After reading many of the comments on the Preso thread concerning going to production or not, I thought I'd start a new thread.
FWIW, I'm of the camp that believes FAR wont be there to flip SNE's first barrel - at least not in their current form. As much as they would like to be ('like' is not a corporate strategy or goal), in the balance of short-medium term strategic outcomes, it is not the best value path to commit the company to.
As everyone here has correctly observed and commented; it is a huge commitment to take this Mega-project through to production. FAR's share (based on $US3.5B and 15% WI) will be A$700m. FAR would (if going by itself) most likely need A$220-250m for project equity and then another A$150-200m to float its corporate/other needs until the banks allow meaningful production cash to end in FAR's accounts (maybe 18-24 mths post production commencement).
It is what I call the 'project vortex'...huge commitments that heavily distract all/most of a junior coy's (FAR) capital and resources....even more so in mega projects such as SNE/FAN. And if the Board commits to it, they are very unlikely to have the resources or capability to develop other avenues of meaningful growth....until the post finance cash starts coming in...say 2023/24.
And I'm sure the Board doesn't want to be in strategic stasis from late 2018 to 2023/24....especially with a minority project interest.
FAR are working very hard (and well, I might add) to give themselves and shareholders the best alternative to the 'single project vortex'. I am really excited about their Gambia acreage and their tie-up with CNOOC but we've yet to see the approvals and the shape of possible CNOOC partnership.
I am sure that Reg Nelson will have voiced to the Board his experience about having been (at BPT) a minority player behind STO and the other heavies in the Cooper/Eromanga for more than 3 decades. Reg is a legend...knows more about the CE than anyone alive or dead and on many occasions had to 'diplomatically' subordinate his knowledge and strategic objectives because of BPT's minority position. I very much doubt he wants to see a repeat of that.
This is why I am confident that FAR will be pursuing a "MoD", Master of Destiny strategy. But what's needed to achieve this?
Ok...(and assuming no PE)...in no order:
1) 2P Reserves. We're all hanging out for not only an upgrade of 2C at SNE which should come about by late August or so but the all important 2P reserves which should follow soon thereafter. Reserves mean banks can open their vaults and Big Oil can bid for minority interests (Big Oil will buy minority Reserves but not Resources unless operatorship is attached)
2) Senegal Approvals. Hmm...this ones a bit of a problem. Senegal's permit approval processes are not currently working to anyone's satisfaction. Likely reason for sacking of oil minister? We need to see final approval (or otherwise) of COP's sale, resolution of the Djifere issue and what was that sleight of hand deal with Total? No one's going to commit to anything until this shite is clarified.
3) Gambia's approvals. FAR is not going to have a repeat of the Djifere block and will not touch this until they are very sure about having clarity of title and commitments. Lets see if the Gambia's oil ministry can do better than its buddy Senegal. Once they really have it, they can develop their short/medium term alternative with a huge 90% interest. Plenty of options for this one...especially with CNOOC salivating for some participation.
4) FAN South. This result will greatly influence not only the value of the Sangomar block but also the A1 and FAR A2 block to the south.
5) Other Exploration. Hints of other wells in or near Sangomar.
Pretty much all of these should come to light by the end of the year and give greater clarity to FAR's ability to be Master of its Destiny.
One possible avenue that could give FAR its MoD ticket is a partial sell down of SNE (say 8-10%). I would never advocate selling all of the interest. I'm thinking in the magnitude of US$400-500m which would leave them more than enough to do what they do best....explore. Yes...this is what they are good at, this is where their value-add resides; not project development...at least not yet.
In fact, I'm betting they'll put an initial well into A2 as soon as they possibly can. They just mentioned estimated US$25-30m dry well costs which they could easily do themselves but typical exploration risk management says one should off-set this to some degree...hello CNOOC. Expect a clear and rapid action plan as soon as clear title from The Gambia. FAR will want to know what A2 looks like before FID on SNE.
So keeping 75-90% of a 150-250mmbbls discovery in A2, for example, would give FAR much clearer $Bs value optics and also the crucial step up to the Big League.
A 15% minority interest in 1000 mmbbls will, unfortunately, take a lot longer to get there.
I hope they want to be Masters.
Cheers,
FAR Price at posting:
8.2¢ Sentiment: Buy Disclosure: Held
(20min delay)
