Dilution crops up as conversation a lot on HC, that's largely because it's a traders forum and traders or other short term holders can get caught out by CR'S .
However FAR Management are charged with looking after the Companies shareholders as a whole and not just part of them.
It's a subject well worth discussing as its a fact and does impact the Company in two main ways...with out cash your F@#$ and getting it will impact on future value and unfortunately the collapse in oil price has meant we have had to raise at a lower Shareprice but also as a consequence have needed to raise a lot less because of the collapse in drilling costs..
The first consideration of investing in any Company with no income is accepting there will be dilution until such time as there is income, or an asset is sold ,should they have any to sell , it's purely a matter of when , how many, how much and at what price. Having established that rather obvious observation you are left pondering is that dilution going to be matched by future growth...if they haven't even got an asset you ponder on how long they will survive..
So that gets us to establishing where FAR sits in all of this, it still has no income and won't for some time but now has a very good asset and some very good potential assets.
Dilution comes in several forms:
1: Debt, that affects future income but doesn't add shares. FAR are not in a position to take that option anyway as yet.
2: Sell off WI , that again affects future income and also any future capital gains that may have come from any WI sold. It is an option for FAR but much to early in the value chain to be realistically considered at this stage IMO, they seem to be looking for more not less..
3: Raise cash, which maintains the WI hence any future capital gains or future income from it but reduces the full benefits as well..its the path chosen by FAR to date..in other words it's a trade off which is skewed towards the main benefits being in the longer term..
4: Combination of the above..
There are several ways the effects of Dilution can be mitigated when you have taken the path FAR have chosen, which is to maintain it's WI .
1: The future price of oil, it's an unknown but everything above a certain price goes to the bottom line at no extra cost. Out of FAR's hands but can have a huge impact through leverage...
2: Using the cash raised to Increase resources, this actually reduces the overall development and production costs and ends up going straight to the bottom line...this has happened big time to date..maintaining WI gets all the benefits of this less any cash used to achieve it.
3: Reduce drilling and development costs , this again has happened big time to date..rig costs are down 70% and drilling efficiencies have risen...
Maintaining WI gets all the benefits of this less any cash used to achieve it.
4: Use some of the cash to aquire surrounding leases and farm out..this is an unknown with almost no downside but huge upside...FAR are doing this in spades..
5: in FAR'S case use some of the proceeds to follow up on its PE rights...again an unknown, with very little to lose but a huge amount to gain..
You can either have high risk dilution, which is raising to pay your way while hoping for a discovery, that was FAR before FAN and SNE, or you have low risk and absolutely nessessary dilution which is FAR now post discoveries, or you sell out for a pittance and hand any remaining cash back to shareholders ,that's not going to happen...
So what's the score pre discovery to now using the June quarter 2014 as a starter:
1: Shareprice around 4c now 8.5c up around 100%.
2: Shares on offer was 2.7bil now 5.5bil up a little over 100%.
3: Cash on hand was $42.7mil now approx $90 mil up a little over 100% and will be spent trying to increase resources above whatvwe have already plus administration.
4: MC was $108 mil now approx $462 mil up over 300%
5: Resources none now 641Mmbbls 2C and rising.
6: Discoveries none now two with more being looked at.
7: New leases secured around Discoveries now two, although one to be confirmed.
8: AMI deal with CNOOC.
9: Changes to the GB lease.
10: Kenya and Australia , who knows or cares at the moment.
11: we have raised another $226 mil over and above the cash on hand back then, making $268mil avaliable to spend, of which approx $178 mil has been spent to date..with another $90 mil odd to go ..
12: That $178 mil spent has raised our 2C resource from nothing to 641Mmbbls 2C plus more coming (with an unknown future value) and increased our MC by $354 mil plus given us 2.8 bill new shares, a stronger register and more potential farm ins...all done while the oil sector has been in the deepest and longest slump for a long time.
What's this all mean to shareholders? Well if you purchased around June 2014 and did nothing you would be up over 100%, if you purchased in June 2014 and took up all offers you would be around even but have twice as many shares and if you purchased after discovery you could either be up or down depending on where you bought or averaged down to..timing and luck are everything...
It also means you are in a Company with a strong balance sheet , rising resources, money to drill several more wells if needed , potentially two or more new farm in deals on surrounding acreage at little or no cost to the Company, no more CR's until FID, PE determination etc..
It also means you are at the mercy of the oil price and the markets, as are all Oil Companies, large costs going forward if FAR proceeds to production but with ensuing increase in reserves and value placed on those reserves..income getting nearer.
It's a heady mix with considerably more upside than downside IMO but it will be a long haul as it already has been.
So from a straight Company perspective to date dilution has been more than mitigated by value added and that is indicated by the fact the Shareprice is still 100% higher despite the shares on offer doubling...also the MC increase is considerably higher than money spent...from a shareholders perspective it depends on when and at what price you entered but by most measures the money spent has been very well utilised which is all you can ask for at this early stage in proceedings, when we buy in is our problem..
Or In other words dilution through raising funds has given FAR a future where it once had none , it also meant the slice of the future pie got smaller as a result but the pie itself still keeps getting bigger through the use of those very funds...I'll take those odds on any day...
(20min delay)