Following Cairn Energy PLC’s (Cairn) sale of its interest in Sangomar, eventually to Woodside Petroleum Limited (Woodside), FAR Ltd (FAR) announced a deal to sell its stake at a 30 to 60% discount to what Cairn achieved on a 2P basis. The range of outcomes is linked to contingent payments related to oil volume and price.
FAR has entered into a sale and purchase agreement with the National Oil Company of India, ONGC, for its entire 13.67% interest in the Rufisque, Sangomar, and Sangomar Deep Offshore Blocks, Senegal (Sangomar) for the following consideration:
- Initial cash payment of US$45M;
- Reimbursement of development CAPEX incurred since 1 January 2020, of US$66.58M, including US$29.60M paid to cure FAR’s default to the Joint Venture; and
- Contingent payments capped at US$55M related to the volume of oil sold from Sangomar and oil price.
FAR is a distressed seller having recently stopped making payments for cash calls since its planned debt financing fell through earlier this year due to COVID’s oil price impact. In absence of a transaction or alternate additional source of funding, FAR is not likely to be able to meet its obligations in relation to Sangomar beyond December 2020. If this were to occur, FAR would be in default of JV obligations and its Sangomar interest would revert to the other members of the Joint Venture at no cost.
When this deal is compared to the Cairn transaction on a pro-rata basis for net interest, FAR achieved US$68M less in initial firm payment but potentially US$17M more in contingent payments. In both deals, Cairn and FAR will be reimbursed for their respective capital cost contributions since 1 January 2020. See our August article for Cairn Sangomar sale analysis.
|
Deal Details |
Cairn |
FAR |
||
|
Actual |
Estimated based on Cairn deal equivalent |
Difference (Cairn deal equivalent – FAR) |
||
|
Net interest |
36.40% |
13.67% |
13.67% |
– |
|
Net 2P Reserves |
91.4 |
34.3 |
34.3 |
– |
|
Initial firm payment (US$M) |
300 |
45 |
113 |
– 68 |
|
Future contingent payment (US$M) |
100 |
55 |
38 |
+17 |
|
Capital costs reimbursement (US$M) |
330 |
66.58 |
66.58 |
– |
Note: Based on Cairn 2P numbers for deal comparison and metric consistency.
When comparing the deals with and without capital reimbursement and with 0 to 100% of contingent payment achieved, the FAR deal is between 33% and 60% discounted to the Cairn deal.
Including the capital cost reimbursement and assuming no future contingent payment, Cairn achieved US$6.9/bbl on a net 2P basis while FAR realised only US$3.3/bbl, a 53% discount. Ignoring capital reimbursements to make it comparable to other transactions in the development stage and assuming both parties receive 50% of the future contingent payment, the discount reduces to 45%; Cairn US$3.8/bbl and FAR US$2.1/bbl. This is reflective of the distressed nature of the sale and discount for a minority interest, i.e., reduced Joint Venture influence.
|
Capital reimbursement |
Future contingent payment |
Cairn (US$/bbl 2P) |
FAR (US$/bbl 2P) |
Discount |
|
100% |
0% |
6.9 |
3.3 |
53% |
|
100% |
50% |
7.4 |
4.1 |
45% |
|
100% |
100% |
8.0 |
4.9 |
39% |
|
0% |
0% |
3.3 |
1.3 |
60% |
|
0% |
50% |
3.8 |
2.1 |
45% |
|
0% |
100% |
4.4 |
2.9 |
33% |
Note: Contingent payments for each deal have different trigger conditions which are not directly comparable. These have not been modelled against future oil price scenarios to determine their probability. Instead, three deterministic outcomes (0%, 50% and 100%) have been applied to the contingent payments.
Considering that in a matter of a month or two, FAR could lose its Sangomar interest for nothing in return, the deal, while discounted, is positive news for shareholders. ONGC also benefits from acquiring an interest in what many call a world-class, tier 1 asset during a commodity cyclical low at a price that is depressed even further by having a distressed seller. Buying in halfway through the development at US$1.3-2.9/bbl 2P (excluding capital reimbursements), for an asset that will produce ~13,700 bopd net in early 2023 may prove to be an astute piece of deal-making by the Indian National Oil Company.
Once it starts trading again on the ASX, FAR should see its share price recover since it had appeared that investors had priced in already the risk that FAR would lose its interest in Sangomar for naught. If the deal successfully completes and assuming a market capitalisation of ~A$110M (share price of A$0.011 immediately prior to trading halt), FAR’s net cash / market cap ratio would be between 1.6 and 2.3 depending on how much it receives in contingent payments. A net cash / market cap ratio of greater than 1 should be quickly corrected with an increase in the share price.
|
Cash Received |
Cash (US$M) |
Cash (A$M) |
Net Cash / Market Cap Ratio* |
|
Post-completion |
130 |
178 |
1.6 |
|
50% Contingent payment received |
158 |
216 |
2.0 |
|
100% Contingent payment received |
185 |
253 |
2.3 |
Note: * Net Cash / Market Cap ratio assumes zero value for FAR’s other assets including its interests in promising Gambia blocks adjacent to the Sangomar field, where there is potential for continuation of the Sangomar field.
Finally, considering the discounted nature of the sale, it will be interesting to see if Woodside would want to activate its pre-emptive right and further increase its Sangomar interest from 68.33% to 82%. This would be a large percentage interest in a major project with significant near-term capital commitment which Woodside may perceive as too high a risk.
Disclaimer: the author of this article is a FAR Ltd shareholder.