Current Price: A$0.68 (A$0.4 dividend already distributed)
Target Price: A$1.07+
Upside: 50%+
Expected Expiration: Q2 2022
This idea was shared by Jeremy Raper (aka puppyeh), who is an activist in this situation.
FAR is a busted Australian O&G explorer that has been horribly mismanaged for many years and is now facing activist pressure and a low-ball opportunistic takeover offer from one of the shareholders at A$0.45/share. Aside from the failed African exploration assets, FAR sits on US$55mm of unrestricted cash on the balance sheet, an earn-out on the Woodside asset sale of up to US$55mm over the next 2-3 years (very likely to pay out in full) and just US$17mm in future near-term cash obligations – resulting in adjusted NAV per share of A$1.1 or 50% upside to current prices.
Jeremy Raper is pushing for the sale or wind-up of the company, with more immediate requests being the resignation of the CEO, stopping all the discretionary spending on drilling/exploration activities, and a large tender with available net cash on hand. If the recommendations are not followed, the activist intends to nominate his slate of directors and take-over control of the company in the annual shareholder meeting expected in Jun’22. Jeremy Raper states that around 30-35% of the company shareholders are already supportive of an orderly wind-up and liquidation of FAR.
FAR equity sum-of-the-parts valuation framework
Per the table below, almost all the value residing in FAR equity today consists of net cash on hand (after deducting residual Bambo-1 well expenses, other committed exploration, and corporate G&A), and the earn-out consideration from Woodside due over the next 2-3 years. Given the failure of Bambo exploratory well, there is very low chance they decide to spend any more money on it.
Aside from cash, the only other meaningful asset (excluding the busted exploration assets, for now) is the earn-out coming from the Woodside asset sale. Here is what FAR has disclosed regarding this contingent payment (from the 1H report to June’21):
The Sangomar project is a huge one for Woodside and was supposed to be a company-maker for FAR (even with a small stake), before the creditors forced them to sell down. You can read here about Woodside’s plans for the field; you can see the project is very close to first production (expected mid-2023), and they plan 100k boe/d from the first phase. Simple math implies ~$27mm in earn-outs, per year (but capped at $55mm total), from Woodside to FAR, assuming they make it to production at these rates and with Brent oil well north of the max price ($70/bbl) stated in the agreement:
It may be debated whether a 10% discount rate is plausible for an earnout on a field not yet in production. But Woodside is a premier operator; the cost of this incremental earn-out is irrelevant to the scale of returns from the field; and Sangomar is slated to come online in just over a year. Furthermore, the earn-out clock only starts ‘ticking’ when the first production occurs, and exists until 2027, so it is largely derisked from incidental delays. Most importantly, the Brent futures market for end-2024 is already north of $70, meaning any financial buyer of this earn-out is readily able to fully hedge the price risk and simply take execution risk on the field ramping production. Frankly, with this operator, and with a three-year period to collect, and able to hedge most all price risk today, I believe a 10% discount rate is fair. In any case, even if you used 15% discount rate, the implied fair value for FAR stock would still be $0.98 (versus $0.70 today).
Upside from the busted exploration assets
There is a further, potential wild card: one of the oil majors with whom FAR has worked closely comes to the party to pick at the carcass given the implied negative value at which it currently trades. There are two likely interest parties: Woodside (the former partner in Sangomar) and Petronas, the Malyasian state-owned oil champion, the 50% partner in the Gambia Bambo well that just failed. I will not spend any time trying to ascertain whether large majors would care with the package of assets FAR has left. However, keep in mind Bambo was supposed to contain up to 1 BILLION barrels of oil (even though the first exploration well failed) and so picking up a 50% interest in these blocks for a pittance – $10mm? $20mm? who knows? – may well appeal to a deep-pocketed, long-term operator like Petronas. Of course, another financial buyer could step in too… but in any of these cases the equity should be worth probably a premium to my base $1.1 NAV, and perhaps a solid premium. Given the ~100mm shares outstanding, even if nothing more accretive is done with the share count, every $10mm of excess value from the oil assets is ~15c on the stock.
Some further thoughts and detailed recommendations to the board regarding these assets are outlined at the end of the Open Letter.
Recent Takeover Offer
The company has recently received a A$0.45/share takeover bid from a 4.9% shareholder Samuel Terry Asset Management. The board has already recommended voting against it. Given that almost 20m+ shares (or 20% of the entire company) have already changed hands at or above the offer price and that Meridian (a 19% shareholder) rejected it outright, the offer is probably in the rearview mirror already.
The target statement and some of the reporting reads like Cath and this board are aggressively trying to sell themselves. They’ve put a AUD $1 price out there. For the bidders out there – unclear who the bidders would be – they’re pretty much telling them it’s AUD $1 top. If/f they find a buyer, the buyer probably needs to capture some value here…how much do they pay….AUD $0.90? AUD $0.80? The buyer is going to have to pay transaction fees etc…. how much is it worth to them? If they don’t find a buyer, looks like they’re planning to spin out a contingent value right. How much of a discount will a CVR price in the market? – how many existing shareholders are going to sell it as soon as they get it?
I think these are the scenarios you have to assign probabilities to to figure out the true realizable value to shareholders.
Happy Hunting!
i dont believe they are trying to sell themselves. they are simply trying to keep their jobs. the playbook here is as I outlined in my letter. fire the MD; take board control; negotiate an early cash payment for Woodside earnout; exit all other drilling obligations (for cash if possible); and tender for as much stock as possible in the 75-80c range.
i fully intend to realize $1.2+ of value if i/someone like me gains control here.
