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Faroe Petroleum (FPM LN): Discontinuing coverage
Faroe Petroleum
We are discontinuing coverage on Faroe Petroleum following the company’s upcoming delisting from AIM on 14/02/2019. The company is being acquired by DNO. Accordingly, all prior research ratings, price targets and earnings estimates must no longer be relied upon.
Equinor (EQNR NO) (not covered): Discovery in Norway | Faroe Petroleum (FPM LN); Tender, £1.60: Listing cancellation | i3 Energy (I3E LN)1; SPEC BUY, £2.50: Initiating coverage | Exploration licences award in Norway | Reabold Resources (RBD LN): Dry hole in the UK | Serinus Energy (SENX LN)1: Processing units in transit to Romania | Total (FP FP): Selling Dutch upstream? | Cadogan Petroleum (CAD LN) (not covered): Operational update in the Ukraine | Energean Oil & Gas (ENOG LN) (not covered): Trading statement & operational offshore Israel, Greece and the Adriatic | Gulf Keystone Petroleum (GKP LN) (not covered): Operational update in Kurdistan | Tethys Oil (TETY SS)1,6; HOLD, SEK85: Production update in Oman | Tullow Oil (TLW LN); REDUCE, £1.80: 4Q18 trading update
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DNO has increased its offer to acquire Faroe from £1.52 to £1.60 per share. The offer is now final and Faroe shareholders have until 23 January to accept it. DNO has already secured 52.44% of Faroe, which is above the required threshold to take control of Faroe’s board.
Faroe Petroleum (FPM LN); HOLD, £1.75: Reserves reduction at Oda? | Independent Oil & Gas (IOG LN); BUY, £0.80: Projects update in SNS | TransAtlantic Petroleum (TNP CN/TAT US) (not covered): Operations update in Turkey | San Leon Energy (SLE LN) (not covered): Refinancing of OML 18 RBL in Nigeria
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The Brasse East exploration well was water wet. The Brasse appraisal well in the northern area however encountered 40 m of gross hydrocarbon-bearing reservoir. Both the reservoir depths and the hydrocarbon contact are similar to the pre-drill expectations.
Faroe is selling its interests in the Njord, Hyme and Bauge development to Equinor in return for interests in Alve, Marulk, Ringhorne East and Vilje. This adds 7-8 mboe/d production to Faroe to take overall FY19 production to 18-22 mboe/d.
DNO ASA has announced the terms of an offer for the whole of the issued and to be issued share capital of Faroe Petroleum. The offer will be 152p/share in cash for each Faroe share, valuing Faroe’s existing issued and to be issued share capital at c £607.9m.
Faroe Petroleum (FPM LN)6 ; BUY, £2.10: DNO makes hostile £1.52 per share cash offer; probably too low | Serinus Energy (SENX LN)1 ; BUY, £0.25: First gas in Romania delayed | Petro Matad (MATD LN) (not covered) | SDX Energy (SDX LN/CN)1,6: BUY, £0.80; 3Q18 results
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DNO has made a cash offer for Faroe at £1.52 per share. This represents a 20.8% premium to Friday’s close but the offer price is well below the level of £1.77 per share reached in early October.
Faroe Petroleum has announced the results of the Agar/Plantain exploration/appraisal well in licence P1763 (Faroe has a 25% interest in Agar/Plantain and 12.5% in the wider licence). The well encountered 20m of gross hydrocarbon-bearing reservoir with high net to gross ratio. Operator Azinor Catalyst estimates gross recoverable resources at 15–50mmboe, a volume expected to be commercial given available infrastructure. Assuming the partial de-risking of Agar/Plantain at mid-case 32.5mmboe (down from our pre-drill estimate of 79mmboe) to a 70% chance of commercial success would leave our RENAV broadly unchanged, but provides validation of our approach of including risked value for Faroe’s exploration programme, which made up 32.6p/share of our 185.2p/share RENAV in our recent initiation.
The Agar/Plantain well in licence P1763 (FPM 25%) found gross recoverable resources in Agar of 15 and 50 mmboe (between 3.8 and 12.5 mmboe net to Faroe). The reservoir encountered was close to prognosis i.e. 20 m of gross hydrocarbon-bearing reservoir section with excellent reservoir quality and high net to gross ratio.
The Rungne exploration well 30/6-30 (FPM 40%WI) found uncommercial quantities of hydrocarbons. The well encountered a 56 m gross (17 m net) gas/condensate column in good quality interbedded Middle Jurassic Ness formation sandstones and 86 m of gross water bearing reservoir in the primary Oseberg formation target.
Faroe Petroleum has announced the results of the Rungne exploration well 30/6-30 in the Norwegian North Sea in which it has a 40% working interest. The well encountered 86m of gross water-bearing reservoir in the primary Oseberg formation target and a 56m gross gas/condensate column in the Middle Jurassic Ness formation sandstones. The preliminary company estimate of recoverable gas and condensation is 2.7–17mmboe, which is unlikely to be commercial in isolation. Assuming the removal of Rungne from our RENAV, our valuation falls from 185.2p/share to 179.3p/share (-3%) based on a $70/bbl long-term oil price. We estimate a post-tax well cost net to Faroe of c $2m.
Kropz PLC—an emerging plant nutrient producer with an advanced stage phosphate mining project in South Africa, a phosphate project in the Republic of Congo and exploration assets in Ghana. Looking to join AIM, offer TBC, market cap TBC. Due Late October. Azalea Energy—oil and gas production and development company based in Louisiana, United States. Net production of 13 MMcfe/D (2,200 boepd) and total 1P proved reserves of 91 Bcfe (15.1 mmboe), 2P reserves of 111 Bcfe (18.5 mmboe) raising up to $38m, expected mkt cap over $100m. Due 29 Oct Path Investments— First acquisition of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Seeking £10m raise. Due late Oct Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is exploring its options in relation to a potential move to the AIM market of the London Stock Exchange which, if it were to proceed, would likely take place over the next few months.
