FAR Ltd (FAR)
Important flow testing underway in first pre-development well (SNE-5)
Flow testing of thin sands targeting additional 2C Resources
SNE-5, the first of two pre-development wells into the SNE oil field in offshore Senegal by joint venture (JV) partners - Cairn Energy, 40% and Operator; ConocoPhillips, 35% (whose stake has been sold to Woodside Petroleum subject to resolution of the pre-emptive rights); FAR, 15%; and Petrosen, 10% - is well advanced and ahead of schedule. After reaching total depth, SNE-5 is carrying out a series of flow tests on the generally thinner, upper reservoir sands. A key aspect of the current flow testing program is the planned connectivity testing that could potentially result in significant additional 2C Resources – potentially as much as about 300+ million barrels (Mbbls) - being booked for the thinner upper sandstone reservoirs. Current independently assessed 2C Resources for SNE are 641Mbbls, pointing to potential for the SNE field to contain over 1Bbbls of recoverable oil if the upper sands testing is positive.
Not a question of commerciality, just one of how big SNE is
Recently, independent prospectivity studies have estimated that there are additional prospective 2C Resources of 1.5 billion barrels (Bbbls) of oil in a group of high ranking plays within a 30-40km tie-back radius of the SNE development hub with average probability of about 31%, raising the question as to how big are the resources that could be developed at the SNE hub. We expect the SNE field will be declared commercial, assuming maintenance of the current oil price (Brent) at around US$55/bbl and that the oil industry’s low capital and operating costs are sustained.
Oil prices holds above US$55/bbl as cutbacks impact
Recent production cuts by major members of OPEC, particularly Saudi Arabia, and also some reduction in non-OPEC output (notably by the Soviet Union) has seen some stabilizing of world oil inventories, which has flowed into stability in the international oil price at around US$55/bbl, aided by some improvement in physical oil consumption. After a sharp reduction in North American activity and supply following the fall in oil prices in early 2015, USA oil production since September 2016 has been rising but is still below its 2015 peak. This rising US oil production may be the precursor to greater USA oil output as confidence and profitability returns to its shale oil industry, potentially acting as a limiting influence on the extent of further upside to global oil prices.
Investment thesis – Valuation $0.30/sh (previously $0.30/sh)
The FAR-led oil discoveries in offshore Senegal remain the most significant finds for several years and they continue to grow in size and economic attraction. We have revised our valuations of FAR to reflect several significant de-risking events over the last six months, which have confirmed and in some cases increased the reservoir value of the SNE field and surrounding area but this has been more than offset by the dual impacts of assuming a lower long term real oil price of US$65/bbl (compared to US$70 previously) and lower valuations for the company’s non-Senegalese interests as they receive less attention. We have also reverted to a single current time valuation methodology. The net effect of these changes is a 10% reduction in our equity diluted valuation to $0.27 per share. Our Speculative Buy recommendation is retained.
Disclosure: Bell Potter Securities acted as Lead Manager for the $60m placement in April 2016 and received fees for that service.
Recommendation:
Speculative Buy
Previous Close:
$0.08
Valuation:
$0.27 (prev. $0.30)
Regards, Peter
Peter Arden
Resources Analyst
Direct +61 3 9235 1833
Mobile +61 412 304 010
Fax +61 (0) 3 9256 8789
[email protected]
Bell Potter Securities Ltd
Level 29, 101 Collins Street
Melbourne VIC 3000
www.bellpotter.com.au
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