FAR offers an example of typical market responses to exploration efforts as a company moves through its development cycle
FAR offers an example of typical market responses to exploration efforts as a company moves through its development cycle. On 7 October, the company announced a significant well discovery in offshore Senegal. In the lead-up to the announcement and in the following day, the price rose 292%. On 10 November, the company announced a second significant discovery. On this occasion, the price went up 36% before giving up 25 percentage points of this return. The second result was possibly of a higher quality but less of a surprise. Given the risk, the return probably did not warrant the investment exposure. FAR is showing itself to be unusually successful in managing one of the highest risk activities in the resources sector, namely, offshore oil and gas exploration. It has funded drilling commitments by farming-out positions to better capitalised companies although, now, attention will increasingly turn to the multi-billion dollar development costs and the prospective returns on capital from an eventual development. Exploration success adds to the certainty of development but becomes less worthy of re-pricing.
John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...
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