I was amused to see the ‘expert’ Woodside payment valuation report in the target’s response letter.
https://far.live.irmau.com/irm/PDF/49c96741-4072-4da1-b6dd-2008f9dd196e/Target39sStatement
These guys did Damodaran 101 calculations, plugged a bit of background info, added some finance theory ramblings and legal disclaimers – all of this resulted in a 17-page report, that does not add any incremental value compared to Jeremy’s couple of paragraphs on the matter.
The section on comparable market transactions was the best – one transaction without any valuation info, a table with absolutely irrelevant data, and then the conclusion: ‘we do not consider that the Cairn Transaction is a directly comparable market transaction’.
A prime example of work by outside consultants.
One of the members emailed the extracts from the Australian stock forum Hotcopper with some potentially concerning background and relations between the largest shareholder Meridian and Far’s chairman Patrick O’Connor:
https://hotcopper.com.au/threads/an-open-letter-to-the-board-of-far-limited.6592978/
the CEO has been fired. obviously this is a huge filip to the investment case and suggests the activism is working. the language in the PR is also quite direct, ‘a period of transition’ with no attempt to hire a new executive; retaining Cath for he advice (on Gambia divestiture I guess) for just 12 months; and then direct calling out of initiatives to ‘reflect the underlying asset value in the share price’ is not language you would see if a new risky initiative were being contemplated. instead it directly recalls the language in the Target Statement whereby $1 minimum of hard per share value was outlined.
in other words this seems a straight liquidation. I expect it will take around 12mos, or less, and we will likely get back a substantial portion of our cost basis, in cash, via special dividend or (ideally and my preference) a tender via off-market buyback.
in a variety of conservative scenarios, assuming a 12mo liquidation and nothing more than $1 of total value and 79c entry price, I get a mid-30s% to 50% IRR with still a 10% IRR in the worst worst case (eg a sale of the woodside earnout at 50c on the dollar, no tender, and a 15mo process).
frankly this remains quite mispriced. assuming they announce a plan to formally wind up, in the coming days (still some risk), this should trade well into the mid-high 80s, in my view.
A number of updates from FAR:
– Woodside contingent payment – after review management does not intend to divest this asset and will keep it within the existing corporate structure. Shareholders will see capital return from this asset only after the proceeds are received.
– Gambia assets – the company will seek an outright sale or farm-out + demerger of these assets. In case of demerger the “stand-alone entity would need to be sufficient in size and operations to justify such a listing”. This seems concerning given part of the existing cash balance could be shifted to capialize this new demerged entity.
– Nothing was mentioned regarding the large cash pile just sitting on the balance sheet.
https://far.live.irmau.com/irm/PDF/7df9d503-be28-4fc5-b6a5-dc21de9fa065/ShareholderUpdate
The company also published the annual report – uncommitted cash as of Dec’21 at US$33.4m.
https://far.live.irmau.com/irm/PDF/c50c154d-0685-47f9-8f94-4b12930f96e2/AnnualReporttoShareholders
This month another key member of the previous management resigned from her position as a CFO. Victoria McLellan will hand over her responsibilities at the end of April.
https://far.live.irmau.com/irm/PDF/090bdd9b-b012-45cc-873f-eb829d70a270/AppointmentofChiefFinancialOfficer
FAR Limited posted a new investor presentation outlining the strategy going forward – most items have already been highlighted above:
– Expected value realization for the Gambia assets during 2022.
– Woodside payment to be held within the existing corporate structure – monetization opportunities to be reassessed in 2023.
– Seeking to minimize overheads and preserve capital.
– Aiming for shares to better reflect underlying value.
– A tiny buyback of A$0.85m for unmarketable shares.
– Further capital management strategies will be decided once the outcome with the Gambian assets is clearer.
Somewhat more worrying – the company also noted “the Board is considering new business initiatives in both oil and gas and across the Energy
Transition sector”. And while these will supposedly be weighted against buy-backs or capital returns, an outright liquidation would be a preferred option.
The next milestone seems to be the company’s decision on what will be done with the Gambian assets and any capital return that may follow.
https://far.live.irmau.com/irm/PDF/4ff7e4e2-9c1b-42c6-836a-149e93308a33/AGMPresentation
They have no business investing in energy transition and doing so would destroy value.
i think the chance they invest in anything related to the energy transition is maybe 0.5%. having discussed the matter w management, they are well aware of shareholders’ prerogatives here.
A small positive development for FAR Limited.
The company reported it has increased its ownership in Gambia assets from 50% to 100%. Albeit FAR did not disclose how much paid to acquire the other half of the assets. Also on a positive not, the commitments to drill an exploration well during the next 2 years have been removed and the company is looking for partners to fund the exploration program. Management says this development has limited impact on FAR’s forward budget.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02559039-3A600355?access_token=83ff96335c2d45a094df02a206a39ff4
FAR released an update on Woodside’s contingent payment:
– Sangomar’s development plan was 63% completed as of June’22 and first oil is anticipated in 2H 2023.
– The company has reiterated its expectation to receive the full US$55m payment related to the contingent consideration by 2027. Annual payments are expected to commence in 2024.
– Monetization opportunities will be considered in 2023:
– The comment about the evaluation of ‘broader opportunities across the energy sector’ still remained.
https://far.live.irmau.com/irm/pdf/50ac8634-fd26-40cd-b63d-d0115f81cdff/Contingent-Payment-Update.pdf
I suspect I am missing something rudimentary in all this, hence my simplistic question based on the Sangomar earn-out calculation above:
What is the scenario if Brent is trading at <= USD 58/barrel ? Does it mean FAR will receive an annual earnout of only USD 2.245m? Or, possibly, does the FAR release of 2-Sep-2022 concerning the contingent payment imply that they have hedged this possibility in the futures market, hence their expectation of receiving the maximum USD 55m, presumably based on a price of USD 70/barrel?