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Faroe has successfully established a 98mmboe reserve base through an exploration-led organic growth strategy. Norwegian exploration tax incentives, combined with recent success at Iris/Hades, underpin finding costs of c $1/boe (post-tax) and have delivered a portfolio of development projects with point-forward IRRs ranging from 21% to 41% at $70/bbl. With a RENAV of 185.2p/share, we believe that the market is not fully valuing the risked value of Faroe’s upcoming seven-well E&A programme that targets net un-risked prospective resource of 144mmboe, or is not fully taking into consideration the positive cash flow impact of tax depreciation carry-forwards/consolidation in Norway. Based on current debt availability, we believe Faroe is fully funded for current development commitments at an oil price down to $40/bbl.
Faroe Petroleum (FPM LN)6 ; BUY, £1.80: 1H18 results | i3 Energy (I3E LN) (not covered): JV update in the UK | United Oil & Gas (UOG LN) (not covered): £3 mm placing | Eland Oil & Gas (ELA LN) (not covered): Opuama and Ubima Update in Nigeria
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Jadestone Energy (JSE LN/CN); BUY, £0.70: 2Q18 results | Faroe Petroleum (FPM LN); BUY, £1.80 & DNO (DNO NO) (not covered): DNO Withdraws Faroe general meeting requisition | Lundin Petroleum (LUPE SS) (not covered): Johan Sverdrup update in Norway & production test on Rolvsnes | Serinus Energy (SENX LN)1 ; Speculative Buy, £0.35: Moftinu - 1003 well in Romania | Petroneft Resources (PTR LN) (not covered): C-4 well in Russia | SDX Energy (SDX LN/CN)1,6: BUY, £0.80; 2Q18 results
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Faroe is acquiring 25% WI in Agar Plantain from Azinor Catalyst. Agar and Plantain have a combined mid case resources of 60 mmboe (upside of 98 mmboe). Agar was an oil discovery and Plantain is an exploration prospect that would grow the size of the combined pool in a success case. Faroe is also acquiring 12.5% WI in the P1763 licence through the same transaction. The overall cost of the well is US$15 mm and it will be drilled later in August. We understand that Faroe is paying a small promote to the well cost.
Faroe Petroleum (FPM LN)6; BUY, £1.80: Farm-in to Agar Plantain in the UK North Sea | Tethys Oil (TETY SS)6; HOLD, SEK100: 2Q18 results | TransGlobe Energy (TGL LN/CN)1; BUY, £3.70: 2Q18 results and dividend reinstatement | ExxonMobil (XOM US) (not covered): Transaction in Namibia | Seplat Petroleum (SEPL LN); BUY, £2.60: Positive progress at ANOH
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1H18 production stood at 12,402 boe/d (GMP FEe: 13.5 mboe/d) reflecting maintenance at Ula and Brage, delay at Tambar and temporary loss of production at Trym.
Faroe Petroleum (FPM LN)6; BUY, £1.80: Good financial performance and large resources increase at Iris/Hades |
Appraisal well 6506/4A encountered 58 metres of gross hydrocarbonbearing Garn sand-rich reservoir and 87 metres of gross hydrocarbonbearing Ile reservoir. The well flowed at a maximum constrained and stable rate of 4,047 boe/d (including 547 bbl/d of oil) on test. Preliminary analysis suggests a resource range of 40-90 mmboe gross (50 mmbbl required for commerciality). The discovery could be developed through a tie back to Asgard B. Development is expected to cost NOK5-6 bn with a lower number of wells than previously envisaged given the good flow test results. This is a HP/HT field. Taking the field to FID is only contingent on FEED study (no more drilling required).
Faroe Petroleum (FPM LN)6 ; BUY, £1.80: Positive results at Folgeberg in Norway | Transaction in Norway | Panoro Energy (PEN NO) (not covered): Acquisition of DNO Tunisia & Private Placement | Transaction in Tunisia
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Faroe Petroleum has decided to add the drilling of the Brasse East prospect to its exploration programme in 2018. The Brasse East prospect is estimated to potentially hold 15 mmboe gross Prospective Resources (FPM WI: 50%). The decision to drill Brasse East reflects recent seismic reprocessing and reinterpretation work. This well will be drilled after the Rungne exploration well.
Cabot Energy (CAB LN)1 ; Speculative BUY, £0.10: Operational update | Faroe Petroleum (FPM LN)6 ; BUY, £1.60: Additional well in the 2018 exploration programme in Norway | OMV (OMV AG) (not covered): 1Q18 results | Gulf Keystone Petroleum (GKP LN) (not covered): Payment in Kurdistan | Orca Exploration (ORC CN) (not covered): 1Q18 results
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With the two new Tambar wells now onstream, the Tambar field has produced 18.5 mboe/d gross (Faroe WI: 45%). Even adjusting for 85% uptime, this would imply 7.1 mboe/d net to Faroe which is above the company expectations of 4.50-6.75 mboe/d. Faroe production on 20/04/2018 stood at 19.3 mboe/d, which compares to our forecast of 13.5 mboe/d over 1H18 and 14.2 mboe/d in 2H18. While Faroe has reiterated its FY18 production guidance of 12-15 mboe/d, we believe it could be increased. However the strong production at Tambar offset a weak 1Q18 overall production of c. 11 mboe/d, particularly due to the temporary loss of production from the Trym field, caused by a downstream export fault which has now been rectified. Decline at Tambar will be important to monitor but we only forecast 5.3 mboe/d net contribution to Faroe in 2H18 and the start-up of gas lift will contribute to maintain the flow rate. At Fogelberg, the company experienced a cementing problem at the recently drilled well which could therefore not be tested. A side track (that was initially budgeted) now needs to be drilled to perform the well test.
