a couple of comments concerning TO and appraisal/expl. strategy/split and OP. Apologies for the diverse content, these thoughts have accumulated for some time.
Potential TO
In recent posts there has been repeated discussion on a potential TO with claims that first approaches have already been made but have not been officially announced. First I wanted to clarify Australian TO rules for myself and found the following helpful document "Australia, Takeover Guide": http://www.ibanet.org/Document/Default.aspx?DocumentUid=829DE877-E880-4C5C-B6B1-B27064FD550F
Firstly about applicable thresholds and consequences:
"below 5%—ASIC, public companies and the responsible entities for a listed MIS can trace beneficial ownership in shares or units, even where voting power is below the 5% level;
5%—substantial holding level which requires the holder to give information to a company, responsible entity for a listed MIS and the ASX;
over 10%—holder can block compulsory acquisition which requires voting power of 90% to be held;
15%—notification may be required under the Foreign Acquisitions and Takeovers Act if the bidder is a “foreign person”;
over 25%—can block special resolutions of the company or MIS;
50% — voting control of the target;
75%—holder can ensure special resolutions are passed;
85%—holder must give notice of substantial holding and the company must notify shareholders that, at 90%, the person can compulsorily acquire the remaining
securities;
90%—in general, confers the ability to compulsorily acquire remaining securities in target"
There has also been discussion on the board whether there has been a TO approach to FAR and whether FAR should have informed the market about that approach be it Indian or other. I have copied below some text from the same document about the pre bid activities that may happen. Conclusion is that quite a bit can happen pre official bid but it becomes difficult as soon as information is relayed to the potential bidder which is not available to the market. What I still fail to understand is whether there is a point reached when a bid is compulsory. My guess would be that there will be many approaches if not most approaches which never lead to an official bid:
"Pre-bid discussions with major shareholders A bidder will often have pre-bid discussions with major shareholders and lock-up agreements. It is important that the parties do not reach any understanding which would result in the bidder gaining more than 20% voting power in the company in breach of section 606. Lock-up agreements with shareholders which do not result in the bidder gaining more than 20%. voting power in the target are valid. Otherwise they are invalid.
Pre-bid discussions with target If a friendly bid is possible, a bidder may have pre-bid discussions with target management both to learn more about the company and to work out whether a merger, rather than a takeover bid, is an option. The bidder should ensure that it is free to disclose any information about the target obtained during these discussions; that is, it is not bound by confidentiality requirements. If it is unable to disclose this information because it has agreed to keep the information confidential, it:
may not be able to comply with the bidder’s statement disclosure requirements and, accordingly, may not be able to proceed with the planned takeover; and
may be in a position where it cannot buy any further shares in the target because of insider trading laws.
Due diligence and insider trading It is common in an agreed bid for the target to allow the bidder to perform due diligence on the target before finalizing its bid. If the bidder becomes aware of insider information - that is, information which is price sensitive and not generally available, then the bidder will not be able to continue to buy securities in the target unless the inside information either:
is no longer price sensitive; or
becomes generally available.
Where the bidder has entered into a confidentiality agreement with the target, it may be prohibited from disclosing the information itself."
Farjoy´s position in a TO situation:
As listed above in a TO situation Farjoy cannot be squeezed out with a holding of > 10%. That puts a lid on things and probably prohibits that we are taken out at a too low price with him. My feeling is that he should be a person in good demand currently. The pre bid discussion with major shareholders is probably not for nothing the first point mentioned in the document even before pre bid discussion with the TO target itself. It can be assumed that interested companies talk to him first before they go to FAR. When Farjoy declines, it will be difficult to complete a TO. The flip side of the coin should actually be that Farjoy cannot increase its stake further because he would be dealing on insider knowledge (not 100% sure about that).
That is as far as I have researched the TO situation.
Next I would like to make a few comments on the possible next drilling targets:
Appraise SNE-1: This is the obvious one. Seal and sourcing works. Continuity of the reservoir is the open question. Proving reservoir continuity gives a quick "return" in terms of resource confirmation and on top will most likely be the economically most interesting development priority in case sufficient reserves are proven.
Appraise FAN-1: The discovery well has been drilled in the crestal location. A 500 m hydrocarbon column has been found in the well. COP´s chart (Presentation 19.11.2014) shows that oil was encountered in separate layers, which was expected due to the varying oil qualities reported. Next task is to determine the downdip OWC in each specific potentially productive layer. That will be the key information which needs to be obtained to allow for a more precise resource estimate. The appraisal well should try to find downdip oil and water to be able to chart the most likely OWC per oil bearing layer. This can be achieved with a well that can be sidetracked up or downdip as required. The problem again is reservoir continuity. Ideally pressure measurements should be taken within the same layer (water and oil leg).
It has been discussed that it might be a possibility to reenter FAN-1. Partners have to weigh the cost saving of having to redrill the top hole section vs. the cost of a pretty long deviated well. I would probably go for a new vertical well which can also more easily be sidetracked. I don´t remember whether FAN-1 was P&A and is potentially difficult/impossible to reenter. Wording in the October 7 Ann. seems to indicate that the well is still accessible as the well testing option still seems to be open (Ann says: "As intended pre-spud, there are no plans for immediate well testing").
