Antoine Darque 11 August 2020

Beating FAR Ltd (FAR) to the door, is its Sangomar partner, Cairn Energy PLC (Cairn), who is selling its 40% interest in the Rufisque Offshore, Sangomar Offshore and Sangomar Deep Offshore (RSSD) Contract Area to LUKOIL for:

  • Cash consideration of US$300M
  • Reimbursement of development CAPEX incurred since 1st January 2020, estimated at US$330M
  • Further contingent consideration of up to US$100M, dependent on the timing of first oil and the average Brent oil price during the first six months of production:
    • If first oil occurs in 2023:
      • a payment of US$100m if the Brent oil price during the first six months of production averages above US$60 per barrel
      • a payment of US$50m if the Brent oil price during the first six months of production averages above US$55 per barrel but less than US$60 per barrel
    • If first oil occurs in the first half of 2024:
      • a payment of US$50m if the Brent oil price during the first six months of production averages above US$60 per barrel
      • a payment of US$25m of the Brent oil price during the first months of production averages above US$55 per barrel but less than US$60 per barrel

Assuming that Cairn achieves a contingent payment of US$50M, 2P reserves transaction metrics are:

  • US$3.5/bbl, ignoring the CAPEX reimbursement; or
  • US$7.4/bbl, including the CAPEX reimbursement.

Note: this is calculated using Cairn’s reported net 2P reserves (working interest) of 99 mmboe.

This is a very similar deal size to what Woodside agreed with ConocoPhillips in 2016; US$350M for 35% plus US$90M in adjustments:

  • US$4/bbl ignoring capital adjustments; or
  • US$5/bbl, including the capital adjustments.

Note: the above is calculated using the current Cairn 2P reserves.

At the time, FAR contested the transaction as it claimed that it was not allowed to assume its pre-emptive rights; a battle it later lost in the arbitration courts.  The court battle was driven by a view that the deal under-valued Sangomar.

It appears that Woodside may seek to utilise its pre-emptive rights to match LUKOIL’s offer. Currently, LUKOIL is on a US list of sanctioned Russian firms, including for transactions related to deepwater oil projects. Woodside may prefer to buy-out Cairn’s stake to avoid any potential US sanction complications.

FAR has been unable to meet its cash calls since its planned debt financing fell through earlier this year due to COVID’s oil price impact. It has less than six months to divest some or all of its Sangomar interest, or find another solution, to fund its share of the development costs. With an estimated EV of A$32M (market cap of ~A$120M ($0.012 share price) and US$63M in cash), it appears investors have priced much of the risk that ASX-listed FAR will lose its share in Sangomar. If FAR sold its 15% Sangomar interest on the same $/bbl metric as Cairn, it could achieve an initial payment of US$113M, a contingent payment up to US$38M, plus potentially CAPEX reimbursement of US$39.7M.

Disclaimer: the author of this article is a FAR Ltd shareholder.