We update our model for recent news flow which increases RENAV from 124p to 142p. Although the upside to our PT (set at RENAV) is only 12%, we believe the recent stake building by DNO should limit the downside, and hence believe the risk reward profile given organic and inorganic growth options is still attractive. News flow is limited over the next 6 months so short term the share price may drift, but we expect E&A drilling to ramp up again in Q418.
Faroe Petroleum (FPM LN)6; BUY, £1.60: Execution and value | OMV (OMV G) (not covered): 1Q18 trading update | SDX Energy (SDX CN/LN)1,6; BUY, £0.60: Gas discovery at Ibn Yunus-1X well, Egypt
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The Fogelberg appraisal well encountered 62.5 metres of gross hydrocarbon-bearing Garn reservoir. Gas was also logged in the Ile Formation. The reservoir quality is better than that seen in the original discovery well.
Faroe Petroleum (FPM LN)6 ; BUY, £1.40: Another positive well result in Norway | Serica Energy (SQZ LN) (not covered): YE17 results | Aminex (AEX LN) (not covered): Ruvuma update in Tanzania
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Faroe Petroleum (FPM LN)6 , BUY, £1.40: DNO (DNO NO) (not covered) completes tender for shares in Faroe | Ascent Resources (AST LN) (not covered): Operational update in Slovenia | Volga Gas (VGAS LN) (not covered): March 2018 production in Russia | Bahrain discovery figures
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Faroe encountered 19-113 mmboe gas condensate resources in 15 m net pay of moderate to good reservoir quality sandstones at the Hades target on Licence PL 644B (FPM WI: 20%).
FY17 production of 14.3 mboe/d with YE17 net cash of £75 mm had already been reported. FY17 cash flow from operations was £134 mm (GMP FEe: £98 mm). The difference with our forecasts mostly reflects a positive working capital movement of £20 mm as well as higher tax refund (£41 mm vs GMP FEe: £25 mm). The company reiterated its FY18 production guidance of 12-15 mboe/d with capex of £255 mm including £80 mm for exploration (pre-tax).
Faroe Petroleum Flash : Reflecting Fenja disposal, operations update
Faroe release its FY 2017 operational update this morning, which looks broadly inline with our model, so we don’t expect to make any major changes to our RENAV of 125p. Given a strong balance sheet, several wells drilling in 2018 and good progress on developments so far, we remain with our BUY recommendation.
FY17 production was 14.3 mboe/d (GMP FEe: 13.6 mboe/d, production guidance: 13.0-15.0 mboe/d). The strong production reflects good performance at Trym (+0.6 mboe/d). YE17 net cash was £75 mm, below our expectations of £95 mm. FY18 production guidance is 12-15 mboe/d (GMP FEe: 16 mboe/d). Production will be impacted by the partial shutdown of Trym and the permanent shutdown of Schooner in 3Q18 offsetting better performance at Tambar and Brage. Two new Tambar wells on stream in February and March should deliver above company expectations with an incremental 4.50 - 6.75 mbbl/d net. At Brage, the drilling result of the second producer suggests flow rates above expectations. FY18 development capex is expected to stand at £175 mm (GMP FEe: £165 mm when adjusting our £195 mm capex forecast for the reduction of WI in Fenja. Reducing the company’s WI in Fenja to 7.5%). Most of the difference with our numbers appears to be related to the Brage area with £22 mm capex. In addition decommissioning will be c. £13 mm. The company expects to spend £80 mm on exploration in 2018. This includes Iris/Hades, Fogelberg (5.2-32.5 mmboe net resources), Cassidy (7.5 mmboe net prospective resources) and Rungne (28 mmboe unrisked net prospective resources). Two further wells will be drilled in 2019. YE17 2P reserves were 98 mmboe with contingent resources of 79 mmboe. Faroe expects Brasse on stream in 2021 at 15 mboe/d net production plateau, with first oil at Njord and Bauge still in 4Q20.
Faroe Petroleum (FPM LN)6; BUY, £1.30: Trading update and FY18 outlook | SDX Energy (SDX LN/CN)1,6: BUY, £0.60; South Disouq, West Gharib & KSS-2 well update | Tethys Oil (TETY SS)6 ; REDUCE, SEK60: 4Q17 Results | Eland Oil & Gas (ELA LN) (not covered): Opuama update in Nigeria
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Faroe Petroleum has announced that it has executed a transaction with Suncor Energy Norge AS (‘Suncor’) for the sale of a 17.5% working interest in the Fenja development located in PL586 in the Norwegian Sea. Faroe will receive cash of c$54.5m in exchange for the 17.5% stake.
Faroe is selling 17.5% in Fenja (Pil) on PL586 to Suncor Energy for US$54.5 mm (net of all taxes). This includes tax balances. The transaction is effective 01/01/2018. Faroe will retain 7.5% in the asset. The transaction is expected to reduce Faroe's future capital expenditure on Fenja to approximately £70 mm.
Jadestone Energy (JSE CN); SPECULATIVE BUY, C$1.00: Results for the quarter ending 30/09/2017 | Faroe Petroleum (FPM LN)6 ; BUY, £1.30: Iris/Hades Well in Norway | Greenfields Petroleum (GNF CN)8; SPECULATIVE BUY, C$0.50: Reduced estimates post 3Q17 results | Soco International (SIA LN) (not covered) | Tullow Oil (TLW LN); REDUCE, £1.85: US$2.5 bn debt refinancing
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Faroe is issuing a US$100 mm senior unsecured bond, with a fixed coupon of 8%, payable semi-annually. This will boost the company balance sheet ahead of a period of large investments. At Brasse, the estimated capex is now expected to be in the range of US$500 – 700 mm (previous guidance of US$550 mm for the resources mid case). The company plans to complete the concept selection process in 2018. Oda is on track for first oil in 2019 as planned. The forecast average plateau production is now 30 mbbl/d versus 35 mbbl/d, which did not include operational uptime assumptions. The Iris/Hades exploration well (Faroe 20%) and the Fogelberg appraisal well (Faroe 33.3%) are expected to spud in December 2017 and February 2018 respectively.