Buried hill and others: As indicated before, chart 13 in the November investor presentation seems to show, that the Albian reservoir was full to spill (OWC = Spill point), which means some oil must have migrated updip. I am not sure whether that means it has migrated updip into the buried hill formation or laterally into the next Albian sand or Aptian carbonate structure. That is probably the reason why the SNE-1 well was deepened. After going through the OWC in the Albian, likelihood was high that there was no HC present in the Aptian carbonates. Nevertheless Aptian carbonate reservoir characteristics were important and were obtained. It is going to be interesting to see whether the fracturing visible on seismic has an effect on porosity. It remains to be seen whether buried hill is supported by other evidence e.g. DHI.
General thoughts: After the results of the 2 wells prospect inventory will be reworked and will give some fairly good, lower risk targets for explo. With improving risked NPV FAR will be even more tempting for potential predators. This certainly applies to the partners first, who have the complete picture.
As always: COS = Source x reservoir x seal probability. The 2 wells drilled so far have shown that source is prolific and working (500m oil column and structure full to spill). Seal in both cases is working. This was by the way to some extent surprising to me at SNE-1 as the Albian and Aptian reservoir dip was counterregional from overall dip of the unconformity, which required existence of 2 different effective seals.
I am not so sure what to make of chart 22 of COP´s presentation which was referred to earlier (dated 19.11.2014). It shows oil in the SNE-1 carbonates (which was not present) and it shows a source rock to the east which we all did not have on the books. The source rock to the east has been drilled with SNE-1 (unless it pinches out towards the west). From cuttings it should be visible whether it is a good source or not. This source should be less mature than the source rock shown to the west which has been buried deeper.
Split
I am not an expert on this, therefore I would just like to put the question forward to the board. We have had the discussion whether with or without merit, that there are too many shares outstanding. Could this be mitigated through a share split?
Oil price
Even though the OP has no immediate effect on FAR, as FAR has no production, it does on CNE and COP. It will influence their E&P budgets. When the partners agree on an aggressive appraisal program, this will clearly show which value the Senegalese assets have in the respective worldwide portfolios.
Some thoughts on the OP.
As usual there is a multitude of commingled influences which has sent the OP down. The OP has always been political, but after a fairly long stable period we have now arrived in a very turbulent period. A few comments/observations:
We see shifting alliances which are in the process to be reconfirmed. Russia is being forced away from Europe into an alliance with China. Russia suffers from a lot lower income from oil and gas in combination with effect of the imposed sanctions. From the US point of view this is certainly a wanted side effect. Whether it will have the obviously desired effect, i.e. destabilize the Russian government, remains to be seen.
The strong bonds between the US an Saudi Arabia seem to unravel. US instead looks to improve ties with Iran the arch enemy of Saudi Arabia.
Turkey´s actions are very difficult to predict. Even though it allows a large number of refugees to stay in camps on its soil, it does not want to support the fight against IS directly. Erdogan is just visiting Putin and it is unclear where Turkey´s loyalties sit. It reminds me of a big switch which can start a number of different activities. It is unclear who moves the switch.
OPEC this week decided not to reduce production. The fight for market share is in full swing. It looks like we are in a similar situation as in 1998/99. The pain must increase further before action is taken. This decision is also pointed directly against US shale oil and shale gas producer, which are now taking market share especially in the US away from OPEC.
Traditionally the oil lobby has always had a strong influence on political decision making in the US. In my view it was a lot easier to do politics in oil when most of the oil was imported. Now a lot of oil is produced in the US. A longer time span with low oil prices was in the past not as dramatic as today from US oil industry perspective. As quoted in the recent article at Forbes on another thread, that within 3 - 4 years 3.5 mmbbl of US production may get lost, simply because the required continuous drilling (and fracking) is no longer commercially viable. Some of the junior oil shale producer are sitting on large debt and will have a hard time to survive at 60 - 70$/bbl as investor trust is disappearing. Probably some are sitting on large drilling commitments and will be forced to continue drilling to avoid losing the licenses. This will maintain oil & gas flow certainly in short term and will keep prices down. At the same time it will drain money from the producer pockets, because they are producing loss making barrels.
Lobbyist will be screaming in Washington. At some point in time we will see the influence of low prices and the number of idle onshore rigs will be increasing (Last week we saw a slight decline of 13 onshore rigs 1876 => 1863).
So we are looking at 3 main factors which explain today´s weak OP:
o The need to have low OP prices to prop up world economy. o OPEC´s struggle for market share. o The US wish to reduce Russian O/G income to weaken the Putin government.
This comes in parallel with a new wave of QE market flooding with money in Japan, potentially Europe and....
It remains to be seen what the impact the low OP has on the Middle East. As long as the US$ is strong they will be able to counter the effect of lower OP´s in their local currency. I nevertheless see the risk that even more countries will be sucked into the black hole of chaos developing between Libya and Iran.
This list is by no means complete and could be prolonged effortlessly...
Conclusion:
I feel a little bit like we are voluntarily setting fire to all four corners of a building w/o knowing whether the firebrigade will be able to arrive in time to extinguish the fire.
In the background we may all have a wish for lower OP´s to prop up the worldwide economy and bring back growth but this means oil companies around the globe will be suffering.
What does it mean for FAR? As explained above, the current low OP will lead to a redistribution of E&P budgets. Shell and COP have already indicated that they will reduce oil shale budgets in the US. My hope is, that Senegal is one of the remaining bright spots within COP´s and CNE explo. portfolios. Senegal is not located in one of the turmoil and chaos regions and I sincerely hope that the barrels in Senegal can be produced at reasonably low cost.
Happy to hold through turbulent times as value will prevail!
Cheers
R1
FAR Price at posting:
8.8¢ Sentiment: Buy Disclosure: Held
(20min delay)