Things have been a bit quiet on the FAR threads recently so thought I would add some detailed fundamental analysis. Quite a long post and is written from a bottom up perspective so skip it if you don’t want a decent read. Happy for the below to be critiqued with reasoning, good or bad, as always. I have tried to be conservative and balanced for the most part.
The Base Case SNE FAR's base case is the 13.667% of the fully appraised SNE field it will end up with once Petrosen exercises its option to fully farm in. Currently FAR has 15% but I cannot see Petrosen failing to exercise its option. Upside to FAR exists if Petrosen fail to increase its stake
So what is FAR's share of SNE worth? Well Cairn (the operator) have provided a NPV figure of US$12.50 per barrel @ FID @ US$70 Brent Price.
US$12.50 converted to AUD @ $0.75 = A$16.667 a barrel. This figure needs to be discounted by one year, as FID is a year away, at a discount rate of 10%, that equates to A$15.00 NPV as at today all based on the assumption of a long term Brent price of US$70. Brent price is currently closer to US$80.....
So we know what Cairn are valuing the barrels at, but how many barrels are there? Well Cairn say 563mmbbls, FAR say 641mmbbls for SNE. Lets use Cairns figures to be conservative, that equates to 76.9millions barrels of low sulphur sweet oil net to FAR. Upside exists if FAR’s estimate is more accurate.
A$15.00 NPV x 76.9m barrels = A$1.15billion dollars of value using the operators figures and the assumption of US$70 Brent Price. For reference FAR's market cap is approximately A$620m.
Cairns last put out the NPV figures in the Aug-17 Half Yearly Presentation, since then the capex costs have likely been reduced which will benefit the NPV figures.
Goldman Sachs are valuing WPL's 35% share of SNE at $1.93billion via a SOTP valuation on a 100% risked basis (freely available information via Commsec), this equates to $830m for FAR's share. Risked at 80%, which is what Goldman are doing in their final valuation still equates to $664m which by itself is still more than FAR's current market cap.
Two tiebacks to the SNE development being the FAN and SNE-Nth Fields will likely prolong the SNE developments life and add further value. Both will likely require further appraisal. FAR has booked 2C Resources for the FAN field of 198mmbbls (27mmbbls net to FAR).
Cash Far is currently sitting on a cash balance of roughly $35million dollars.
The value of SNE ($1.15billion NPV from the above) plus the cash balance of say $35m, totalling $1.185billion is simply not reflected in the Market Cap of $620m IMO
The 'Free' Hits Samo Petronas is effectively free carrying FAR's 40% of the well costs for a huge 825mmbbls prospect just south and on trend with the SNE field. FAR have given the well a 50% Chance of Geological success. Petronas are effectively paying 2 for 1 drilling costs,so they definitely think the prospect is worth drilling. This well is rapidly approaching (October spud) and is being drilled by the same rig that has drilled a number of SNE wells successfully and quickly (ie cheaply). If the total cost of the well is less than US$45m (from memory) then FAR gets more cash from Petronas the cheaper the well is.
Petronas and FAR each have 40% of the Gambian A2/A5 acreage. Erin Energy has the remaining 20%. The Gambian Government has minor farm in rights. Erin Energy is currently in all sorts of bankruptcy/administration/liquidation issues - it has been alluded to on here that FAR are a good chance of benefiting out of this situation, by potentially taking rights over part or all of Erin's stake, as Erin owe FAR and the Gambian government money. FAR are carrying Erin's share of drilling costs as part of the original farm in.
PE WPL purchased its 35% from COP a couple of years ago. FAR have asserted they were denied Pre Emptive rights on the sale and the issue is currently in Arbitration. Results are likely at some point after the end of June 2019. Any positive outcome for FAR will add either cash or further equity in SNE for minimal cost. PE is a can of worms so I wont go any further into it other than it will likely cost a few $mil to see out and the upside is anywhere from tens to hundreds of millions of dollars.
Investor relations In my opinion, FAR's investor relations and investor marketing could be improved, the most recent quarterly was a step in the right direction and a continued improvement in relations/marketing could add a cent or two to the share price just on increased market awareness.
Atum FAR has approximately 21% equity of acreage in Guinea Bissau. FAR has identified a SNE lookalike prospect on the shelf edge of circa 450mmbbls size. FAR and the operator are currently looking to farm their equity down. For a free carry I would assume Far would need to farm down to say 10% equity, although I am expecting FAR to retain 15% and pay some of their own drilling costs. There are plenty of oil fields and oil shows surrounding this acreage.
