Market Valuation: Analysis of history

FAR’s historical market value has conformed to symmetrical triangles during the discovery and proving phases, as can be seen by the green and blue triangles in the graph below.



The triangles show how the initial jubilation in share price movement on material announcements provide an indicator to the longer-term market value. For example, the announcement of 7-Oct-2014 Significant oil discovery offshore Senegal led to the share price re-rating from .045 to .145. The median of these two price limits is .095, which multiplied by the 2.7b shares on issue at the time suggest a long term market value through the exploration phase of AUD 256M. Trading after this initial re-rating was predominantly within the isosceles triangle whose base is defined by the two price limits before and after the re-rate event and whose apex points to the 256M.

The ‘efficient’ market absorbed all the risks and issues that arose during the exploration phase and still fitted within the isosceles triangle envisaged at the start of that phase. The risks and issues included the significant decrease in oil price, the increases in the numbers of shares, the potential size of the resource, the technical risks associated with the oil field, Grexit and all those other issues we angsted about at the time.

The next phase, the Proving Phase is shown by the blue triangle in the graph and appears to have started with a re-rate in February 2016. This re-rate coincided with the announcements of the flow testing results and the upgrade in contingent resources. The blue triangle also is an isosceles triangle with the same characteristics whose apex suggests a longer-term market value during this phase of AUD340M.

The potential bounds for FAR’s market value as it progresses through the Design and Construct phases are also indicated, but the actual size of these triangles at the time will be dependant on the size of the re-rate at the time. That is, if the restatement of the reserves is much better than the market expects, then you would expect the size of the base of the isosceles triangle to be taller to match that initial increase in jubilation.

This analysis is another reminder that, as shareholders, the serious profits come to those who are disciplined enough to sell near the top of those re-rate events. The rest of us have to try and trade through the ups and downs within the triangles, which sounds easy, but as I continue to find out, is not straightforward.

The application of symmetrical triangles to market valuations is only a charting theory, and so the above chart is merely an illustration of future changes in market values.  Please don't do any trading on the basis of this illustration!  

My method for plotting the historical market valuations was to take the closing share price each day multiplied by the number of shares published in the Appendix 3Bs over the same periods.