Guys,
There has been a stream of questions on both the HC thread and other stock forums, some of which fall into the following camps (in no particular order);
-
The perceived reserves Senegal may hold.
-
How to price these reserves.
-
The intentions of FARJOY.
-
The future of FAR in terms of what it can do with what it has.
-
Perceived holding down of the share price (by day traders).
Back on October the 15th, I decided to get in touch with our largest shareholder and sent an email introducing myself to look to fill some of my knowledge gaps. I was overjoyed to wake on the morning of the 16th of October to see I had received a response.
The following chain of emails go on fill many gaps in my knowledge; Tim following a request on behalf of the rest of the shareholders on the Hot Copper forum has reluctantly agreed this can be shared with the wider group.
Speaking, I would assume on behalf of every FAR shareholder; I want to say a huge thank you to Tim for his support of FAR both financially, but also intellectually. To say Tim’s understanding of Oil and Gas has impressed me, is an understatement.
Disclaimer - Tim is not a broker and is by no means instructing anyone to change their holdings or subscribe to his views, the following is exerts of Tim’s own research and views presented in a non emotive manner. Please do your own research and make your own investment decisions.
In order to provide more background around FARJOY and the foundation for the following email exchanges, I would strongly suggest first reading FARJOY’s initial post here - http://hotcopper.com.au/threads/becoming-a-substantial-holder.2362169/#post-13995848
Email 1, a response following my initial introduction and a question around the perception of the price being held down;
Sent: 15/10/2014 11:23 PM
Subject: Re: FARJOY and FAR
I do not know how a price could be successfully capped when demand for a stock exceeds supply.
I think that what you complain of may be a function of the speculative nature of the stock and the extent of trading which does tend to accentuate small changes in price, both up and down (without oscillation, trading would be futile).
I know that this is very frustrating for investors who believe that the value of the stock is not reflected in the market, but I do not think that this is anything other than a temporary phenomenon. Ultimately, a stock which is highly liquid as FAR is will build into its price investor expectation as well as accounting value. There are simply too many buyers and sellers for any one person to control the price. In any event, it is relatively easy for the regulator to detect - the software has been available for more than a decade.
I have been slightly surprised that FAR has not traded higher - I bought a large slab at about 14c last week, and although I did so for a strategic reason - to discourage an opportunistic takeover before FAR could complete its current exploration program - and so was prepared to pay above market, I did expect others to follow my lead.
Then again, FAR is typecast as a spec, and if it did not fall after a rise it would not be true to form. I hope that shortly it will be no more.
That said, Farjoy does have a different investment horizon and price perturbations are of little interest to us, except I suppose as buying opportunities. We have been prepared to sit out long periods of quiescence in the belief that fundamental value will eventually emerge.
We are not share traders (as would have been obvious from our notices), least of all do we engage in wash trades or any other form of price manipulation. We operate through a full service broker whose actions are tracked and recorded. We know the law. We comply with it.
I have no doubt at all that FAR and its partners have discovered a new oil province, which will exceed other African fields. FAN 1 is more than the sum of its parts. It was carefully selected to give the partners an insight into 4 geological structures, and the interim results suggest that each structure will contain commercial oil. Volumetrically, the northern fan is the smallest of these structures, from which I infer that at least 6 billion barrels of oil has been discovered. There is a good chance that at least as much again will be discovered upslope.
Most will be recoverable with gas injection, which these days is a common way of squeezing the rocks. For FAN 1, the unanswered question is whether the reservoir seals are sufficient to enable CO2 storage, which may make this a carbon neutral oil field. That may only be answered after injection with colourised gas to detect sea floor leaks. The World Bank, which has hitherto declined to fund carbon, may be prepared to do so because of the demonstration effect - it recently invested in CAS, a Brazilian gold and iron ore miner listed on the ASX (we hold too), because of its positive social and environmental actions.
Best regards
Tim
Email 2, a response following my questioning around how the estimated 6B barrels came about;
Subject: Re: FARJOY and FAR
19 Oct 2014
I don't have time for a detailed explanation.
