Last chance under 1c, page-10

Even Bell Potter has reduced their top valuation as 5 cents.

Market valuing Sangomar and The Gambia at less than worthlessThe sharp decline in the FAR share price over the past month currently sees the company trading at a negative EV of A$5m. That EV comes from FAR having an estimated US$72m (~A$125m) of net cash currently after allowing for most of the company’s total budgeted expenditure of US$43.2m for the current quarter. While there may be some slowing in the capex for Sangomar, the project is still continuing and most long lead items have been secured with relatively limited cash outflows. FAR is still working to finalise its US$300m Reserve Based Lending (RBL) facility with its three providers, led by Macquarie Bank. We understand there have not been major changes in the terms for such facilities globally but with all transactions of this nature, there is a risk that the lenders could seek to change the terms or pull out. Woodside Petroleum (ASX – WPL, not rated), which is the Operator of the Sangomar Oil Project, recently affirmed its support for the Project but WPL is facing increased pressure to fund its huge Scarborough LNG Project. While the dramatic changes in global energy markets of late would seem to give WPL a good reason to defer Scarborough, WPL’s support for the Sangomar Project may be reduced. Cairn Energy (LSX – CNE, not rated) also recently affirmed its support for the Sangomar Project when releasing its 2019 financial results. It had been expected that CNE would announce the sell down of a major part of their interest in Sangomar, which could have given a meaningful look-through to its current value, but CNE has put the matter on hold until at least 2Q 2020 and is now seeking to extend its undrawn US$575m RBL facility to US$1B to support its share of the Project’s capex. We expect FAR to defer the drilling of the planned well in its highly prospective A2/A5 blocks in The Gambia until 2021, possibly to take advantage of using the first drilling ship for the Sangomar development wells.Oil price war may go for an extended time with lasting effectsThe oil price war that has erupted between Saudi Arabia and Russia is exacerbating the oversupply conditions in an already fragile oil market, driving oil prices to their lowest levels in eighteen years. Brent and WTI are trading around US$25/bbl and US$22/bbl respectively. With the global economy under severe strain from the effects of the coronavirus and likely to print significant negative growth numbers until the virus is being constrained, our interpretation of the nature of the Saudi-Russia actions indicates they could extend for a considerable time and have quite lasting effects.Investment thesis – Spec. Buy, Valuation $0.05/sh (prev. $0.14)Despite oil market uncertainty, we continue to see significant value in the Sangomar Oil Project and upside from a much higher oil recovery rate; the FAN and Sangomar NE discoveries (which could potentially be tied into the Sangomar output) and other nearby exploration targets; and monetisation of the substantial Sangomar gas cap. We also see considerable value in the company’s interests in The Gambia and Guinea- Bissau, where wells for each area that were planned for late 2020 are now effectively on hold until 2021 as FAR focuses totally on its Sangomar interest. We have increased the risk factors for all of FAR’s oil and gas interests and significantly reduced our long term oil price forecast (for Brent) to US$45/bbl reflecting the unprecedented disruption and uncertainty in world oil markets, which results in a 64% reduction in our valuation to $0.05 per share. We retain our Speculative Buy recommendation.