Posted by Malcolm Graham-Wood - Malcy's Blog
Yesterday was a bad day for oil, not because it fell but more as it started brightly moving up on general news from Russia and sundry participants that a roll over was increasingly likely at the May meeting. During the day announcements from Libya that it was increasing production (something to be taken with a large pinch of salt as a rule at the moment) and the the inventory figures rained on oil's parade.
April WTI expired yesterday and May (above price) was already a bit weak, this morning Brent is down 72 cents so flirting with the key $50 level which the chartists hate. So, those API stats showed a build of 4.5m barrels, more than the expected 2.8, and although gasoline stocks drew by a bigger than expected 4.9m barrels the market was disappointed. Stand by for EIA tonight…
Readers will know that I have been planning a piece about FAR that addresses some of the points I am regularly being asked about regarding where FAR goes from here, how the ConocoPhillips ‘exit' has affected them and what options they have from here. It looks to me that COP has effectively driven a coach and horses through the letter of the law and certainly the well accepted behaviour of partners in a joint venture as it exits Senegal. The deal with Woodside appears to have been done almost as a ‘fait accompli' and whilst FAR has tried to understand the terms of their pre-empt rights (after all, they were offered these rights from COP), they have been frustrated at every turn. Attempts through the usual official routes have appeared to have so far failed despite the fact they have signalled that they have the necessary funding (with a partner) to exercise their pre-empt option should they wish to do so. I understand that the Senegal Oil Minister fully appreciates the situation and understands that FAR are going by the book but share in their frustration. They also must understand that FAR could if they wanted make life a lot more difficult, for example by enacting international arbitration and thereby bringing the issue under the spotlight of the international community, which the Government of Senegal certainly does not want for their first, large oil development offshore. With the Government also wanting the project on-stream as soon as possible (at present by 2021/22), and elections looming before that, FAR are in a strong moral and legal position.
In my view FAR might be better served, and keep its excellent relationship with the Minister, by stepping back and accepting Woodside as their new partner thus ensuring a more stable future. Senegal, as indeed is a good deal of the West African coastline, is fast becoming one of the most highly prospective and desirable areas in world oil, something that has been recently proved by BP farming in with Kosmos to the North and this special relationship with the country is to be valued. Indeed, if by maintaining such a favourable relationship with the Ministry led to a possible, nay favourable chance in upcoming offshore licence awards, then it would all have been worth the while. With Cairn holding 40%, and I am not at all convinced that they are keepers of this stake, and of course at some stage may have to pass on the operatorship of the licence to Woodside, then all is up for grabs, at which point FAR's 15% comes into play. Who is to say that these two stakes might suddenly become a much more tempting stake, valuable to the marauding major to whom 50% or more is needed, less is not….
By accepting that, with the passing of time, the pre-empt is lost and Woodside may be a healthy bed partner, I take it that FAR will not lose their right to take COP into arbitration and go for damages. Reading the Chairman's comments in the annual report today, it certainly seems as though all options are in front of the board.
Did anyone notice by the way that COP indemnified Woodside against any losses incurred as a result of this deal going pear-shaped? Woodside have a money back guarantee – did COP have to offer this to get the deal across the line? One ponders whether this constitutes one of the terms of the deal that COP were not sharing with FAR.
As I see it FAR's options are as follows:
They could keep fighting for the COP stake as is their partner pre-emptive right but this would ultimately lose the goodwill that has been built up with the oil Minister and of course ahead of the Presidential elections.
They could accept Woodside as a partner, things could be worse and I understand that relationships between the two companies are good which would be a bonus as development gets under way. With the blessing of the Ministry, which would be likely under this scenario, I can see FAR getting a decent shout in bidding for upcoming blocks, not to be sneezed at.
The final option, the ‘Kingmaker' option so to speak, as indicated above would be to offer the 50+% stake held by Far and Cairn to a major if such a substantial offer was potentially on the cards. If such a deal was available, and it would have to be significantly above what is reflected in FAR's current share price, this end may justify the means. With a new Senegal exploration process to look forward to, with fresh acreage and new, more trustworthy partners and a healthy bank balance to boot maybe this is the best way out for FAR.
The operatorship card is also interesting, as I understand it Woodside are expecting, as per the original –rather ill defined agreement between Cairn and COP, to take over after the exploration phase and before FID. However, if Cairn is planning to sell to a major and maybe with FAR to offer a bigger stake then it would be well advised not to hand over the operatorship lightly…Woodside could hardly complain about this given the way they got into the licence to begin with.
My valuation of FAR is still 25c, I strongly believe that one way or another the current share price has not taken into account the appropriate value of what the company has in Senegal and will do so before long.
We now have the next stage of the RRE journey as they announce details of various deals done in recent months. They are continuing to progress on the acquisition of Scott (5.16%) and Telford (2.36%) although the Wytch farm part of the deal was pre-empted by existing partners.They have signed an SPA with Egerton Energy Ventures to acquire the non-operated interests in the Galahad (27.8%) and Mordred (8.33%) gas fields. In addition they have signed up with ‘a major trading company' to acquire a number of small, non-operated interests in the SNS. In total the production is about 1,400 boepd to RRE.
This will all result in a net cash inflow to RRE from Maersk which although not announced is, as I understand it, extremely positive even after decommissioning is taken into account. It's a bit early to say that this is transformational but it maybe just that, as I understand it they are considering a raise at a substantial premium to the suspended price as existing shareholders and some of the vendors above are keen to get this show on the road. No idea when they shares will come back but probably before Easter so watch this space…
Things are starting to look up for IGas as following the completion of their refinancing they announce today that their planning application at Tinker Lane in Nottinghamshire has been approved. Very good news for the company as they can now test the gas shales but also for the industry and the country as the potential of finding our own gas for power moves closer to reality.
Solo has bought a 10% stake in Helium 1 which sounds a bit funny to me (ok it's a poor joke I know) for £2.55m of which £1.2m comes by raising money at 0.54p and the rest in shares. With an option to buy another 10% at £4m half and half in shares and cash the company has the put and the call but whether it's a good deal or not better men than I can judge, never valued helium!
Follow up from yesterday…
I was out and about yesterday but spotted the following…
Faroe had a very good set of figures even though we knew how they would be good, the presentation later was very confident and there will much to see from the company this year and next. Faroe will likely take over as best in class after the Judas' that is Ithaca leaves the scene after capitulating to Delek….
EnQuest released a surprisingly good set of figures pleasingly in the black. Improvement is coming quicker than most, including me, where expecting and I salute them.
And Bahamas Petroleum announced that the Government has extended their requirement to drill a well from April 2017 (clearly a non-starter) for another year. Patient shareholders are told that a farm-out or similar, ‘remains in advanced discussions' for funding or operational partners. This sounds a tad more optimistic but as usual one shouldn't stand on one leg waiting for it to happen…
Two links this morning, firstly this is my weekly Vox Markets Podcast which featured SDX Energy, Savannah Petroleum and IGas Energy
And secondly, yesterday I managed to lure Andrew Knott, CEO of Savannah Petroleum into the TipTV studios for a Malcy CEO interview, the result was a fascinating insight into a most interesting company.
As it is International week it is incredibly short of news anywhere, England are in Germany playing their B team, as are we and I for one wont be viewing it.
Visit source siteFARRockRose EnergyIGasSolo OilMalcy's Blog