not to exercise, we would consider this a buying opportunity.
We consider that the merger is likely to proceed, with the merged entity having a large diversified asset portfolio and an enterprise value of only A$35m. This is well below peer comparisons and we view a re-rating as highly likely. We rate FAR as a Speculative Buy with a price target of 7.7cps.