AR Limited (FAR) is an independent Australian Securities Exchange listed (ASX: FAR) oil and gas explorer with high impact assets in West and East Africa. The Company has a robust balance sheet to progress its assets, an experienced Board, and management with strong relationships in Africa. FAR is dedicated to being a leading African focussed exploration company.
http://www.far.com.au/wp-content/uploads/2013/10/20131016-StockAnalysis-Special-Edition-FAR.pdf
Originally Published
16 October 2013
FAR Cranks Up For Drilling in 2014
Recommendation:
FAR is approaching a period of drilling activity during 2014 that offers significant share price upside on any hint of success. The stock is well capitalised and funded, offering a speculative buy as it continues in a short downtrend to test likely support at 3.4 cents and then has a target of 8 cents during H1 2014, once resistance at 5.5 cents is overcome FAR is well capitalised, with cash of about $25 million and a further US$5 million due from Cairn Energy once government approvals are in from Senegal. The stock is well positioned to emulate the successes of Hardman Resources in the early 2000’s.
Final costing for two wells in waters offshore Senegal is in preparation. FAR is fully carried to AFE costing for both wells by funding of up to about US$190 million from ConocoPhillips and Cairn Energy, with a retained net revenue interest of 15%. This funding alone represents a look through value of about 1.3 cps for FAR.
The Senegal coast is still very much a frontier province with no commercial oil found so far. However the presence of world class, excellent source rocks and mid Cretaceous reservoirs (89 million years old) that have proven to be prolific from offshore Mauritania in the north to Ghana in the south, support a strong case for exploration success.
The first target is expected to be a deep water turbidite (clastics) play in a buried underwater canyon where up to 900 mmbbls of oil is in prospect, but StockAnalysis assesses success with 304 mmbbls of oil. Water depth is around 1,500 metres and the target is about 1,500 metres below mud line. The well will test known sand formations that are seen to outcrop onshore. Sands are known to be prolific and could potentially provide large reservoir volumes with expectations of good reservoir quality characteristics, overlain by sealing mudstone. The target has high amplitude seismic anomalism typical of hydrocarbons in sediments.
The second well, estimated to cost about US$80 million to drill, will target the Lupalupa prospect also in deep water, but slightly shallower at around 900 metres. StockAnalysis evaluates a 154 mmbbl target but around 200 mmbbls is possible. This prospect occurs in a tilted fault block where carbonates are the main targeted reservoir, with seismic data indicating porosity is present, but effective seal is a risk.
StockAnalysis assesses a net present value for success at both Senegal wells at just over $1 billion for FAR, which compares favourably with its current market capitalisation of $93 million. Discovery value per share takes into consideration the impact of dilution resulting from additional equity required to assess and appraise any hydrocarbons.
Any success offshore Senegal would high grade several additional prospects for drilling. A programme of appraisal drilling would follow on, which might involve further low risk farm out funding by FAR or additional equity issues at a much more favourable share price.
In Kenya, FAR is seeking farm in support to test the Kifaru carbonate prospect in ~300 metres of water, close to the Kenyan coast. In this region, FAR identifies three possible source rocks with the deepest having produced gas in the Mbawa discovery. Nearer the coast, the chances of finding oil from less mature source rocks are thought to be higher.
The Kifaru prospect has a primary carbonate target at about 1,800 metres but a deeper sedimentary target at about 3,100 metres which could be tested in the event of encouragement from shallower sediments while drilling.
The Kenyan prosects are assessed with a 19% chance of finding hydrocarbons and then a 50/50 chance of either gas or oil.
Underlying value for FAR is limited as the company relies on its risked exploration upside.
StockAnalysis sees an undiluted risked value of about 6 cents per share for Senegal and 1.7 cps for the Kenyan acreage with other projects adding a further 8.6 cents to lift total target risked value to 17.5 cents.