Far spreadsheet 500mb table interim DEC 2015 update, page-10

Aqua, I’m still struggling with the prunes, but please see my brief responses in bold italics below. I am sure we can all benefit from both sides of the argument and appreciate you putting the points you have made forward.

Your post and my responses:
pj,
So you are saying post the current drilling programme, if FAR was taken over and Oil was at $40 - it would be at a price of 16.3 cents?
Have you taken into account the following factors?

pj: No I am saying that if you apply a 40% premium to the non cash component of the market forecast price then that is what you would get at an oil price of $40 (refer full spreadsheet below):




A. FAR management is stating that they believe they could achieve a valuation as though Oil was at $80 in a takeover, per the commentary from OOO. Which we both know makes a quantum shift to the pricing. From your own tables the difference between $40 oil and $80 valuations seems to be a 3.5X factor, although you are saying in a takeover at $40 only a 1.4X multiple?, a difference of >200%

pj: If you really believe that then, from the tables the price would be around 50c, you can use the tables in that way, if you like


B. We are now seeing commentary (Senegalese gov, article in the Australian on FAR) that production could be achieved in 3-4 years, not the initial 6-7 years quoted previously (which obviously should significantly change the valuation metrics - I am not sure if you have adjusted the tables to accomodate). Perhaps first step would be seeking clarification / confirmation of this from Cath. From previous statements you have made I believe you had factored a 10% year on year discount factor. Removing 3-4 years from the table is therefore a significant difference. A difference of as much as >33%

pj: Prices are discounted from Cairn’s FID guidance date not 6 –7 years to production. In the table under discussion I’m using an initial 25% discount then 2 years at 8% for market forecasts. Adding the T/O premium essentially adds this back in.


C. Achievement of commerciality for SNE (one of the aims of the current programme), then significantly de-risks any of the assets within the tie back radius including many of the prospects in the following table, surely COS would be driven up significantly in this event, as they would only need to prove in excess of 75MMBLS to successfully tie back into the FPSO at very low cost.

pj: I have increased the COS for further de-risking, not by a lot more at the moment, as SNE already did that. Also tie ins given a pre-discovery efficiency premium. Yes low volume tie backs are included that would not otherwise be commercial.


The following table adds to $439M USD risked, (at CNE's 40% share), at FAR's 15% share, this would equate to $183M USD or $255M AUD. The valuation therein of the risked surrounding assets from Edison below equates to almost 7 AUD cents in the event of success at SNE alone?




https://www.dropbox.com/s/lo56zmpyhh0psaj/Edison research Cairn 020715-1.pdf?dl=0
Your valuation tables do not seem to ascribe an increased valuation of the surrounding prospects above in the event that SNE is successfully deemed commercial?
A difference of potentially 7 cents.

pj: See comments to C: Edison may have used differing assumptions.


D. Geo's are governed by the http://www.spe.org/industry/docs/Reserves_Audit_Standards_2007.pdf to be very conservative in their assessments of reserves at every stage in the maturity of a field such as ours, as we both know - From all accounts, FAR mgmt through views from the RIG, seperate Geo's, analysts, Malcy, Reg, Gordon, Cath, FARJOY, the list goes on - have hinted Senegal is larger than we know publicly. I think it is very difficult to value into the future until actual detail comes to hand, or an estimated upside should be factored for fairness. (Remember that even Jubilee went from a P50 of 370MMBLS to an over enthused estimate of 3BBLS during appraisal, before settling at a more realistic 1BBLS). Refer - http://64be6584f535e2968ea8-7b17ad3...dn.com/Jubilee_Development_Project_Tullow.pdf
There is no accomodation of significant potential upside, with the exception of a 'enthusiasm range'.
A difference of potentially ~270% in comparison to Jubilee maturity post appraisal from P50 of 370 -> 1BBLS after appraisal for Jubilee.

pj: All "conservative" geo assessments already taken account of in market pricr. Careful with numbers grabbed as OIP not recoverable resources etc etc


