FARst Forward


You probably thought that we wouldn’t be giving much airtime to an old Blue Lake Invest favourite First Australian Resources (ASX:FAR) in the near future given the nosediving oil price and mass exodus from energy and commodity stocks. To be fair, we thought the same as well. Despite solid foundations (including adequate capital reserves and licensed access to the best oil discovery of the last few years) ASX:FAR was looking like a typical “watchlist” stock, in the sense that we’d expect that the price would middle along for a few years until the commercial viability of the Senegal fields they’ve mapped proved to be a sure thing. Obviously, with the price of oil so low that day was starting to look like it would never come.

However, strange things happen in the world of speculative stocks and that’s why we love them. To begin, the FAR discovery SNE holds about 3 times as much oil as originally estimated, and has been drilled to prove that it can flow at viable levels for commercial development. You don’t need to take my word for it though, as The Age published a ripping puff piece on Monday that summarises the quality of FAR’s assets and the likelihood that it will outperform market returns in coming years. FAR was also praised for the progressive leadership of Cath Norman and the potential it has to create a billion dollar valuation from the same foundations as other exploration outfits such as Oil Search. Positive media coverage of a stock you own is always a nice surprise, but it’s absolutely golden for any stock that trades under significant uncertainty. Having a great write up in a mainstream publication like The Age will do wonders for the reputation of FAR and help insulate the share price from variances in the price of oil. As you can see from the graph below, the two series (FAR Price and Brent Crude Price) track fairly closely together, however recently FAR has held up despite continued softness in the price of oil. I reckon that’s got to be due (at least in part) to a growing number of investors converting to true believers in the long term potential of FAR and jumping on board while the stock is still (arguably) undervalued.

far_crude

So as the commercial declaration is still a long way off (2019 to be exact) you’re probably wishing you could hit “FARst forward” (sorry, not my best work) on the clock and watch the price explode. Just remember, patience is a virtue and the price will be supported by any further information that enhances market knowledge of the quality of the SNE field. And it probably pays to remember that if you’re betting on any type of oil rebound it looks likely that FAR will follow the price back up. Not exactly rocket science, but stocks that behave like you’d expect are pretty rare.

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