Can anyone please answer this question?
I haven’t seen any mentions anywhere about future earn-outs being hedged. From my understanding, the payment expectation is simply based on management’s assumption that the brent price will not go below USD 70/barrel within the timeframe of expected payout/monetization of the asset.
And regarding the earn-out requirement itself, it is contingent on reaching certain targets so unless the price exceeds the minimum of USD 58/barrel, FAR will not be entitled to any payments.
update: whilst i havent sold any shares, i no longer think this is an attractive situation as i did until recently. the 10% buyback seems like an in-between outcome – and is certainly not the holistic capital return/tender/buyback program that I, and many others, had been pushing for for many months. whilst there is still some decent chance this emerges over time, it also seems some other large shareholders are much more content to maintain their investment and see FAR (potentially) pursue an acqusition to remain a listed entity (speculating here based on lack of activity thus far). in the low-80s then I think the risk/reward is good, but not great, given my decreasing conviction in getting the $$ out in an expedited fashion. to be clear, i think the price in the low-70s is far too cheap and probably more of a long than a sell, but just to update the board on my latest views here. best of luck to all involved.
Thanks a lot for your updated views they are much appreciated. In many ways your updates are even more important that the initial write ups.
Cheers,
G
Hunsbury Capital – Belco Special Situations Fund has acquired a 5% stake in FAR.AX. It is a fresh fund launched in Jun’22, which focuses on event-driven investments.
https://www.newswire.ca/news-releases/hunsbury-capital-belco-special-situations-fund-acquires-interest-in-far-limited-898124244.html
https://www.newswire.ca/news-releases/launch-of-the-hunsbury-capital-belco-special-situation-fund-861761989.html
What about the activist? What will they do next step after a long time?confused……
FAR released December’s Quarterly Activities update.
– In December, 0.7m (<1% outstanding) of shares were repurchased at around A$0.69/share - in line with the current price. Share buyback has been temporarily suspended in January and will now resume in February.
- Management is reviewing the options of monetizing Gambia assets and is looking for a JV partner who would fund exploration and drilling.
- Other opportunities across the energy sector are still being considered.
- Comments on Woodside earn-out monetization remained the same although the timeline has been moved to late 2023: "The Board will also consider opportunities for the monetization of the Woodside Contingent Payment nearer the commencement of first production from the Sangomar field in late 2023.
https://www.far.com.au/investor-centre/announcements-reports/
FAR released 2022 annual report:
– The company repurchased 3.9m shares (4% of outstanding) from January 1 through March 28 at the average price of A$0.71/share.
– The management reiterated that Sangomar field is on track to start producing oil in late 2023. The company expects to receive the full US$55m payment related to the Woodside contingent consideration by 2027, with annual payments expected to commence in early 2025 (vs 2024 guided previously). Monetization opportunities will be considered in 2023.
– FAR is still looking to monetize Gambia assets. The company has entered into discussions with the Gambian government to extend the permit term (to Sep’25) while the company is looking for a JV partner.
– New business opportunities are still being considered, though so far “none have matured into a recommendation to be put to shareholders”.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02649210-3A615737?access_token=83ff96335c2d45a094df02a206a39ff4
I think the situation remains mostly unchanged and the main takeaway is that the company has significantly ramped up share buybacks with 3.9m shares repurchased during the current quarter. This is definitely a big positive and with such a pace the current 10% buyback authorization will be filled by mid-year. If management is so enthusiastic about buying back shares, maybe we could expect another capital return program to follow. The company had almost half of the current market cap in cash in Dec’22.
FAR announced Q1 results. Nothing new on the business side but the accelerated share buybacks continue and in Q1 the company repurchased 4.2% of outstanding shares. Cash position at the end of Q1 was A$0.49/share vs A$0.70/share current price. On top of that, FAR is expected to receive the full $55m (A$0.88/share) payout from Woodside contingent consideration by 2027, with annual payments expected to begin in early 2025.
https://far.live.irmau.com/irm/pdf/bb2d0712-d80a-4fc4-a056-ca3ad2ce0c05/Quarterly-Activities-Report-and-Appendix-5B-Cashflow.pdf
If production starts in late 2023, why will first payments only be received in early 2025? Shouldn’t they start receiving them in 2023 or 2024 at the latest? Could you by any chance share the link to the earnout contract – maybe I am missing something wrt timing pf the payments.
The contingent payment is based on barrels sold over the previous calendar year. So if production only starts in late 2023, there might be a small payment in 2024, but it is likely to be negligible. The payment in 2025 will then reflect the full production during 2024. At least that’s my understanding of te situation.
Thanks, understood! Do you happen to have a link to the contract that describes the earnout?
@pmgs here is the asset sale announcement with the relevant details:
“The contingent payment comprises 45% of entitlement barrels (being the share of oil relating to FAR’s 13.67% RSSD Project exploitation area interest) sold over the previous calendar year multiplied by the excess (if any) of the crude oil price per barrel (capped at US$70) and US$58 per barrel.
