Planets aligning? Or colliding neutron stars?

Hello All

I've been thinking a lot lately, an activity guaranteed to agitate Mrs OOO who believes me incapable of such mental gymnastics.

PE hangs over FAR like a cloud. We hope it has a silver lining, but at the moment it precludes the corporate activity that I have long maintained is FAR's best chance of extracting big value for shareholders over a relatively short time period.

Three players are involved - FAR, WPL and COP. FAR has nothing to lose, but much to gain, while COP's exposure seems to be limited to a possible compensation claim from Woodside (although that reference seems to have been expunged from COP's reportage). Woodside, on the other hand ... I will return to that later.

There is little doubt FAR pulled the PE trigger reluctantly; it would have preferred a negotiated settlement (Cath said as much at the AGM). It seems to have held out an olive branch to WPL - and by association COP - but been rebuffed at every turn. To paraphrase Cath: We are not stupid people, Cath told us, and we would have talked sensibly about a settlement. Instead, FAR was stone-walled. There can only be one reason for that: COP and WPL believed their case was rock solid and talking to FAR was therefore pointless.

And so FAR filed and we are three or four months into what is said to be a 12-month, million-dollar process (although a mate who works in the field tells me we could easily triple that first number and multiply the second by ten). Arbitration, in short, is fraught.

But if it is fraught for FAR, then it is fraught for our opponent(s), too. We suspect they have indulged in corporate skulduggery and are banking on being big enough and clever enough to get away with it. David FAR's temerity in calling the Goliaths on to the battlefield will, in my experience, have produced the first tiny chink in the armor of hubris that spawned the too-clever-by-half 'company sale' in the first place. Somewhere deep within Woodside's corporate soul will now lurk a tiny flicker of doubt that arbitration - if allowed to proceed to conclusion - will bring the resounding victory they expect. It can be as simple as copping arbitrators whose natural inclination is to side with the underdog - and don't worry, it happens - and WPL could easily find themselves with a major disaster on their hands. They are also arguing French law in an unfamiliar jurisdiction and that in itself introduces further doubt. And might the Senegal Government yet exert influence? More doubt.

Our opponents will only have allowed this to run to arbitration on the advice of lawyers, and in 20 years in corporate affairs I never once heard a lawyer guarantee an outcome - they always hedge a little. In my experience, again, their hedge will widen as the case proceeds; the nearer to a finding they allow this to run, the greater their angst and the less certain their advice. My firm once ran a similar 'rock solid' case and I can tell you there were some sweaty palms and tight sphincters in the office on judgment day. We got lucky, we won, but had it gone the other way we would have lost hundreds of millions.

For those reasons, I'm not certain this will get to judgment day.

Woodside chief Peter Coleman has said he is prepared to walk away from Senegal, but I'm not sure he has that option. Let's face it, Woodside is struggling. Myanmar didn't work out, Wheatstone's production is falling and of course there was the Oil Search debacle. Its only growth option is West Africa, where they believe they have paid peanuts for 35 per cent of a huge and growing asset, but do not yet have certainty no matter how confident they are.

That certainty could be gained quite simply by cutting a sensible deal with a small company that has been grievously wronged but is pragmatic enough to be willing to cut a deal. FAR is clearly prepared to settle for a less-than-whole victory; Woodside is rolling the dice on all or nothing. I don't get it. In my experience, deals usually get done and they always happen somewhere in the middle. Why is this different?

Woodside's best way forward seems to be a compensation payment - or increase in SNE percentage - to FAR. You would think Woodside would have learned from its Oil Search mistake - when it offered a measly 'premium' that was never going to get the job done - that you need to pay a fair price for a quality asset. FAR would certainly demand that, but with the SNE field growing and growing, there is surely a case for Woodside to pay a sensible price for a deal that will add value to its own balance sheet.

So yes, PE hangs over FAR's share price like a cloud, but it hangs over Woodside like the Sword of Damacles. If it loses Senegal, on top of the Oil Search embarrassment, then its growth prospects are bleak.

OOO