Oil Cycle Play FAR is an interesting play on the oil cycle, if you are bullish on oil over the next few years then FAR is certainly worth a look. I am bullish on oil over the next few years due to the POO coming off a cyclical low which resulted in a chronic underspend in exploration and development - the development of SNE fits a long term cycle very well. There are likely to be better plays for a shorter term POO recovery (ie leveraged producers) than FAR.
Takeover Given FAR has quite a healthy amount of fully appraised resources and some exploration acreage in sought after areas, acquiring FAR is a no brainer (at the right price) for many larger company wishing to add to its Reserve life and future production/exploration profile.
Upside at a cost SNE Gas I do not believe that the gas associated with SNE (2 Tcf) has been factored into Cairns NPV calcs outlined above. Most of this gas is likely to be sold as domestic gas to Senelec (Senegal Gov Generator), prices are not likely to be astronomical given Senegal is a Developing country however any development of the gas will certainly be value accretive.
Spica The SNE JV has identified the Spica prospect as a likely future exploration prospect. A new 3D has been contracted for 2019 and drilling would likely occur in 2020 when drill rigs are in the area for SNE development. There are further prospects in the acreage held by the SNE JV. FAR will be paying for its share of this well.
Saloo/Bambo FAR has identified three prospects (2 x Saloo, 1 x Bambo) in its Gambian acreage that could all be drilled in one well. The two Saloo prospects are both relatively high chance of success plays of approximately 140-193mmbbls size whereas the Bambo play is 18% chance of success but a larger 333mmbbls target. FAR have identified the one of the Saloo plays could be an extension of the SNE field into Gambian waters...
If Samo does not find oil then I would expect FAR to farm down its working interest to fund a portion of a Saloo well.
Kenya FAR has some acreage in Kenya that has been on hold due to civil unrest. From memory Farjoy (owner of 10% of FAR) bought into FAR originally for the Miocene Reef plays in Kenya. I suspect any drilling will be a few years away.
Western Australia FAR has acreage off Western Australia. It has gained permission to have a 3D shot over the prospect, after encountering environmental delays. Once the 3D is analysed I would expect a farm down, sale or relinquishment of the acreage depending on the prospectivity shown on the 3D.
Risks Financing FAR currently has not got any financing secured for its share of the SNE development. This is probably one of the biggest reasons the shareprice is where it is. Fortunately Cairn have indicated that the JV is currently well progressed on project financing for approximately 50% of the development costs. FAR will need to find the remaining 50% via debt or equity. FAR have indicated that additional equity dilution is not the preferred route and plenty of debt options are available. Project Financing will likely be the cheapest form of debt available for FAR.
Price of Oil Far is a play on the price of oil, if you are bearish long term oil prices then FAR may not be the best choice.
Drilling issues This mainly applies to the Samo well which is a huge opportunity and a lot is riding on this well.
S400 Sands The S500 series sands of SNE are world class and will be targeted first. The lower S400 sands are more complex and may be costlier to extract and develop. I don’t think this is a huge issue as they have drilled plenty of appraisal wells and proven connectivity of the 400 sands.
Project Delays Any delays on the SNE development will have a negative impact on the value of SNE to FAR. Big projects tend to experience delays or overruns. The operator only two weeks ago firmed up 2022 as the likely date of first oil with potential for this to end up as 2021 or 2022.
PE PE does present some risks to FAR in terms of securing financing or causing project delays however the Senegalese Government will not want this to happen
Sovereign Risk The majority of FAR's worth is on west coast of Africa, Soverign Risk is a threat as West Africa is certainly not Western Australia.
What does this all mean? I am fully expecting the share price to rise towards 15cents as drilling commences and short termers, risk takers, gamblers and traders roll in.
If Samo finds a decent amount of Oil then the upside could cause a decent spike and significant rerate of FAR.
If Samo fails then I am expecting a retrace to maybe 9-10cents as traders sell quickly and then in a few months the shareprice should settle around where it is today and then be at the whim of the POO and SNE derisking over time as it heads to production.
I have bought quite a lot of stock recently to the point where FAR is now by far my biggest holding, on the basis of the above fundamentals. I have been rolling out of other O&G plays and into FAR on the recent SP weakness of FAR and recent strength of other stocks. My sphincter will be clenched that tight as the drilling progresses that it could be used as a BOP.
AIMHO, DYOR etc.
FAR Price at posting:
12.0¢ Sentiment: Buy Disclosure: Held
(20min delay)