The contingent payment terminates on the earliest of 31 December 2027, 3 years from first oil being sold (excluding any periods of zero production), and a total contingent payment of US$55 million being reached. ”
https://far.live.irmau.com/irm/pdf/da548e99-92da-4a2f-8045-fff13577a002/FAR-Senegal-Sale-Announcement.pdf
And the same contract details are in the latest annual report:
https://far.live.irmau.com/irm/pdf/8c8ab923-ebdb-4aaf-a606-baa2bdab2a01/Annual-Report-to-shareholders.pdf
Let’s see puppy’s comments/let’s see paul allen’s card. Good updates/questions though thx.
Seems like buybacks have resumed and it looks like 70c is their price. Is this going to be a 2025 payout story or is there any reason to believe it’s going to trade more appropriate sooner?
I am guessing/hoping this will rerate earlier. When the Sangomar field starts producing and the production rates (and in turn the payout schedule) become clearer, the market should gradually start incorporating the upcoming payout into FAR share price.
Previously management intended to reassess Woodside asset monetization opportunities in 2023, so any announcement with regards to this, would obviously speed up the re-rating.
Dt, just one question on the asset monetization. This seems like a super exotic asset to be selling. Who would buy it, except for perhaps Woodside? Have they mentioned anything about potential buyers in the past, or do you have any thoughts?
Once the production starts and payments on the contract become more certain, this asset will not be that dissimilar to a bond with a fixed and known payment schedule. So I think there should be plenty of interested financial investors that could take this asset off FAR’s balance sheet, all will depend on the discount to the $55m face value that the board will be ready to sell.
Western Gate Group led by Joseph Oyaski disclosed a 9.7% stake in FAR.AX. Joseph Oyaski seems to be a co-founder of Mnj Capital Management, an Asia-Pacific-focused hedge fund. From his LinkedIn page description, they seem to have some exposure to event-driven strategies. But beyond that, not much more information is available.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02669433-3A618946?access_token=83ff96335c2d45a094df02a206a39ff4
Western Gate recently increased its position by 1%, reaching an 11% total stake in FAR.
https://far.live.irmau.com/irm/pdf/626e0171-b520-4939-8533-12932cf3b936/Change-in-substantial-holding.pdf
In FAR Limited AGM, the board received some symbolic pressure to change the course for the better. 23% of shares voted against directors’ remuneration and 10% against the reelection of the company’s chairman and executive director. I do not think that is sufficient to have any meaningful effect, but it is nevertheless a five-fold increase in objecting votes compared to 2022 AGM. It also seems that the new substantial shareholders are not really voting against the board, otherwise, the objecting vote count would have been higher.
In Chairman’s address and the recent presentation the company reiterated the same points:
– Continues to seek monetization of the Gambian assets
– Review of new business initiatives is ongoing, but luckily nothing has been found so far. The company stresses that any new initiatives would have “to offer significantly better returns to shareholders than share buybacks or capital returns.”
– Woodside monetization will be considered closer to the commencement of the first production from the Sangomar field in late 2023.
– 6% of outstanding shares have been repurchased so far through the buyback program.
I think now shareholders are simply waiting for any announcements with regards to Woodside asset monetization in late 2023. If by that time management simply keeps dragging their feet, we might see increased shareholder pressure.
Looks like a large capital return is coming: https://far.live.irmau.com/irm/pdf/d8ac4077-cc22-41d3-9110-e7bf1a8f0478/Proposed-Capital-Return.pdf
It would be great to hear your revised thoughts on this thesis in light of this positive turn of events.
I think it is a very positive announcement. Shareholders will vote on A$0.4/share distribution in August and payout will probably happen shortly afterward. Importantly management noted:
These ‘new business initiatives’, that management started talking about over the last half a year, were the key risk to the SOTP/liquidation thesis. And while it is still a long way to go till the full winddown (it depends on the timeline of Woodside/Gambia monetization), it seems that the company is finally on the liquidation trajectory.
My calculation for the FAR stub (after A$0.4/share capital return):
– FAR stub is trading at A$38m market cap (A$0.815/share with 92.4m shares outstanding).
– The stub will have A$7.3m (US$5m) in cash + Woodside earnout of A$80.3m (US$55m) + whatever value could be fetched for Gambian assets (I assume zero).
– In total that is A$87.3m in face value of receipts/assets vs A$38m market cap.
– If the Woodside asset is not sold, the receipts from it will come in Q1’25 and Q1’26, likely equally split.
So even in the absence of earlier Woodside monetization and assuming the full $US5m cash balance is used for ongoing operating expenses and winddown costs, FAR investors are still looking at doubling their money in 2.5 years.
Woodside earnout would need to get monetized at a 50% discount of the face value of expected payouts for investors to breakeven at current share price levels. Such a discount would imply c. 60% IRR over two years for the acquirers of the Woodstock asset from FAR. I think this is far too drastic assumption. The buyers should be content with something like 15%-20% annual return. That would leave plenty of upside from the current FAR share price levels. At 15% discount rate Woodstock monetisation would result in A$65m proceeds and at 20% in A$61m (assuming sale happens in Q1’24).
At the minimum there seems to be 50% upside on the stub value, i.e. another A$0.2/share.
Do you have any insights on the potential tax implications for US holders regarding the distribution?
Thank you for the timely and insightful update. This all seems very positive.
In relation to this: “Woodside earnout of A$80.3m (US$55m)”. What happens if Brent is trading at less than USD 58/barrel?
The earnout will be calculated on:
So if the price for any barrels sold is below $58, FAR will not receive any earnout from these barrels. But then earnout will accumulate again if the oil price moves above $58. In this case, the full earnout might take longer than 2 years to payout – the long stop date is 3 years after the start of production, so likely by the end of 2026.
