Falcon Oil & Gas’s farm-out strategy vindicated as Beetaloo deal completes

With the completion of its Australian farm-out today Falcon Oil & Gas (LON:FOG) is vindicated for playing hardball over negotiations, says broker GMP Securities.

For starters Falcon gets an immediate A$20mln cash boost.

Falcon denied former partner Hess an extension when it stalled on an investment decision last September.

As the American oil firm failed to pull the trigger on a proposed five well programme, Falcon took back full ownership and launched a fresh farm-out process.

Just under a year later and Falcon has now completed the tie-ups with local operator Origin Energy and South African gas-to-liquids specialist Sasol.

Analysts at GMP Securities say this new partnership deal is better.

“Falcon has successfully secured an impressive nine-well carry from Origin and Sasol for its unconventional acreage in the Beetaloo basin in Australia,” said GMP’s Tao Ly.

“This deal trumped the previous five-well deal brokered with Hess and is vindication of management’s previous decision to reject Hess’s request to extend an option deadline, and hold out for a better deal.

“Falcon investors can now gain exposure to a visible, funded work programme with drilling expected to start by mid-2015.”

Upfront Falcon receives A$20mln of cash, though more significantly the new partners have committed to funding a nine well work programme.

They will spend A$64mln on the first phase of five wells, while the next phase of horizontal drilling will cost around A$100mln.

The drilling will be designed and targeted to take the project towards commerciality, the company says.

Falcon chief executive Phillip O’Quigley describes the transactions as transformational.

“We look forward to the immediate commencement of the nine well exploration and appraisal programme," he said.

Elsewhere, Cantor Fitzgerald analyst Sam Wahab, who rates Falcon as a ‘buy’ with a 30p target, said today’s completion was a “key step forward in de-risking its considerable acreage in Australia.”

In a note, he said: “Origin brings significant expertise to the table as an unconventional operator in the country, whilst Sasol, through its interest in the Montney unconventional shale play in North America, brings significant expertise in operating unconventional shale plays and is a world leader in gas to liquids.

“Therefore Origin and Sasol offer many potential options for the monetisation of any natural gas discovered on the permits.”