Back of the envelope ...

Hi All

Having long urged posters to follow the money with FAR, I have watched with interest as Substantial Shareholder notices have stacked up. One can only assume this is part of the inevitable transfer of ownership from small retail investors to the ‘big end of town’. Since there is no evidence to suggest large holders are selling down, these new Substantial Holders must be acquiring shares either from the market or the capital raise (or both).

So why this newfound interest in ‘struggling’ FAR?

Put simply, FAR is on the cusp - if two years can be termed ‘cusp’ - of enviable cashflow that will deliver shareholders considerable earnings spanning decades. The following is a rough back-of-the-envelope illustration of the value to be gained from obtaining four-cent shares. And before the Bash Brigade line up with their baseball bats, I have ignored many factors that might change the example for better or worse. There is no consideration of geopolitics, climate change, cost overruns, etc etc, but rather just a simple extrapolation of what we know.

Just on that, what DO we know about projected revenue? I’ve searched through recent releases and can’t find a figure, but I recall a meeting attendee reporting ‘free cash flow’ of $200 million per annum. This accords with the Chairman telling the 2017 (or 16 or 18?) AGM that SNE would wash its own face within a few years (from which I took it would erase its borrowings and provide unencumbered cash). Anyway, for our illustrative purposes let’s assume ‘free cash flow’ to mean nett revenue after production and marketing costs but before interest costs. Let’s also assume we’re talking Aussie dollars rather than the more commonly used greenback. In other words, we are making conservative assumptions.

FAR expects to generate $US200 million per annum in nett revenue.
Borrowing costs are $40 million (be maximum, wouldn’t it?), leaving ...
Earnings of $160 million, with ...
10 billion shares on issue, equals ...
EPS of 1.6 cents per share.

Currently Australian oil producers trade on multiples of around 18 (WPL, OSH). Comparing newbie FAR with those big players might be fraught, but let’s say the market values FAR’s earnings at a 12 multiple at worst. That produces a share price value on SNE alone of 19 cents at production. Not a bad two-year (plus, one suspects) return on a four-cent share.

That ascribes zero value to factors such as further exploration success and higher-than-forecast recoveries (that would extend the field’s earning lifespan).

While we waste energy in bemoaning what has admittedly been a woeful recent share price performance, others with longer timeframes, better understanding of economics, and well-programmed bots have identified that value has been created and will be realised.

There you go, bash boys, a whole new thread for you to destroy!

OOO

PS: My numbers are beyond rubbery and are open to correction. It would be nice to think they might be constructively challenged by someone with a better understanding than me.