Drilling operations have started on the Tambar development project in the producing Tambar field in Norway (Faroe 45%). This addresses uncertainty on the timing as to when the rig would arrive. Tambar is expected to add 4 mboe/d net additional production to c. 2 mboe/d current production at Tambar by the beginning of 2018. We are assuming that net production at Tambar would stand at 5 mboe/d in 2018. We forecast Faroe’s production to stand at 16.5 mboe/d in 2018.
Faroe has announced commencement of its Tambar development project, operated by Aker BP. This consists of the drilling of two new infill wells to target undrained areas in the north and south of the main Tambar reservoir (potentially augmenting 2P reserves, possibly by a net low single figure mmbbl number), and the installation of gas lift in three of the four existing producers. The overall project could potentially extend Tambar field life by up to ten years. Production from the new wells should come on in April 2018, with the impact from the gas lift in Q3 2018.
1H17 production stood at 14,800 boe/d (GMP FEe: 14.3 mboe/d), (15.1 mboe/d from 01/01/2017 to 31/05/2017 previously reported). FY17 guidance maintained at 13.0-15.0 mboe/d. FY17 capex guidance consists of £45 mm for exploration and £90 mm for development and production (unchanged). 1H17 net cash generated from operating activities stood at £66.2 mm, well above our expectations of £41.2 mm. However the difference in our forecasts reflects a £22 mm positive change in working capital that will probably be reversed in later periods. Net cash of £117.6 mm at the end of June is not very different from £113.08 mm at 19/07/2017 reported previously. The guided dates for first oil at the company’s main projects are reiterated.
Faroe’s results benefited from the DONG asset acquisition which completed in December, together with higher oil and gas prices and weaker sterling with the loss per share cut to GBp 0.8 (1H16 loss per share GBp 4.85). The improved performance was also reflected in a sharp increase in EBITDAX. Management flagged the growth potential in the portfolio where development expenditure is beginning to increase as will become more evident in 2H17. Production and capex guidance was left unchanged. This was a solid set of results although Faroe did not quite manage to return to the black. We are Buyers of Faroe with a 120p/share Target Price.
Faroe Petroleum (FPM LN)6; BUY, £1.20: 1H17 results | Zoltav Resources (ZOL LN) (not covered): 1H17 Results in Russia | Tullow (TLW LN): REDUCE, £1.60: Total option agreement with Eco Atlantic, offshore Guyana | Victoria Oil & Gas (VOG LN)1,6; BUY, £1.10: Very strong flow rate at La-107
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We have put through some updates to our Faroe model, increasing risked NAV from 104.4p/share to 125.6p/share. We have used our model to examine the funding of Faroe’s upcoming developments, showing that it could potentially fund these from existing facilities. We believe that ongoing progress of these projects will drive the shares up, and maintain our Buy recommendation, setting a 125p price target.
Jadestone Energy (JSE CN); Speculative Buy, C$1.00: FY17 results to 31st March 2017 | Faroe Petroleum (FPM LN)6 : HOLD, £0.80; Increased stake in UK Blane Field | Cuadrilla Resources (not covered): Rig arrives at Lancashire horizontal shale gas exploration site | Eni (ENI IM) (not covered): 1H17 results | PetroNeft Resources (PTR LN) (not covered): 2Q17 Production | Sterling Energy (SEY LN) (not covered): 1H17 results
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Faroe has confirmed a resource upgrade for the Brasse discovery off Norway. Management had already flagged that the DST was encouraging, but guidance has now been revised to 56-92mmboe from 43-80mmboe gross. We increase our resource number from 66 to 74mmboe, and derisk CoS from 80% to 90% as it will almost definitely get developed. The net effect is to increase our RENAV from 121p to 127p (based on an oil price deck of 2017-2019+ $54/bbl, $60/bbl, $70/bbl LT). As such our PT which is based off RENAV increases 5% from 115p to 121p.
Faroe has announced results for the successful Brasse sidetrack. Faroe has increased the mid-point resource estimate for Brasse by 20% to 74mmboe. Brasse is expected to be brought onstream in 2020/21 with production over 30kboed. We have amended our Brasse field model appropriately which adds 9p per share to our raw NAV but after general risking and rounding we add 5p/share to our Target Price taking it to 120p per share and reiterate our Buy recommendation.
We have rebuilt our Faroe model which demonstrates that the company is on the cusp of a step up in activity that could see production exceed 35kboed by 2022. That is rooted in an existing portfolio which has grown rapidly as a result of successful E&A and M&A activity, notably the 2016 DONG deal. Although capex grows rapidly, we believe that should be financeable, even on flat US$50/bbl Brent. We reiterate our reworked NAV based 115p per share Target Price and see strong multiple support. We believe the current share price looks a particularly attractive entry point given the quality of this well managed business with Delek sitting in the wings as a potential buyer of the company at some point in the future.
Faroe Petroleum (FPM LN)6 ; HOLD, £0.80: Good well test result at Brasse | Premier Oil (PMO LN); Speculative Buy, £0.90: Acquisition of 3.75% in Wytch Farm | Sound Energy (SOU LN) (not covered): Sub-commercial well in Italy | Statoil (STL NO) (not covered): Discovery at Kayak in Norway | Caspian Sunrise (CASP LN) (not covered): Operational update in Kazakhstan | Zenith Energy (ZEN LN) (not covered): Reserves update in Azerbaijan | Genel Energy (GNL LN); HOLD, £0.90: Taq Taq production in June | Seplat Petroleum (SEPL LN); BUY, £1.20: Debt extension | Schlumberger (SLB US) (not covered): Financing for development in Nigeria
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Faroe announced a solid operational update today. Production has been quite strong from January to end of May (15.1kboepd) but they are not changing guidance at the moment. Small positive in that they have added an extra exploration and appraisal well to be drilled in Q4. Should expect results of the DST on Brasse shortly although we won’t likely get a resource update for a few weeks assuming a sidetrack will be drilled. Strong net cash position, positive in this weak oil price environment. Making a few small tweaks eg including the Goanna prospect increases our RENAV slightly from 119p to 121p and our PT to 115p (from 113p). We remain HOLD given less upside relative to our other names but think it should continue to perform well in a weak oil price environment.
