FARce


ASX:FAR represents a sure thing. At least it should. For those new to this stock FAR Ltd is an oil and gas explorer, which has been listed on the ASX for a couple of decades. The primary focus of this exploration is Africa, and the key asset of interest is Senegal. This is a partnership with a couple of other parties.

October last year we introduced our Blue Lake Invest readers to this stock. Expert of graphs Cam wrote about FAR, including the discovery of oil in the Senegal back in 2014. Since then FAR Ltd has announced a successful appraisal of the site. But before we get into that it’s important to note that the group have a few other projects on the go.

Now to the announcement that was meant to make FAR investors rich. With an opening line like the one below, there was just cause for a little excitement.

“The SNE-2 appraisal well has completed drilling and evaluation and has delivered a positive result after being safely drilled, cored, logged and flow tested ahead of schedule.”

Yet unfortunately there was minimal movement in the stock price. In fact since the announcement the stock price has dropped 7%. I would speculate the cause being inpatient investors withdrawing money to invest elsewhere has caused this drop.

Yet the question investors are asking is why hasn’t the price improved?

The people who pick stocks for a living reacted with enthusiasm. RBC Capital Markets had suggested FAR is not only the top Australian oil and gas stock for 2016, and described the above news as a “strong result”.

But the outlook is somewhat cloudy for FAR. Placing significant pressure on the value of the stock is the freefalling oil price. Not only is it fast approaching the $30/barrel price level, there is little to no expectation that the price fall will reverse in 2016. Demand for oil is reliant on global economic activity, which for the past decade has been reliant on the Chinese economy.

The next piece of news which works against FAR is the reported ‘breakeven’ point. In July 2015 in an investor presentation FAR stated that the estimated breakeven point for the Senegal project was $45, well north of the current price. While the announcement this year suggests better than expected results, the breakeven number reported last year will remain a sticking point for potential investors.

So this leads us to the next point. Is the oil price going to recover? While commodore driving old people in the outer suburbs hope not, there are several factors that could drive up the price.

  1. The first one is that the global economy could start firing again. This will place demand on the resource and drive up the price. It is however unlikely that this will occur in the next 12 to 18 months.
  2. The second revolves around the ‘unrest’ in the Middle East. The geographic area is a significant source of the world’s oil. Oil wells represent attractive military targets as it would reduce the operating countries revenue stream significantly. Should oil wells be taken out, one can expect supply to be effected and the price to rise.
  3. The third point I want to highlight today is OPEC. The once powerful body controlling the supply of oil has started to fall apart. Saudi Arabia is producing more oil than the body desires. If OPEC can rein back control over the supply of oil we may see the price rise.

I don’t believe renewable energy is at a point which can support the transition of the underdeveloped third world into the strong economies that they will inevitably become. There is no doubt oil will have a role to play in fuelling growth in Africa, Asia and South America. But first these regions need investment from the western world, who are still licking their wounds from the GFC.

The next step for FAR is drilling a third well to continue the appraisal process for the Senegal project. Having raised a further $40m of capital during the close of 2015 FAR is well placed to continue the work.

There is no doubt that companies will be watching these results closely and looking to see if they can buy an undervalued stock. Want to be the first to hear about our next look at FAR? Or other attractive speculative stocks? Then subscribe through the below box today.