However, in the scenario that oil is consistently close to or below $58 during 2024-2026, the contingent payment would be close to zero. Brent futures for the years 2024-2026 currently sit at/above $70.
fishwithwings – the planned distribution should be treated as capital return and the press release explicitly stated that “the Capital Return will not count as a dividend for taxation purposes”.
So my understanding is that the cost basis will be adjusted by the capital return amount.
FAR has announced a shareholder meeting on Aug 18 to vote on the capital return. The distribution date is set for August 31 with record date on August 24.
https://far.live.irmau.com/irm/pdf/01a0d4ca-6396-42d4-80b2-73c85902389e/Capital-Return-Notice-of-General-Meeting.pdf
FAR has released an update on the Woodside contingent payment:
– As of June 30, the overall Sangomar project was 88% complete.
– First oil production is now targeted for mid-2024 (vs late 2023 as previously guided).
– FAR still expects a contingent payment in early 2025.
– The full US$55m is still expected to be received before the long stop date in 2027 – FAR said it’s confident.
– Importantly, FAR’s chair mentioned that monetization will be considered closer to commencement of oil production.
https://far.live.irmau.com/irm/pdf/14508f69-8009-44f1-b795-ba5fb5cd33a5/Woodside-Energy-Contingent-Payment-Update.pdf
So that means, liquidation, if it happens, it won’t commence until mid-2024?
It seems so. The annoucement was quite surprising as there seemed to be no prior indications of any delays. However, I don’t think this is a strong negative as the timeline has been slightly pushed, but management said they will try to monetise the asset and expect to receive full value before 2027. Meanwhile the company will return half of invested capital via the aforementioned A$40c payment.
Fair enough. I don’t have an original thought here, but Raper was expecting monetization sooner rather than later and a liquidation in relatively short order…. I guess management are drawing it out as they get to collect salaries for another year….
If you were to fully hedge the oil price risk here by buying puts at $68-70/bb and selling puts at $58/bb (matching the exposure profile of the earnout), the remaining upside pencils out to about a 10% IRR, so it seems that the majority of the return is coming from oil price exposure? Any thoughts on this?
Which time period did you choose for this btw?
expiration dates**
I used dec 2024, maybe not ideal but seems like there is less liquidity after this. If they sell the earnout it should be around this time I think.
As expected, FAR shareholders have overwhelmingly approved the proposed capital return of A$0.40/share. The payout will be made on August 31, with the record date set to August 24. FAR is currently trading at A$0.82/share, implying that the stub is valued at a A$42m market cap vs A$86m in expected Woodside earnout payment on top of the remaining cash.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02699115-3A623636?access_token=83ff96335c2d45a094df02a206a39ff4
FAR.AX paid the A$0.40/share dividend on August 23. The stub now trades at A$0.42/share, the same valuation outlined in my comment above.
FAR announced the ruling of the Australian Tax Office, stating that the 40-cent capital return will not be taxed. This was largely anticipated, but it’s good to have confirmation.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02714132-3A626517?access_token=83ff96335c2d45a094df02a206a39ff4
FAR has released its Q3 earnings. Not much has changed since the previous updates. Key takeaways.
1) Woodside Earnout: The target for Sangomar’s first oil production remains at mid-2024. Management explained that the project is now 90% complete, compared to 88% as of June 30. The company still expects to receive the full US$55 million before the long stop date in 2027 with the first payment in early 2025. As communicated previously, monetization opportunities will be considered closer to the first oil production from Sangomar field.
2) Cash and expenses: At the end of the quarter company had US$3.3m in cash. Total expenses during the quarter were US$1m and included some one-off expenses. As I understand, expenses will be lower going forward. The company has no employees left and admin activities will now be carried by contractors.
3) Gambia Blocks A2/A5: Management will continue with the low-cost marketing efforts for these assets during the Dec quarter, but so far there hasn’t been any firm interest. Board’s decision on the future of Gambian assets will likely be announced in Q1’24. The investment pitch above considered these assets to be worthless, so any extracted value will come as an incremental upside.
FAR is trading at A$44m compared to A$86m (US$55m) in expected Woodside earnout. The discount still seems too wide, especially as we are nearing the likely monetization window.
Key risks same as before: (1) exposure to oil prices, which might reduce Woodside earnout; (2) further delays in Sangomar oil production; (3) uncertainty regarding monetization; (4) further admin/liquidation expenses.
https://far.live.irmau.com/irm/pdf/c5526f49-896c-4c7a-acd0-21b703d8403b/Quarterly-Activities-Report-and-Appendix-5B-Cashflow.pdf
I’m looking at my IB statement and see that the $.40 distribution is treated as a dividend although the description (FAR(AU000000FAR6) Cash Dividend AUD 0.40 per Share (Return of Capital)) mentions it being a return of capital. Does anyone know how IB will treat this distribution when the tax forms are finalized?
I’d write a ticket to them about this. They are usually very good about responding, curious what they say!
IB should revert the tax charged. This happened a number of times to me and when I forwarded the documents that the distribution should not be treated as taxable dividends, IB always reverted withholding taxes.
Trading in FAR shares has been halted as the company plans to make an announcement regarding a potential tax claim from the tax authority of Senegal. The claim is related to the sale of FAR’s stake in the Sangomar project to Woodside for US$126m (plus the US$55m earn-out) in 2021. FAR anticipates making an announcement before the market opens on Monday, November 27.