Faroe is a North Sea E&P focused on Norway and the UK. It produced at 17.4mboe/d in 2016, and holds 77mmboe of 2P reserves. The company has a series of development projects, which are planned to get production to 40-50mboe/d in 2021. Portfolio diversity controls risk, and coupled with the defined growth profile, we believe the shares are attractive. Buy.
Faroe reported a pre-tax loss for 2016 of £61.5m and a net loss of £32.8m, significantly worse than we or the market expected. However, production guidance was narrowed upwards to 13-15kboed (from 12-15kboed) and development projects continue to progress as expected. Faroe had already preannounced many of the key financials, including YE16 cash and net cash of £96.8m. While 2016 was a difficult year for Faroe from an underlying financial perspective, the DONG deal and organic growth potential in the portfolio coupled with solid management continue the attraction for us while the 13.2% Delek stake maintains some take-out frisson. We are Buyers with a 115p/share NAV based Target Price.
Faroe updated on its FY16 performance, which was in line with previous guidance. The main incremental highlight was a good reserves replacement performance, excluding the direct impact of the DONG acquisition, which we calculate at 114% underlying. For FY17 production guidance of 12-15kboed looks on the light side at the low end of the range, reflecting issues at Tambar and Trym. The other notable feature is the sharp pick up in development capex as Faroe moves into development mode. Faroe is a quality investment proposition that is now underpinned by the arrival of Delek as a 13.2% holder with an avowed interest in growing further in the North Sea, notwithstanding its agreed offer for Ithaca
Faroe Petroleum (FPM LN)6 : BUY, £1.60: Operational Update
Faroe Petroleum (FPM LN)6; BUY, £1.20: Licences award in Norway | Lundin petroleum (LUPE SS/LUP CN) (not covered): Licence award in Norway | Statoil (STL NO) (not covered): Discovery and licence award in Norway | Urals Energy (UEN LN) (not covered): Trading update in Russia, share consolidation and dividend policy | Tethys Oil (TETY SS)6: HOLD, SEK70: Production update December 2016 | Africa Oil (AOI CN/SS); BUY, C$3.30: Important oil discovery on Erut prospect further de-risks Kenya | Cairn Energy (CNE LN); HOLD, £2.60: Important upcoming appraisal wells in Senegal | Tullow Oil (TLW LN); REDUCE, £3.00 - Important oil discovery on Erut prospect further de-risks Kenya
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Jadestone Energy (formerly Mitra Energy) (MTE CN)1: Speculative Buy; C$1.60: Mitra Energy changes name to Jadestone Energy | Faroe Petroleum (FPM LN)6; BUY, £1.20: Completion of Norway acquisition and production update-
Faroe Petroleum Montanaro European Smaller Companies Trust PLC
Pacific Exploration and Production (PEN CN) | Mitra Energy (MTE CN) | Faroe Petroleum (FPM LN) | IGas Energy (IGAS LN) | Victoria Oil & Gas (VOG LN)
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Faroe held an analyst trip on 18th and 19th of October in Norway. The Company unveiled production addition (+3.5-5.5 mboe/d) at Tambar well beyond our expectations. While the most likely tie-back development concept at Pil means that the field net production plateau is just 7 mboe/d versus 13.5 mboe/d previously, Brasse and Njord are expected to contribute 16 mboe/d by 2021; which is well above our expectations. Overall, we believe that the company’s existing assets could comfortably support c.40 mboe/d by end 2021 at the low end of the range of the company’s aspiration of 40-50 mboe/d. The company does not have the intention to become a large developer operator. Instead, it continues to rely on competent operating partners. This addresses one of our previous concerns.
Faroe Petroleum (FPM LN)6 ; BUY, £1.20 – Unveiling details on growth plans | Hurricane Energy (HUR LN) (not covered): £70 mm equity placing and open offer | OMV (OMV AV) (not covered): 3Q16 Production | Providence Resources (PVR LN) (not covered) | Cuadrilla Resources (not covered) – Local Community Group Challenge Fracking Decision
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Faroe provided a comprehensive update on its operations and aspirations, including a site visit to the Njord A platform. That revealed that operations are going well, particularly with the Dong asset acquisition package. It also provided more specific detail on the company’s planned developments. These have the potential to turn Faroe into a 40-50kboed producer by 2021. The prospective drilling campaign was fleshed out with the Dazzler well likely to spud at the end of the year. Faroe has fully repaid the existing RBL and expects the final cash payment in respect of the Dong asset acquisition to be around US$35m, confirming the quality of the deal. Faroe also indicated that it is looking to acquire in the UK. We are buyers of Faroe with a 115p per share Target Price.
