Excitement wells at FAR’s ‘huge potential upside’, says CEO Cath Norman
The Australian May 18, 2015 12:00AM
Despite last year’s major success, Cath Norman is feeling vulnerable, in a good way.
A geophysicist, Ms Norman is chief executive of Melbourne’s FAR, the most successful oil explorer on the ASX in the last 12 months, and the world to boot, in terms of finding oil.
Ms Norman’s sense of vulnerability stems from the sideways share price performance of FAR since the $285 million company and its joint venture partners, Britain’s Cairn Energy (operator) and US giant Chevron, announced two oil discoveries off the coast of Senegal in October and November last year.
Despite the SNE and Fan finds pointing to a one billion-plus discovery by the joint venture of a new west African offshore oil fairway, FAR’s value has pretty much stayed put, enjoying only an initial run-up on news of the finds. It makes FAR vulnerable to a low-ball takeover from one of the world’s oil major companies.
“It was the largest oil discovery in the world in 2014. So it is under the spotlight. It has been a lean few years for oil discoveries and any company that wants to increase their oil inventory couldn’t avoid looking at our project. That’s the reason I feel vulnerable,’’ Ms Norman told The Australian.
But the sense of vulnerability to a low-ball bid is counterbalanced by the fact that the joint venture has just handed its forward-work program to the government, headed by petroleum geologist Macky Sall as president.
It outlines plans for two appraisal wells and an exploration well (plus three uncommitted wells), starting in October, to get the SNE find in particular on a pathway to first production by 2020, potentially as a 100,000 barrels-a-day producer. “So in other respects, I would have to say that I am not feeling vulnerable as any sensible predator would wait to see the (risk-reducing nature) of the appraisal drilling program before they made a move,’’ Ms Norman said.
She is excited by the “huge potential upside’’ expected to be confirmed in the work program kicking off in October.
“Not only is SNE alone 330 million barrels of oil on a C2 basis (best estimate of unrisked gross contingent resource), it is 670 million barrels on a P10 (10 per cent probability) basis. So the upside is enormous,’’ Ms Norman said.
At Friday’s annual meeting, the standing room-only crowd were told that beyond last year’s discoveries, the joint venture’s current undrilled prospect inventory stood at 1.5 billion barrels (best estimate and at varying ratings for chances of discovery). It all feeds in to expectations of a joint venture being on to a new world-class oil province.
FAR was the trailblazer in the Senegal hunt, arriving 10 years ago and doing what junior oil explorers do — work up technically sound drilling prospects and then attract heavy hitters like Cairn and ConocoPhillips to make it happen through farm-out deals.
Originally a 90 per holder of the exploration blocks, FAR now has 15 per cent. Cairn has 40 per cent and ConocoPhillips 35 per cent. The remaining free-carried 10 per cent is held by the national oil company Petrosen.
In a capital markets presentation last week by Cairn, the net present value of a west African oil discovery like SNE was put at $US10 a barrel, assuming a $US70 a barrel oil price. On that basis, FAR’s 50 million-barrel share of SNE’s current rating as a 330 million barrel find would have a value of $US500m ($615m). That is more than twice FAR’s market cap on Friday of $287m when it was trading at 9.2 cents a share.
Should Cairn’s expectation of the joint venture being on to a one billion-plus new oil province come to pass, the NPV number for FAR cranks up to $US1.5bn ($1.86bn or 60c a share). Those figures reflect FAR’s vulnerability to a takeover bid.
That the market has yet to price in some of the upside — even if analysts value the stock at an average of 20c a share — reflects a number of factors.
Not the least of those is that the initial discoveries coincided with the crash in oil prices from the $US100 average of the previous three years to less than $US50 a barrel. Oil has since recovered to more than $US60 a barrel, and the futures’ curve has markets betting a further recovery to $US70-$US75 a barrel late this year, early next year.
But still FAR’s share price has stayed put.
“The oil discoveries have been a great story — but in a crap market,’’ Ms Norman said. The Cairn-led joint venture won’t be producing oil until around 2020, so there is plenty of time for oil to return to higher levels. And besides, the cost of hiring the drillship for this year’s program is half of what it was last year.
Apart from the current “crap’’ market for oil stories, FAR is going to have to raise money to pay its way (it was free carried on last year’s wells as a reward for its trailblazing) in the joint venture.
It has cash on hand that just about covers its expected $US35m cost of the forward program. But prudence means it will be looking at its fundraising options before long.
“Clearly we have to raise the money to stay in the project. “It is one of the reasons why our share price hasn’t moved in the last couple of months,’’ Ms Norman said. Success in the appraisal program could help.
“The first appraisal well is going to be drilled in to a low risk position and it is going to be flow tested. We fully expect that to be great news. And there is nothing like raising funds on the back of a great flow test.’’
FAR Price at posting:
8.8¢ Sentiment: Buy Disclosure: Held
(20min delay)