We have seen some serious tree shaking in the past as major investors build their stake and shorters do what they do best. I see this as a massive tree shake, the biggest we have seen.
You can either fall out the tree or you can hang on for the ride. It's simple but either way is a tough call and a gamble at this stage.
Some of the numbers being thrown about in regards the buy price for COPs stake in the leases and how it determines the value of FAR are short sighted in my opinion. They are valuing FAR at $2 a barrel on current 2c contingent reserves for SNE only. On top of that the contingent reserves do no include the results of the last three appraisals (I believe but please correct me if I am wrong).
So it is easy to see why some are pessimistic. Firstly why would COP have bailed out of Senegal unless the early views of the latest appraisals are duds? Why wouldn't they simply hang in there prove up more resources and then sell at a premium in a year or two? We are not talking big bickies here for them. That is a great argument and a very good reason to be nervous IMHO. However you can counter that with why would Woodside buy their stake if it didn't look good. Surely Woodside had seen the data and had full view of the data room. So my understanding is, COP said they are selling off all off shore exploration plays due to the market and their debt. They are focusing on core business for strategic reasons. They are prepared to drop their price to $2 a barrel for contingent reserves as of Jan 2016. Or, and I also don't understand this yet so please someone explain, they have opened the bidding at $2 using Woodside as the opening bidder and are giving CNE and FAR an opportunity to buy them out at $2 a barrel. This is also a nervy thing for investors because what does it say about the prospect if neither FAR or CNE don't buy at least some of the stake? Again I am really interested to see what others think about this.
Which ever way you look at it this is a massive tree shake and a reality check for most of us. To me it feels like playing stud, the first three card are on on the table and we FAR investors are sitting on a low pair. The first bet has been thrown in at $2, is it a bluff or is it a low ball bet to drag all hands into the game. At this stage I will stay in and not raise, but if someone else comes in and raises will Woodside match it and raise it some more...
I am worried about why COP took the $2 offer in the first place. It's a very very low ball offer. But the reality is Senegal is a brand new province and there is lots of investment needed to bring it to commerciality. Woodside are already invested in the region and have cash to burn. None of our current other JV partners are in that position. So it makes sense that they are leveraging against their strength.
Personally I think FAR is still in a good position. I think we can safely say this is commercial now and it also now makes sense to why FAR intends to declare that independently. Good call FAr team. I can see why you called that one out a couple of months ago now.
I also think Dj is a chip that we can use and that Woodside coming in now gives FAR a better chance of farming in Dj. It shows clearly that the big boys are moving in and will be more keen to take a stake in the Senegal game if the price is right. I think FAR need to farm out Dj ASAP now, and I would imagine being an explorer that is their major focus right now.
I could easily sell out today and be ahead and find a new sweetheart stock. I would be totally justified in my own mind and would walk away with profit. It's very tempting.
But I have ridden through so much so far with this stock and I honestly believe the Woodside offer has just valued FAR at pretty well where the SP is today. So in that regards I determine that I am safe at this price and it is very unlikely to retrace lower in a big way. So I can pretty well relax and look at the upside.
For me the upside is a good bet for these reasons. 1) SNE contingent is most likely going to grow and even if the current contingent is valued at only $2 a barrel in the ground, it can only go up from there both in value and resource. That's good reason to stay in. 2) Woodsides offer is an initial bid, it could go up, others could buy a stake in this through a FAR partnership. Unlikely but possible.. 3) FAN is sitting there. Woodside has the cash and possibly more of an inclination to poke around in that, something the the current JV had no intention of doing. 4) we have Djefferrie. It is a bit of a wild card at the moment but could be a very good one if management play it right. 5) Woodside's offer paves the way for another bigger bid to take a stake in the leases. Once one fat cat comes to the table, other usually quickly circle.
The down side for me is 1) new exploration and further appraisal of the leases are on hold presumably till the end of the year when this deal is completed. That said, there are no restrictions on Dj as we have that option independently of the JV. So if FaR focus on that and get the farm in through in the next month or two that pretty well cancels out point 1. 2) the cat has been thrown amongst the pigeons, which will no doubt seriously impact on investor opinions in FAR and god knows what with CNE. I personally think our board and management are strong and have already worked out the negotiation scenarios and are working on them. I think the way they took Djefferrie is a good example of that. They saw this coming and presumably have a plan. I wish they would say something or more about that though.
So my upsides pretty well out way my down sides.
Something that none of us have mentioned here as yet is, Woodside may well have made a similar offer to FaR and tried to take FAR out at the same time as COP. I would love to know if that happened and how management handled it. I am interested in other people's views on that one too.
But it may well be that Woodside wants FAR to stay in the game and are more interested in CNE's stake next. fAR has other interests in the region for Woodside to look at. fAR and Woodside could build a strong in country partnership both in Aus and in Senegal.
So much to think about. I love it to be honest. I am in one other stock PIQ. It's also got loads of potential but news flow is slow and it's very tightly held, the complete opposite to FAR. fAR has all my attention. I am so glad I am in it and looking forward to what the next years brings. Even though I know I could be disappointed.
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