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’s active exploration and appraisal campaign in 2018 and 2019 continues its strategy of creating value through the drill bit. The first well, Iris/Hades, delivered significant success, adding a Faroe-estimated net 2C resources of 42mmboe to the company and rated as one of the largest discoveries worldwide in 2018. The remaining seven firm wells in the programme will target total net un-risked resources of 144mmboe (including 15mmboe in Agar Plantain in the UK continental shelf (UKCS). The bulk of the E&A programme is focused around the three key hub areas of Ula, Brasse and Njord, allowing Faroe to monetise any discoveries through subsea tie-backs to existing infrastructure.
Taking into consideration committed exploration spend, maintenance capex and planned development spend, we believe that existing funds and liquidity are more than sufficient, even at an oil price down to $40/bbl. Faroe’s requirement for further capital, whether through equity, asset sales or farm-out, is therefore limited to the development of material new exploration discoveries.
Our RENAV of 185.2p/share is based on a long-term oil price of $70/bbl and 10% WACC, which rises to 215.0p/share assuming an 8% WACC. Key investment risks include service cost inflation, potential for underestimation of decommissioning liabilities and asset integrity.