The usual equation for estimating the size of a deposit is to multiply the net pay NP by the area of closure A. But that only gives a theoretical maximum which does not represent recoverable oil. You need to apply several coefficients of which the most important are porosity P and recovery (permeability) RF. To these you should add the shrinkage factor SF (not significant unless the gas content of the oil is high) and the saturation factor HS where there is a lot of water hanging around, and multiply by 6.29 to convert to barrels:
Recoverable oil in place (ROIP) = A x NP x P x RF x SF x HS x 6.29
We know that the porosity is good (which means between 30 and 40%) and recoverability is high (so between 30 and 40%}. There is no oil/water interface, so looks like the saturation factor will be low and no reports of significant gas.
Now the problem with the reported data is that it does not distinguish between the northern fan and Beer, which is an underlying delta sand formation (although Beer is not a stacked fan, which is the description of the net pay zone in Cairn's announcement). However, the fact that no oil/water interface was found suggests to me that Beer had not been fully interpreted, and its pay is bigger than predicted.
Go to FAR's 27 Feb 2013 announcement and you will see the relative proportions of the fans inter se and the fans and Beer.
The northern fan is the smallest of the fans.
Beer is quite the largest deposit, double the size of the northern fan. However its areal extent is much greater than any other target - I estimate a minimum of 35 km long and between 2 and 8km wide - a huge potential reservoir.
Now, if you look a FAR's best and high estimates for the field (or fields because I think that the fans are a separate field to the shelf play), you can see that the midpoint is 6B barrels. Best is 10% and high is 50%, both probabilistic estimates which are the equivalent of Cairn's reported volumes.
However, the early delta sand is likely to be thicker and larger than each of the fan layers, which is a consequence of its depositional history about which we know much more now as a result of climate studies. With good porosity, it should yield a much higher than predicted ROIP. I surmise that this was the unexpected success of FAN-1.
Now look at Cairn's latest announcement. It has 2.2B barrels for the 10% case - if that if just the northern fan and a part of Beer, then you can reasonably assume that the best case will be higher for the central and southern fans.
I think that the final assessment of FAN-1 can only improve these results - and FAR has said as much - probably moving the 10% to 50% and increasing 10% - knowing Schlumberger's current technology, some horizontal seismics were probably taken, as well as the other physical tests during the long interval when the Cajun was treading water, so to speak, at 1.2M US dollars a day.
That in short is why I am confident that the fans field will yield at least 6B barrels of recoverable oil and possibly more.
I should add that permeability is largely an economic constraint these days because higher recovery is gained in almost every giant field by gas injection at the other end of the deposit - so the RF factor can usually be increased significantly, but that is an assessment which can only be done at the appraisal well stage when we know the result of flow testing (unless flow tests were done by the Cajun, which I doubt).
One word of warning - it is rare for a reservoir to be uniform, and most wells only capture a snapshot of the deposit. Commercial fields are not developed on optimistic projections, but usually on pessimistic parameters to determine whether it will be profitable in the worst case. Whether the deposit will be declared commercial depends on what is happening at the 90% interval. Against this is the geomorphological fact that deltas and river systems are developed under erosional forces by cyclical sedimentation which is reasonably predictable, with similar grain size and shape. A good analogue today would be the Bangladesh delta systems, initially snow fed with movement of bedload and high rainfall intensivities shifting sediment into the deltas. When sand is dredged to maintain the channels, it is not dissimilar to the premier oil sands likely to have been found at Beer.
It is clear from Cairn's announcement that the partners have commenced discussions about appraisal wells for 2015. Those discussions would be well advanced before the results of the second well, and required FAR to have a war chest ready lest it be forced to further dilute, or at worst sell for an improvident sum, its interests. They will need at least 3 appraisal wells for the fan field (about US$300M) but may prefer to appraise the ledge if it is good oil, because the cost will be less. However, it is closer to shore, and that will raise a political problem if Senegal thinks that it can pressure the partners to build a pipeline to shore, and hence increase its onshore facilities (refineries, petrochemical plants etc - you get the picture). The partners would prefer, I think, to build a floating delivery platform, and judging by the number of tankers I have seen cruising past on MarineTraffic, it is on the current crude route. Anyway, I shall put my money on Cath to negotiate an outcome which meets the objectives of all parties.