CIRCLE OIL (COP LN) | FAROE PETROLEUM PLC (FPM LN) | ROXI PETROLEUM PLC (RXP LN) | TETHYS OIL AB (TETY SS)
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Faroe Petroleum (FPM-AIM); BUY, £1.00 | Tethys Oil AB (TETY-SS); HOLD, SEK70.00
Faroe Petroleum Tethys Oil AB
Faroe petroleum (FPM LN) | Hurricane Energy (HUR LN) | OMV (OMV AG)
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Faroe Petroleum Plc | Oryx Petroleum Corporation Ltd
Faroe Petroleum Forza Petroleum Limited
Faroe reported a net loss for the half of £13.0m (1H15 loss of £6.7m), having already disclosed a very difficult first quarter in the documentation related to the DONG acquisition and fund raising. Net cash ended the half at £60.9m, essentially flat on the previously disclosed end May position. The outcome of the Njord North Flank 2 well is expected shortly. Results have been rendered somewhat irrelevant by the DONG deal, which we believe was a positive step for the company and answers some of the financing issues that were building. Otherwise the company continues to progress its portfolio and also enjoyed exploration success at Brasse. We formally update our target price to 115p per share (from 140p) to reflect the impact of the placing
Production is strong thanks to the performance of the DONG Assets more than offsetting weaker performance at the legacy portfolio. Some additional reserves booking possible (likely) at Tambar at YE16 as the partners approve the FY17 Capex programme. Production at Brage and Tambar in 2017 could go up on infill drilling and gas lift. The Company talked about an adjusted cash payment of less than £45 mm to DONG at completion of the acquisition of DONG asset. This looks well above our expectations of £10 mm assuming a completion at YE16. While this could reflect the timing of the acquisition and lower oil price assumption, we were probably too optimistic on gas realizations at Tambar which are very low (well below market price) and on overall oil realizations (US$2.5/bbl below Brent). The difference between our numbers and £45 mm represents £0.09 per share.
In this note, we present a valuation of Faroe, inclusive of the Dong Norway assets. Following completion, the acquisition will add 19.8 mmboe 2P Reserves at a cost of about US$3.5/boe per 2P Reserves and we more than double our FY17 production forecast to more than 15.0 mboe/d. The acquired assets provide opportunities for synergy with Faroe’s legacy assets, as well as cash flow and additional borrowing capacity to fund future growth. On our numbers, the acquisition adds about US$70 mm (net of US$70.2 mm acquisition price), however the Company is issuing over US$80 mm equity at a low share price, resulting in dilution. Net, net and including revised valuations for the Company’s legacy assets in line with the latest CPR, we reduce our ReNAV for Faroe from £1.15 to £1.03 per share. Faroe continues to be one of the very few International E&P stories with a large Net Cash position and no balance sheet concerns. With four key near-term development projects, we anticipate Faroe to triple its current production over the next five years. With more materiality and hopefully more liquidity in the shares, our new target price of £1.00 per share (£1.10 per share previously) offers about 50% upside. Our Outperform ranking is re-iterated.
Faroe yesterday announced the conditional acquisition of a package of Norwegian assets from DONG, together with a related fund raise of up to US$86m. The deal potentially adds 19.8mmboe of 2P reserves and 10kboed of production together with two operatorships. The acquisition cost metrics look favourable against those of other recent deals in Norway. However, the financial disclosures indicate Faroe was substantially net cash negative in the first quarter and is raising more than the acquisition cost of US$70.2m. Overall, given the terms, the 33% increase in 2P reserves and, in particular the more than doubling in production, we regard the deal as positive. We are Buyers of Faroe with a target price of 140p per share.
Market Reaction: the US$80 mm equity issue will probably be priced below the current share price. If the acquisition does not close, then the new issue will certainly be dilutive. The transaction discounts US$3.5/boe for 2P reserves and US$2.3/boe for 2P reserves + 2C Resources. Including decommissioning costs would double these figures. We also note that the Net Asset Value of the acquisition has been estimated at £50.2 mm, in line with the price paid by Faroe. However in the current environment institutions often pay more for assets than the industry and using new equity to make acquisitions makes sense. The acquisition also offers synergies with some existing assets. The acquisition also addresses production decline at Faroe's existing assets and will boost Faroe's debt capacity ahead of major developments. It will also boost the materiality of Faroe for Equity Investors that are short of liquid E&P investment opportunities on the LSE. Excluding the DONG assets and based on Faroe's forecasted 8,000 boe/d production for these assets, FY16 production is maintained and we see very few changes at first glance. There will be a conference call Friday 15th July at 09:00am UK time on +44(0)1452569393, password: FAROE PETROLEUM
Faroe Petroleum has made a 43-80 mmboe discovery at Brasse in Norway. This represents twice the volume initially anticipated. Faroe holds 50% WI in the licence.Given that the characteristics of the fluid at Brasse look similar to Brage and other fields in the area, the Company does not anticipate any compatibility issues for a tie-back development to nearby infrastructure.Overall opex and capex are anticipated to be around US$5/boe and US$10/boe respectively with first oil in about three years’ time.We have increased our target price from £1.00 to £1.10 per share. Outperform recommendation is reiterated.Faroe remains one of the very few International E&P stories with a large net cash position and no current balance sheet concerns.The share price currently broadly discounts a Brent price below the forward curve.
Market reaction: positive. The size of the discovery is more than twice the original estimates of 14-33 mmboe. The discovery is located 13 km away from the Brage and Oseberg Sor platforms. We estimate that the Brasse discovery will add £0.06 to our ReNAV of £0.96 per share (Core NAV of £0.94 per share).
Market Reaction: neutral.
Market Reaction: neutral. Without further information it is difficult to assess the results of the Brasse well. While the Company encountered good quality sands containing oil and gas (which would be positive) and is upbeat about the well, there is no mention of net pay while extensive logging and coring activities took place. The side track well could be either interpreted as a well chasing the upside and the Water Oil Contact or as a well trying to address concerns on reservoir quality continuity. We carried the well at £0.02 per share in our ReNAV suggesting limited materiality in any case.
Faroe reported a net loss for FY15 of £52.9m, heavily impacted by asset impairments and an aggressive exploration charge. Net cash generated from operations for the year was £92.6m, close to our forecast and net cash was essentially flat YOY. Forward guidance for FY16 was unchanged. While Faroe will need to undertake portfolio action to manage its forward development expenditure, that is not yet a pressing issue, in our view. In the meantime, Faroe is taking steps to conserve its balance sheet and we believe it is in a strong position to weather and take advantage of current conditions. We remain buyers with a 135p per share target price.
