Description

Far Ltd is a c.$100mm market cap Australian listed independent oil and gas company with a 15% stake in the Sangomar oil field in Senegal. It is the rare microcap company which has an attractive interest in a large oil field - generally difficult to get your hands on.  

The Sangomar field is estimated to hold c.400mmbbls oil - it is very sizable by most standards and was the largest oil discovery in 2014.

FAR was on the cusp of securing the funding for the project and sanctioning it before COVID hit. It would have been a transformative milestone and derisking. 

Now with COVID, the ability to move forward with the project is now in question. Its financing has basically fell apart (namely the proposed debt), but it managed to go through with its committed equity raise which has increased its cash coffer to $80mm. 

The company has announced its intent to sell the core asset given the inability to fund. Far’s inability to fund its stake is a key impediment for larger partner Woodside. Cairn has previously indicated interest in selling down a portion of its interest. 

Far's share price has oscillated between A$0.010 and $0.020 as it has stagnated without real near-term prospect of sanctioning the Sangomar project. It is entirely possible this share price may continue to slide.

When the share price trades at the low end of the range, i.e. A$0.010, it essentially implies little to no enterprise value for the asset which 12 months ago arguably could have attracted a much higher valuation.

Risks

The key risk is obviously being able to find a buyer. But if FAR trades down to say A$0.010, the margin of safety is quite high. Given it holds 60mmbbl 2P/2C reserves and resources net to FAR, most transactions will be accretive. Unlike other oil fields, this is an asset that should be sellable. FAR also has time given its cash balance and one might expect the company to take steps to conserve capital. 

Outlook

Oil looks to be on the road of recovery. US shale is about to get destroyed with a whole raft of bankruptcies. Chinese National Oil Companies are starting to look for resource again, so this could be a target. 

As balance sheets improve, FAR / Cairn could potentially jointly sell their interests to a party with a bigger balance sheet. A low valuation would still be accretive for shareholders of FAR at these valuations, even if means additional value is left for contingent payments. 

Style

This one requires patience. There are plenty of other names to ride the oil price like the majors. But if you can catch a low enough price at A$0.010 or below, it seems to offer an interesting payout that could be worth the wait. 

Catalyst

The key catalyst is the sale of FAR’s 15% stake, or resolution to its financing situation. More likely to be sale of the 15% stake.