market value of far?

Inspired by Plugged’s previous posts on the potential market value of FAR’s Senegal leases (thanks Plugged), I thought I’d do some further research of my own from a slightly different angle, mainly to reassure myself that my average buy in of .12 was not too high a price to pay.

With a lot of comparison with the Hardman story floating around I thought I’d start with the Tullow takeover of Hardman to see how they arrived at a takeover value. Previous to this I knew nothing of Hardman, so if anyone out there can provide corrections please feel free.

Hardman was taken over by Tullow in January 2007 for A$1.47Bn, around USD$1.1Bn at the time. Previous to the successful takeover bid price of A$2.02, shares had been trading as high as $2.50 (April 2006) on speculation of the Tullow bid and of potential rival bids. Until that time HDR shares had been declining after a downgrade of the daily production for Chinguetti, even though the total reserve estimate was not changed. Post April HDR shares were “ the worst performer on the S&P/ASX 200 Energy Index, despite the move by world oil prices to more than $US 78 a barrel”(ABN Newswire), and slumped to $1.19 in September 2006. The shares had risen dramatically to the $2.50 mark in the lead up to spudding (I believe), based on the 4D seismic data. Hard to get an accurate picture of the real price as there were a couple of large placements, one to British investors for $2.33 (Hardman was dual listed).

In Tullow’s presentation to shareholders seeking approval for the acquisition, they cite an increase in production of 6000boepd and an increase in total 2P reserves of 105mmboe. Whilst also citing the ‘potential’ of Hardman’s other exploration assets, the justification for the deal was based on existing assets.
Presentation is here: (http://www.tullowoil.ie/tlw/ir/reportspres/finreportspres/2006/presentations/hardmanres/hardman.pdf)

So in late 2006, with the oil price somewhere around US$65 but market sentiment quite negative (trending down), Tullow valued HDR at US $1.1Bn with 105 million barrels, or just over $10 a barrel (A $14 at the time).

Now we have oil above US $70 a barrel and the medium term outlook quite bullish. Forgetting FAR’s other prospects: FAR’s most recent investor presentation states that prospects from 3D seismic data of Senegal include an
Aptian shelf edge prospect with mean potential exceeding 1 billion barrels of oil in place, and Santonian age fan prospects with mean potential exceeding 180 million barrels of oil in place from a single fan complex.
If Shell confirm this with CSEM data (made available to FAR) and elect to proceed with drilling, FAR are free carried for 20%.

Based on 20% ownership, and if we assume the same price Tullow paid for HDR in 2006/7:
a) For 1.5 Billion barrels (fantasy maybe): FAR’s 20% should justify a market cap of US $2.5Bn, or AUD $2.99Bn. With 800 million shares (as per Plugged’s post), this is AUD$3.73 per share.

b) For 1 Billion barrels this is $2.98 p/s.

c) For 500 million barrels, $1.49 p/s.

Obviously there would be a threshold below which Shell would decline to take up the option, but we don’t know what this would be. I expect they would still proceed with 500 million barrels based on CSEM data, as this is still a very significant reserve. The question might be more a combination of total reserves and concentration of reserves.

This is a simplistic approximation undertaken by someone with no exposure to the oil industry so this post might be torn to shreds. Interestingly though, in a Petroleum Magazine article in September 2007, Hartleys rated the Senegal N3 target alone to be worth between $2.12 and $7.37 to FAR’s sp, based on FAR’s equity position of 30% at the time.

Happy to be corrected, but I don’t consider efficient market theory (the leases are worth what the market is paying today) to be constructive criticism. This is a speculative stock, which by definition means that anyone who buys does so on the expectation that the market will value the stock at a higher value in the future.

Suffice to say I’m comfortable with my average holding price of .12, and although I would not be surprised if we don’t see much better than .25 immediately on good news, I do expect that between a positive Shell announcement and spudding the first well there will be a steady climb to what would be a more realistic market value of FAR’s assets.

Guess we'll know soon enough! Good luck to all