Highlights
The Petroleum Revenue Tax (PRT) is being scrapped completely and the Supplementary Charge on oil and gas is being cut in half to 10%. While this is positive for the fundamental value of assets, this has a muted impact on the equity value of companies given the very large tax losses they carry. The winners are Premier Oil and Ithaca Energy that will benefit from U$2.5-8.0 mm cash tax reduction per year. Our ReNAV for Ithaca and Premier Oil are up respectively £0.05 (+10%) and £0.09 (+7%) per share to £0.57 and £1.31. However none of these adjustments fundamentally change the urgent need to reduce the very high level of net debt.
In today’s UK Budget, the Chancellor of the Exchequer, George Osborne, announced a halving in the current rate of Supplementary Duty and a zero rating of Petroleum of Revenue Tax. With respect to our UK North Sea exposed coverage we increase our Target Prices for each of Parkmead and Faroe by 10p per share taking them to 105p (from 95p) and 135p (from 125p) respectively. Neither company is currently tax paying in the UK and we have not adjusted our financial forecasts, although there could be a potential impact on deferred tax balances.
Faroe Petroleum Parkmead Group PLC
Market reaction: slightly negative. This was potentially a big well, however very high risk. We carried Kvalross at £0.08 per share in our ReNAV (£0.84 per share Unrisked). While we recognize that £0.08 per share is material in the context of the shares trading at £0.61, we believe that investors have now very muted expectations on exploration. Our Core NAV for Faroe is £0.82 per share. Faroe continues offering a valuation with the best resilience to low oil price.
We have materially reduced our Brent crude oil price outlook in 2016e, 2017e and future years, which has resulted in a substantial decrease in our cash flow and NAV estimates for most of our companies under research coverage. Companies that are most impacted by the commodity price revision include EnQuest, Pacific Exploration & Production, Premier Oil, and TransGlobe Energy. Companies that are exposed to natural gas prices and/or fixed commodity prices are least impacted, such as Valeura Energy and Wentworth Resources. Our Top Picks include Faroe Petroleum, Ithaca Energy, and Parex Resources.
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Market reaction: Slightly Positive. While the net cash position at YE15 is below our expectations, the market might focus on lower FY15 capex, FY15 production slightly above the top end of the guidance and good FY16 production guidance (albeit in line with our expectations). FY16 capex is also lower than anticipated. The lower net cash probably reflects a lower operating cash flow perhaps due to working capital movement and the amount of Norway tax refund (£34 mm vs our expectation of £46 mm).
Faroe reported strong production and lower than forecast capex for FY15 resulting in a considerably stronger financial position than we are currently forecasting. For FY16, production guidance of 9-10kboed reflects the anticipated shut-down of Njord for redevelopment, but is robust in that context. The Company reported its own reserves update which is a little more conservative than the third party Senergy report previously disclosed but confirms a near doubling of reserves to 57.4mmboe. Company guidance is for results from the Kvalross well by end 1Q16 but we would not be surprised to see them released this month. Overall, this update confirms Faroe is well financed, disciplined and continues to be active across the range of E&P activity including, exploration, development and portfolio management. We remain Buyers.
Market Reaction: Neutral. While this extends the depth of Faroe's exploration portfolio with very limited financial exposure, this is not likely to capture market attention in the near term.
Market Reaction: positive. This is likely to have a positive impact on our valuation as we will fully derisk reserves associated to Pil. This reserves increase will also likely be supportive to Faroe's borrowing base and access to debt funding. Faroe remains one of the very few International E&P stories with a large Net Cash position and no current balance sheet concerns.
We have adjusted the resources we carried for Butch and Pil in line with the independent report. We have also derisked these resources from 75% to 100%. We have also reduced our reserves estimates for the UK asset, while we have increased what we carried for Norway. Overall our Core NAV and RENAV now stand at £1.07 and £1.16 per share respectively (£1.03 and £1.13 per share previously). The share price currently discounts DACF Multiples of about 1.1x for 2016 and 1.6x for 2017 on our oil price assumptions (1.2x in 2016 and 4.2x in 2017 on the Brent Forward Curve). On the Brent Forward Curve, our Core NAV would be £0.57 per share.
We have changed our recommendation on Faroe Petroleum from Top Pick to Outperform with a £1.00 per share target price. With an exceptionally strong balance sheet and the share price now discounting only US$55/bbl Brent, Faroe is a value name. However, as Pil leaves the centre stage, investors’ appetite for the shares is likely to be impacted by other factors; (1) the next exploration well in the Barents Sea is high risk; (2) even if we do not support the view, with now limited further upside at Pil, some investors will inevitably wonder about the monetisation of the resources in the area in the context of multiple projects being cancelled around the world; and (3) the timing of the return of Njord.
Market Reaction: Negative. While we carried Blink at only £0.04 per share, a success would also have opened up further upside. A discovery would have also almost doubled the volumes associated with the Pil area, boosting the likelihood of finding a partner to derisk its development. Faroe continues to offer value with a great balance sheet but the nature of the exploration upside is now different.
Faroe's Blink well found water wet reservoir, capping a disappointing year with the drill bit. The current drilling programme for FY16 looks light and dependent on Kvalross for outright excitement. Operating performance remains strong with production guidance raised again, to 9.5-10.5kboed, and Faroe continues to add to its portfolio with the acquisition of a 75% interest in the South East Tor discovery. We cut our Target Price for Faroe to 125p (from 130p), removing the risked NAV we were carrying for Blink but remain Buyers of what we believe to be a well-run company with a good portfolio.
