Tim Treadgold: Failure creates an opportunity in FAR
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Failure is not always a bad thing, even if it cuts a company’s share price in half, which is what happened to FAR Ltd in November when a closely-followed oil exploration well proved to be a flop.
The upside of FAR’s (ASX:FAR) fall from 14c to around 6.8c today is the creation of an opportunity for investors to acquire a slice of an oil stock which remains quite interesting – for a much lower price than two months ago.
What hurt FAR was a disappointing result from the Samo No.1 well off the coast of the west African country of Gambia. Rather than deliver the expected oil bonanza, Samo returned a few sniffs of oil and gas.
Speculators, as opposed to investors with more patience, had been buying FAR in the expectation of a discovery to rival what the small Australian company had achieved five years earlier across the Gambian border in neighbouring Senegal.
Blame the speculators
It was back in 2014 that FAR, one of the early-movers in west African oil exploration, participated in a syndicate which discovered the SNE oilfield, follow by the FAN oilfield.
Rated as two of the best discoveries anywhere in the world at the time the unfortunate issue for FAR was a spectacular collapse in the oil price in mid-2014, an event which has slowed most oilfield developments.
The Samo well reignited interest in FAR which had offset a large proportion of the drilling costs by selling a 40 per cent stake in the well to the Malaysian oil company, Petronas.
That sell-down minimised FAR’s exposure to the Samo well, the first point that speculators appear to have overlooked. A second point is that FAR retains its interest in the SNE and FAN discoveries which are moving towards development under the management of Australia’s oil and gas specialist, Woodside Petroleum.
In other words, Samo might have been a dud but it wasn’t a dramatically expensive dud for FAR, while moving into sight is the prospect of FAR doing what most small oil and gas stocks never achieve – make the shift up from explorer to producer.
The Senegalese adventure
There are timing and ownership issues remaining in the SNE and FAN projects thanks to a long-running dispute between FAR and Woodside over a stake in the discoveries once held by the US oil major, ConocoPhillips.
FAR reckons it held a first right to the ConocoPhillips stake which Woodside acquired for $US430 million.
While the ownership issue heads for an arbitration hearing sometime this year, Woodside is pushing ahead with development plans for an oil project likely to cost $US3 billion with the aim of producing as much as 100,000 barrels a day.
FAR’s share of production, depending on how ownership eventually settles, is a game-changing factor for the stock, as a few numbers demonstrated.
If FAR retains its current 15 per cent it will be entitled to around 15,000 barrels of oil a day, worth – at the latest oil price – close to $US1 million (a day). If the government of Senegal increases its stake in the oilfield FAR’s interest slips to 13.7 per cent, which still leaves the small Aussie explorer with a daily entitlement of 13,700 barrels.
It could all change again if the dispute with Woodside is settled in FAR’s favour, though that would also raise issues of funding a big offshore oilfield development.
So Samo disappointed, but they’re still an almost-producer
The important point for investors is that while the Samo well was a disappointment not much changed in the overall outlook for FAR which is why a 50 per cent fall in the share price looks to have been a significant over-reaction.
Two big-name investment banks agree with the over-reaction argument. Both Morgan Stanley and Credit Suisse retained their buy tips on FAR after the Samo result was reported and the company’s share price was plunging.
“We view the pullback (price fall) as an opportunity given the inherent value of the SNE discovery,” Morgan Stanley said. “We value FAR’s interest in the SNE discovery at around 13c.” That’s roughly double FAR’s latest share price.
Credit Suisse is slightly more upbeat, putting a value on FAR of 14c with a buy rating on the stock after Woodside announced in mid-December that it was moving the SNE project into front-end engineering and design (FEED), an important step in an oil project and a precursor to a formal go-ahead sometime later this year.
“While FEED is an important milestone, joint venture project financing discussions have now (formally) commenced, an equally key catalyst for the JV as the partners press towards an investment decision, hopefully by the end of the year,” Credit Suisse said.
A lot could happen in the SNE joint venture and with FAR over the next 12 months. A fresh ownership shake-up is possible with another partner, Cairn Energy, rumoured to be looking for a buyer of its interest, and then there’s the potential arbitration hearing over the ConocoPhillips stake.
Boiled down, FAR remains a small explorer playing a big game and while its shares took a knock late last year it is still a stock with plenty of upside.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.