Capricorn Energy, an oil and gas explorer who also sold its larger stake in the same Sangomar project to the same buyer for US$525m, has recently received a US$43m tax claim (including penalties and interest) from the country. A proportionally similar tax claim would imply a US$10m (A$0.166/share) tax liability to FAR. Meanwhile, cash balance as of Q3 was US$3.3m. Even if FAR goes to court and successfully fights the claim, this would still imply significant legal expenses as well as a potential delay in monetizing the earn-out and liquidating the company.
It’s an unfortunate development for the FAR, yet probably not a thesis killer. The margin of safety remains fairly wide with FAR’s EV, including the tax liability now at US$33m (A$51m) vs US$55m (A$85m) Woodside earn-out.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02744074-3A631522?access_token=83ff96335c2d45a094df02a206a39ff4
As anticipated, today the trading halt has been lifted as the company provided an update regarding a potential tax claim liability.
Firstly, the tax claim itself is significantly lower than I expected, coming in at $4m instead of the anticipated $10m. This is undoubtedly a positive development. However, the company now intends to contest the decision, which could lead to significant legal expenses and a delay the monetization / value realization process.
As a result, the stock is down by 16% after the resumption of trading. However, given the recent announcement, FAR.AX stock seems oversold. Current EV, adjusted for the tax liability, is at US$22.4m (A$35m) versus US$55m (A$83.4m) Woodside earn-out. There is a substantial margin of safety at today’s prices to wait and see how quickly the management comes to a resolution and whether this would actually slow down the monetization process.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02745475-3A631776?access_token=83ff96335c2d45a094df02a206a39ff4
Thanks DT, very helpful. Just curious if JR has anything to add?
I ran into a friend last night who works for another W. Africa offshore exploration company and apparently Sangomar first production got pushed again to Q2 Q3. However, not sure this is new information. He also said that FAR doesn’t legally owe the tax per their agreements but whenever you exit a country you can expect to get hit with a tax. Called it the “exit tax”.
Great news from FAR – the company has finally taken the initial steps to monetize Woodside earnout:
“Gneiss Energy Limited, a UK-based leading energy corporate finance advisory firm, was appointed
during the quarter as corporate financial advisor in connection with the preparation for,
marketing and potential sale of the up to US$55 million contingent payment from Woodside
Energy in relation to the RSSD Project in Senegal.”
Other updates from the quarterly report:
– The sale attempt of Gambian assets was unsuccessful and the company has surrendered the Blocks to the Government of Gambia.
– The target for Sangomar’s first oil production remains at mid-2024. Management explained that the project is now 94% complete.
– The board still expects the full US$55m earnout to be received before the long stop date in 2027 (the first payment is expected in early 2025).
– The Woodside earnout sale process will be undertaken nearer to the commencement of the first oil production from Sangomar.
– The US$4m potential tax issue relating to the earlier asset sale to Woodside – this one is still pending. An objection to the notification from the Senegal Tax Authority has been lodged by Woodside.
Seems like the situation regarding Woodside should be resolved the end of the year. To lose money from the current price levels (A$0.35/share), Woodside earnout would need to be monetized at more than 50% discount to the US$55m face value. I think that’s overly punitive and Woodside will be monetized at a more favorable valuation.
https://announcements.asx.com.au/asxpdf/20240130/pdf/05zv9m5m4mcdb1.pdf
Just to ask again my question as I did not have much traction last time: when I consider the cost of hedging this (which any third party buying the earnout will do, I think), the upside seems to go away.
My reasoning:
– As you mentioned the market is pricing a 50-60% discount on the earnout.
– 10-20% discount is warranted by operational risk (Sangomar volumes come out lower) plus time value (5% compounded 1-3 years, assuming the earnout pays over 2025-27).
– Another 30-40% is warranted by hedging costs: to hedge this you need to buy a $70 put and sell a $58 put; $70 Brent puts show up at around a ~10$/bb premium on Bloomberg for the next 2-3 years, and $58 puts at a ~$6/bb premium, implying net hedging cost per barrel of 10 minus 6 = 4 $/bb. The earnout payment per barrel is 12$/bb, so hedging cost is 4 /12 = 30% of the earnout value.
So this gets me to 40-50% discount on the earnout, very close to what the market is pricing especially if you include expected cash burn for 2024 on your enterprise value. Am I missing something?
Looking at it from another angle:
-Any financial or corporate buyer of the earn-out would be sophisticated enough to use a knock-in barrier structure to hedge the oil price exposure, that would reduce the hedging cost to c2USD/bbl.
-To get 25% IRR on the remaining 10USD/bbl upside, our buyer would need to pay 6-6.5USD/bbl.
-At 6USD/bbl (50% discount on the earn-out) and using 4mUSD tax liability, 2.9mUSD cash and 4mUSD unwind cost/cash burn, that gives a FAR value per share of c0.365, so roughly where we are now
-But this is likely too bearish / any buyer would use leverage to finance the earn-out purchase and could be more aggressive on the price, and of course Woodside would be able to be even more aggressive
-Any additional USD/bbl selling price on the earn-out translates into +20% on the FAR share price
Could you explain how the knock-in could lower costs here? How exactly would you structure it?
A knock-in option only comes into existence when the underlying price hit a predefined level (the “barrier”). The holder of the option don’t get the benefit of the mark-to-market if the underlying price goes down but doesn’t reach the barrier, as such it’s cheaper than the equivalent plain vanilla option
A large part of uncertainty will be removed once oil starts flowing from the Sangomar wells and this should lower the IRR any investor would require from the earnout investment (if boe/d is in line with expectations). That is likely the key reason why management is waiting for the first oil production before monetizing the asset.