E. Cath is assuming via the PRMS standard that our recoverability is around 30% across the assessments that have been made to date, as we have chatted on email, with EOR, you can double this recoverability, not withstanding the quality of today's technology increasing recoverability as high as 80%. (CNE originally hinted they would be testing EOR within the current programme). There is no reference to EOR in your tables? A difference of potentially >200%

pj: Yeah, answer is I don’t know how enhanced oil recovery techniques EOR would apply to increase recovery in the the Senegal discoveries. But in any event average recoveries I have “guessed at” for my speculative net pay conversions for SNE (see spreadsheet above) likely average are more than 30% (especially for the central area). I agree there is potential upside here (see 600mb, 800mb tables).


F. No value to the new Djiffere block?. I am excited by the prospect of the new block and believe that Djiffere could quickly become the jewel in FAR's crown. in 10-100 metre water, FAR could use a jackup RIG to appraise and drill at a cost of around $80K per day, 1/15th the cost of the surrounding blocks. With 75% of 100MMBLS gross to FAR currently, excluding what I think is a potentially massive upside - this could easily carry a significant valuation on its own, particularly in the event that our current prospects continue to deliver upon pre-drill estimates. A significant difference, 75MMBLS to FAR in shallow water that is straight forward to develop?

pj: Yes, currently giving Differe a market value of 0.1 to 0.2c which turned out to be how the market saw it at the time too (price rose from 0.082 to 0.084 from memory).

J. J-Curve theory, if this comes to fruition - then per previous bottoms and recoveries, in the time taken to develop FAR out to May of next year we could see a quantum sentiment change. I buy into this theory and I also buy into a theory that the Saudi's do not have the size of the reserves they have been stating, augmented by wikileaks from as far back as 2011 - http://www.theguardian.com/business/2011/feb/08/saudi-oil-reserves-overstated-wikileaks

pj: I like the J curve theory too, hope it’s not just wishful thinking and the whole things not just a race to the bottom and the end of oil...new technologies etc etc

Summary
I believe the factors A-F could quite plausibly increase consideration of our value significantly. Not withstanding the 'joker' J.

I know for a fact that earlier this year the FAR board stated that they expect takeover offers post appraisal in the vicinity of beyond $1, this has been triangulated through varying contacts close to the company. At the time it made no sense to me as to why they were keeping the find on the down-low and this nonsense around tight hole - post the new Djiffere block, picking it up for almost nothing it now makes utter sense.

Cath talks to 'unveiling the prize in 2015 (perhaps delayed due to the customs issues for the RIG into early '16', separately 'creating significant value for shareholders in coming months'. I believe neither point is evident in your valuations and in consideration of points A-F there is significant scope for both of these to come to fruition.

pj: With respect to T/O, one can wish for what you like but I don’t think you can ignore the price of oil or realistically grasp at hidden straws?

Suggestion
Given your science background and in the interests of proving a hypothesis - I think the most affable method of testing forward valuations would be to test the tables on companies similar to FAR, for example Hardman resources or Kosmos, from the stage we are at now (pre commerciality/ appraisal stage) to where they were valued at a similar stage to then when they were taken out and many others that have developed from minor to takeover status?, These two companies in particular achieved ten bagger success on takeover or offers - I am unsure how we differ, unless we are multiple times over price currently.

I would be very interested in the outcome of the comparative analysis to other success stories. As, I am sure the thread would.
Not withstanding comparisons to Kosmos and Hardman, I still maintain that FAR and it's partners will rewrite the history books with the Senegalese find.

pj: With all due respect I think we’ve been through that before, not too mention different era. The closest sales match we have recently was the one brought up recently by B4mm – Cobalt, where the deal pretty much seemed to validate my table values:

http://hotcopper.com.au/threads/jubilee-field.2655870/page-7?post_id=16557049#.VmuPxL8po4g

Cheers
pj