Sorry I could not be more detailed but I have to prepare some forthcoming trials.
Best regards
Tim
Email 3, a response following questions around the share price, as well as the significance of the SNE-1 find;
Subject: Re: FARJOY and FAR
10 Nov 2014
I am not worried, but I am not trading.
What I do not think the market has appreciated is that this is a compact and very simple reservoir - SNE-1 will almost certainly be used for appraisal and possibly production, a saving of several 100 USD.
The critical next step will be the correlation of the 3D with the well results, after which FAR should update its 2013 guidance on size of the prospects.
As Lupalupa was twice the size of the prospective estimate, each of the hills should be doubled, unless there is something about the matching of geology with seismic that increases or decreases that estimate.
The hills structure is also ideal for CO2 storage, and subsidies will be available for the initial development work on the reservoir for this reason.
The Fans are more complex - hence the somewhat garbled and inconclusive announcement, and the weeks of testing. They should have been worked out by now, except I suppose that the people doing the work have been diverted. In any event, I would expect an announcement soon.
However, I think that the whole game has changed.
The effect of SNE-1 will be to change everyone's perception of the order of development (the shelf first instead of last), the cost of development (the shelf will be about two-thirds of the cost of the fans) and the timing (if SNE-1 becomes a production well, then production can begin in 2016 instead of 2018 if a platform can be found or built by then). It will be easier to tie the other hills into production on the shelf, whereas my perception of the fans was that it would be more difficult at that depth to secure the platform over the central fan to lift oil from the southern and northern fans, at least without several seabed compressors (not impossible but complex).
Best regards
Tim
Email 4, a response following trying to create a view of the valuations of the find, I send a spread sheet within which I had a value of $10 p/barrel
Where did the $10 per barrel come from?
You have to be very careful with values. The comparable sales evidence would not support a value for contingent resources much above $5 and most of Senegal is merely prospective and cannot without geo certification be described as a resource. While there is some market evidence for the trading value of resources, and a lot for reserves, there is little evidence beyond the value ascribed to pure explorers for prospective unrisked resources (if they were risked for both discovery and production they would be reserves or resources, properly so called).
Value does not equal net profit as that would imply a de-risked project with profits fully realised as of today. The value of the oil in ground diminishes the further away we are from its production. With a large field there would be a significant discount, which could be estimated by a NPV calculation, but you must sensitivity test it for different discount rates. In any event I do not think that the market values oil explorers in this way. The simplest example is to compare FAR with Santos which reports its reserves and resources in the barrel of oil equivalent metric BOE. I think it has over 1B barrels in reserves and the same again in resources. Leaving aside the complication of the probabilistic estimates, the market assigns it a value of $13 B. Of course, it has cash flow, which makes the valuation more robust (but misleading on cashflow alone, as the more cash the less reserve, without expenses of exploration). My view is that FAR will eventually exceed Santos, but it is unlikely to establish reserves until production and cannot claim resources without drilling evidence. The best it can do for the undrilled prospects is to announce a prospective resource, unless it can persuade a geo to certify the other plays on the basis that they are all fed from the same source - which I have to say was always my contention. Certification is unlikely because of the (low) possibility that the sands or rocks are less porous or the seal is not effective, but it is at least a possible approach to treat this as one field, at least on the shelf. It is really a question which the partners will be kicking around with their geos, and I can't see them certifying a resource for the field without independent geo agreement.
Any assessment should look at a range of values, and of course recoverable oil. We shall know sooner rather than later the potential of the shelf - in fact I know it now, for the reasons I explained in my earlier email. It is a simple, safe and reasonably cheap drill with high recoverabilities, and the appraisals could be located now to convert to production wells, and tie in the lot of them to a platform. If there is some overlying gas, it should be captured and used to fuel the platform.
My task now as lead shareholder is to find some funds for FAR so it can support the appraisal wells and platform costs, without too much dilution.
Best regards
Tim
Posted by Aquamale28
(20min delay)