Far value versus Cairn value

Valuing by proxy – FAR Ltd
FAR is an Australian-listed company that is (largely) a pure play on Senegal. We can therefore derive a proxy value for Cairn’s interest in Senegal by looking at the EV of FAR (WI 15%) and adjusting for working interests. This generates the charts below. We note the expansion in value implied by FAR is attributed to a doubling of the share price, a 60% plus increase in share count (from date of discovery) and a small movement of exchange rates.

Also overlain in the charts above is the implied value from the target price valuation of FAR analysts. Perhaps not surprisingly, given the range of analyst approaches and levels of optimism sometimes seen in pure-play explorers, this view implies a very high value. We note that the Bloomberg consensus target price includes four of the eight brokers, one of which has a target price over twice that of the consensus number. Just to underline the range of estimates for FAR’s value, there are two target prices above A$0.2/share, which, given the number of shares outstanding and net cash position, would imply that these analysts believe that FAR should be worth more than Cairn’s current market cap (even though Cairn has other assets and >2.5x the working interest in SNE).
This is a paradox. Cairn is a well-funded E&P with two large developments that will be cash flow positive by the end of 2017. It held cash of $335m at end December 2016 and will have c $210m of RBL facility by the end of 2017 (and an estimated peak RBL facility of $350-400m). The cash flows from Catcher and Kraken together with the RBL facility could be enough to fund the SNE development without recourse to new equity. On the other hand, FAR has no internally sourced cash flows and will have to source hundreds of millions (>US$500m) of capital pre-first oil. By definition, FAR has a much higher cost of capital and so arguably FAR should be valued at a lower level than Cairn, yet we believe that its assets are valued higher by the market.

Kimbo