The risk of further delays seems minimal as FPSO vessel (to be used for Sangomar oil extraction and storage) sailed from Singapore 1.5 months ago and 17 out of 23 wells as well as 98% of subsea work was reportedly completed by the end of January.
The first production numbers will likely act as a catalyst for the stock.
https://twitter.com/puppyeh1/status/1754453391118590104
FAR Limited refers to its ASX announcement dated 27 November 2023 regarding the receipt of a notification of adjustments from the Senegal Tax Authority. The notification of adjustments included a capital gains tax claim of approximately US$4 million relating to the sale by the FAR group of its interest in the RSSD Project to Woodside Energy (Senegal) BV in 2021. The ASX announcement noted that FAR considered its potential liability in relation to the capital gains tax claim to be uncertain, and that an objection to the notification was intended to be lodged. By way of update, FAR advises that a further communication has been received from the Senegal Tax Authority by Woodside. This communication accepts that there was no capital gain on the sale. Accordingly, FAR considers that it is no longer exposed to a capital gains tax claim relating to the sale.
Australian event-driven fund Harvest Lane has taken a 5% position in FAR.AX
Harvest Lane continues to accumulate shares in FAR.AX. Over the last week, the fund has increased its position from 5% to 8.26%.
FAR’s chief financial officer resigned and CFO’s role was taken over by the company’s secretary. A cash-saving move, but probably it does not signal much about the timing of the Woodside earning monetization.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02794899-3A640490
The appointment of the new NED is interesting and clearly signals what lies forward for FAR imo:
“Mr Lilley brings two decades experience in capital markets, including corporate advisory and financial
analysis expertise across a range of industries. Mr Lilley holds degrees in Commerce and Economics and was
previously a director of Omni Market Tide”
Highlights from FAR’s Q1 update:
– Monetization efforts for Woodside earn-out are ongoing (same as before). Preparation works for the sale process have been completed and the sale process is expected to start closer to first oil production (mid-2024).
“The Company is intending to seek offers with respect to its up to US$55 million contingent payment due from Woodside Energy nearer to the commencement of first oil production from Sangomar. We look forward to the potential monetisation of this contingent asset.”
– Sangomar project is already 96% complete and the commissioning program is underway.
– Management continues to expect that the earn-out will realize the full US$55m before 2027.
– Cash balance remains at US$2.5m. The company burned US$0.3m during the quarter.
– FAR currently trades at A$36m EV versus A$84m (US$55m) Woodside earn-out.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02800003-3A641324
Any thoughts on potential impact of this on project delays: https://www.afr.com/companies/energy/fears-for-8b-woodside-project-under-senegal-s-new-government-20240404-p5fhc5
Also, any view on the tax status of any further dividends from here? Did the previous dividend suffer Australian withholding tax for non-Australian holders?
The last distribution was not taxed; it was treated as a return of capital. I would expect it would be the same for all upcoming distributions.
Regarding the new Senegalese president, I’m not sure how this would really affect the Woodside development; I can only speculate. From what I’ve gathered, he seems to have been elected on an anti-corruption campaign. So, his statement that he would audit the natural resources space likely relates to figuring out if any of the companies in Senegal are actually owned by local politicians or affiliated parties. Here is a quote from his statement:
“I will proceed with the disclosure of the effective ownership of extractive companies (and) with an audit of the mining, oil, and gas sector.”
Right after this statement, he also noted that “Investor rights will always be protected, as well as the interests of the state and the people”. So, it seems more like his local battle, and unless a large international company like Woodside was involved with local politicians, I think the Sangamor project is safe (but keep in mind that I am making this statement after reading only a couple of news articles). Beyond that, he is a young leader who won an unlikely election against the incumbent just two weeks after coming out of jail (imprisoned for political reasons). I doubt the first thing he will do is expropriate the rights of the international investors.
https://www.reuters.com/world/africa/senegals-new-president-announces-oil-gas-mining-sector-audit-2024-04-03/
Thanks for the useful color. Do you know what is the criteria for classifiying a distribution as return of capital in Australia? Would be useful to gain confidence that future distributions can be treated the same way.
I have no idea what the Australian regulations are with regards to return of capital classification. But my general understanding is that distribution of operating profits is usually classed as dividends, whereas liquidating distributions or distributions resulting from asset sales are classed as return of capital.
Also, if I understand the disclosures in the annual report correctly, the potential gain from the US$55m contingent payment has already been included in the shareholder capital and therefore any distributions to coming from the sale of this contingent payment should be classed as return of capital:
Harvest Lane increased its stake in FAR from 8.3% to 10%.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02805460-3A642234
Pretty interesting valuation work done by Jeremy Raper. Implying that full payout will not be earned by 2027. Thus, it caps the upside on the equity to 35% from current prices.
https://twitter.com/puppyeh1/status/1789490286047150503
Sorry was looking at BoP vs. EoP. Nevertheless, still worth a look.
FAR has released Chair’s letter to shareholders. No changes to the timeline of the Sangomar’s launch. The first oil is now expected “imminently”. Meanwhile, FAR continues to look for the potential buyer’s of the Woodside earnout. One nice new remark from the Chair was that “if there was a sale the Board would consider returning capital to shareholders subject to the necessary shareholder approval being sought.” https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02812861-3A643522
By the way, Western Gate Group has recently increased its position in FAR from 11.99% to 12.99%. Western Gate Group is managed by Mnj Capital Management, an Asia-Pacific-focused hedge fund manager with some track record in the event driven space.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02812928-3A643533
What is the timeline and potential upside? I’m trying to hash out the difference btwn Rapers exit/using 20% discount rate to get aud 60c, and aud 84mm value of Woodside earnout as mentioned previously.