Faroe Petroleum Plc (FPM LN): target price of £1.00 per share, Top Pick | Ithaca Energy Inc. (IAE LN/IAE): target price of £0.90/C$1.80 per share, Top Pick | Parex Resources Inc. (PXT CN): target price of C$12.00 per share, Top Pick
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Market Reaction: Slightly positive on the lower range of the guidance being increased. FY15 capex also appears to have been reduced probably reflecting lower costs. Faroe is a story we continue liking given the combination of balance sheet strength, cash flow value resilience to lower oil price and exploration growth.
Continuing to drill ahead.
We reiterate our Top Pick recommendation on Faroe Petroleum with a target price reduced from £1.10 to £1.00 per share. Our new target price reflects the mixed results at Portrush and Boomerang in Norway. Overall, while these two wells targeted a total of 180 mmboe prospective resources (mid case – gross), only 12-31 mmboe have been discovered. We continue liking the investment profile offered by Faroe. The firm has one of the best balance sheets within our international coverage universe and the upcoming Blink well targets 50-150 mmboe prospective resources in the Pil area. Our Core NAV of £0.81 is well above the current share price. Importantly, Faroe’s valuation is one of the most resilient to oil price with the current share price broadly discounting the Brent forward curve on our numbers.
Monthly Natural Gas Liquids Update - Expanded | Advantage Oil & Gas Ltd. (AAV) Valuation Update | Faroe Petroleum Plc (FPM LN): Mixed Drilling Results
Market Reaction: Negative given the likely high expectations from market participants. This mixed set of results has increased the size of the recoverable resources associated to Pil by 12-31 mmboe but the large upside (50-150 mmboe) associated to Boomerang is now off the table given the low quality of the reservoir encountered at the side track. Importantly, this has no impact on the risk factor of the upcoming Blink prospect targeting another potential extension (50-150 mmbbl) of the Pil discovery where reservoir quality could be better than at Boomerang. As in the case of Portrush, the high pressure encountered at Boomerang suggests that the fault is sealing; which could be seen as encouraging for Blink. Overall, today's result reduces our RENAV by 2p but increases our Core NAV by 3p to £0.81 per share. Given the large net cash position of Faroe and funded exploration upside, Faroe continues to be one of the stand out names within our international coverage universe.
Faroe has announced a discovery at its Boomerang prospect in PL586, offshore Norway, but considerably smaller than pre-drill expectations. The main well encountered a 26m gross column in the Upper Jurassic intra-Spekk/Rogn sandstones with good reservoir properties and moveable oil. The operator estimate is that recoverable volumes are between 13-31mmbbl of oil equivalent. The side-track was dry. The rig will now move to test the Blink prospect. Adjusting our NAV estimate to reflect the scale of the discovery and a revised Chance of Commerciality (CoC) results in a minor reduction in our risked NAV to 183p per share and we leave our rounded Target Price unchanged at 185p per share. However, the potential unrisked upside falls by around 30p/share. We remain Buyers of the stock but expect this result to be taken negatively.
Market Reaction: Negative. Our ReNAV for the well was only £0.03 per share (£0.11 per share), however the market often overreacts. In terms of readthrough for prospectivity at the Boomerang and Blink prospects there are some positives (trap mechanism works and the same sands as at Pil were present) and negatives (no hydrocarbons). It however highlights that Faroe needs to revisit its geological models and it is not clear how the results of the Portrush well will impact the risking factors of prospects around Pil. With its strong balance sheet likely to be intact by YE15, growing production and reasonable risk/high impact exploration programme, Faroe remains one of the stand out names within our coverage universe.
Market Reaction: Positive. This transaction is accretive to our valuation. We valued Faroe's 18% interest in Blane at US$52 mm (excluding tax losses). On our numbers the transaction (even excluding Enoch and tax losses benefits) adds US$16.0 mm (£0.03 per share) to our valuation. In addition, these two fields are likely to add about 600 bbl/d net production to Faroe resulting in accelerated use of Faroe's tax losses. We understand both fields have around 2.0 mmboe upside (net to Faroe). Net decommissioning liabilities are estimated at £6.5 mm but are not expected to be incurred before another ten years.
With the sudden and drastic decrease in crude oil prices, FirstEnergy has elected to update its commodity price forecast mid-quarter and prior to investors returning to their desks at the end of summer.
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Market reaction: Slightly positive given that this might suggest the results so far at Boomerang warrant a side track.
The changes are expected to have very limited impact given that the ring fence tax rate is not expected to be impacted by the progressive 2% corporate tax reduction. There is limited visibility of the qualifying new expenditure that would benefit tax allowances.
With production of 11,324 boe/d significantly ahead of the 8 mboe/d - 10 mboe/d full year guidance, an opex of US$22/boe, cash increasing by £14 mm by YE15 to £107 mm, net cash representing almost 40% of the share price and an additional exploration well operated by Shell (RDSA/B LN) being added to the 2015 drilling programme, Faroe remains one of our preferred stories in the UK. We maintain our Top Pick recommendation and £1.20 target price, based on the latest results to May 31, 2015.
Market Reaction: Positive. Production is ahead of our expectations (10,154 boe/d in 1h15) as well as net cash (FCCe: £22 mm), reflecting strong cash flow and probably capex timing. The Portrush well is estimated to target 70-90 mmbbl prospective resources at a gross cost of £23 mm (reflecting a 50% reduction in cost compared to pre crisis levels). On 25% chance of success, this would add 4p to our RENAV. This is also a strong vote of confidence from Shell with regards to the area. Faroe remains one of our preferred stories in the UK. Net cash represents almost 40% of the share price.
Market Reaction: Slightly negative as we carried the well at only £0.01 per share (RENAV). We would buy the shares on any weakness today ahead of drilling at Blink and Boomerang from June/July with an overall Unrisked NAV of £0.40 per share. We understand that production is strong with limited decline and good uptime. Faroe has the best balance sheet within our North Sea coverage universe.
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