Not sure what do you mean exactly. So if they sell it, it’s probably gonna happen this year or early next year, right? Regarding the discount, I’m not sure what’s appropriate, but the currently implied discount factor of around 50% seems too wide. Something around Jeremy’s guesstimate (20-30%) seems reasonable enough to me. So still some upside left here assuming the sale happens.
Far announced today that woodside achieved first oil in Senegal. https://hotcopper.com.au/threads/ann-senegal-first-oil.8045625/
at the same time woodside has announced that they expect to pay the contingent to FAR.
good news with FAR spiking 5%
Western Gate has increased its stake in FAR.AX again and now owns 14.05% of the company, up from previous 12.99%.
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02820217-3A644767
FAR is up 5% today and 8.5% this week so far. However, I don’t see any news from the company.
FAR and Woodside have recently released quarterly updates. Sangomar’s ramp-up is progressing smoothly. Subsequent to Q2, the project reached peak gross production rate of 75k bpd (management did not comment on the run-rate figure. The ramp-up is expected to continue through 2024 till 100k bpd total capacity is reached. FAR management noted that the company will likely receive a payment under the earnout in early 2025. It also expects to receive the full US$55m consideration by the long stop date in 2027.
Earnout sale process is still ongoing and no further details or hints have been provided so far. Cash at the end of June was US$2.2m (A$3.4m). Quarterly expenses stood at US$0.3m, including some exploration expenditure to wind up Gambia interests.
Assuming the production rate will average around 80k bpd during H2’24 (and assuming oil stays above US$70), FAR would be eligible for c. A$16m payment in early 2025. If the production stays close to max. capacity and brent remains >US$70 during the next two years, the company should easily achieve the full Earnout by early 2027.
My calculations of potential earnout payments:
– early 2025 – A$16m
– early 2026 – A$41m
– early 2027 – A$18m
Any potential buyer of the Earnout will likely want IRR north of 20% on this earnings stream. It will also have to incur some hedging costs for the brent price volatility, etc. With discount rates of 25%-30% I arrive at a likely earnout monetization value at A$56-A$59m. This compares to the current market cap of A$46m.
There still seems to be 20-25% upside left from the current prices. Near term catalysts are Woodside earnout monetization and Sangomar reaching full capacity.
Western Gate has further increased its stake in FAR to 15.21%.
Western Gate has upped the stake again – from 15.21% to 16.29%.
https://far.live.irmau.com/irm/pdf/96ee37b1-301c-4619-925c-819c54755e5c/Change-in-substantial-holding.pdf
Western Gate has increased its position in FAR from 16.29% to 17.5% stake.
Another stake increase by Western Gate – they now own 18.81% of FAR, up from 17.5%.
I am closing FAR.AX position – only 33% return in 2.5 years (at $0.505/share). I was waiting for the announcement of earnout monetization, but, after the latest update from the company, early monetization is less likely.
FAR and Woodside Energy have released their quarterly updates. The key takeaway is that FAR’s management has received several offers for the earn-out, but none were considered attractive enough “compared with holding the Contingent Payment”. While management is still open to earnout monetization, they haven’t provided any clear details on where things currently stand.
This is not necessarily a bad thing – selling the earnout at low price might have left FAR shareholders worse off, than keeping it till maturity. Assuming the earnout pays out fully (A$82m vs A$47m market cap), FAR shareholders stand to generate 30%+ IRR over the coming 3 years. And this scenario is still in the cards.
However, the key risks are that Sangomar production turns out to be lower than expected or oil price declines. We are experiencing the biggest turmoil in the Middle East in a long time, and the price of oil is barely above $70. If things settle down, oil could easily approach $58/barrel, the point at which the earnout would stop accruing. I am not trying to predict the oil price, just showing that this could be viewed as a very big risk and maybe that’s the key reason why the offers for earnout monetization have been underwhelming. Oil price risk could be hedged, but that’s not a complication I am willing to get involved in.
On the bright side, the continuous buying from Harvest Lane—which raised its stake again this week to 18.81%—provides confidence in the eventual positive outcome.
Other highlights:
– Sangomar reached its nameplate capacity of 100,000 barrels per day in July.
– FAR’s cash balance stood at US$2m at the end of September, with a quarterly cash burn of just $0.2m.
FAR rose sharply from around A$0.5 to A$0.59/share in recent days. Didn’t see any news.
Oil price appreciation may have contributed to this.
there is this:
https://www.oedigital.com/news/520861-senegal-s-sangomar-oil-and-gas-field-beats-output-target?t
Woodside has advised that as a consequence of this audit, a claim has been raised by MEPM that certain costs incurred by FAR, in excess of the maximum described below, up until the end of 2013, are rejected for cost recovery due to insufficient information to support the claim.
Woodside has also advised that the MEPM claim has been and remains the subject to discussions between Woodside and MEPM as part of broader discussions on the merits of all items raised in the audit and that depending upon the final MEPM position, Woodside may make a formal written claim to the FAR group under the indemnity under the Sale and Purchase Agreement.
The Sale and Purchase Agreement contains an obligation on the FAR group to indemnify Woodside up to a maximum of US$6,803,355 relating to an any loss from an inability of Woodside to recover petroleum expenditure not directly linked to exploration activities. Any such obligation only arises if Woodside provides written notice of the claim stating in reasonable detail the nature of the claim and the amount claimed in respect of it on or before the first anniversary of first oil being sold (namely June 2025).