Buy Falcon Oil & Gas?
By Brokerman Dan — Monday 27 May 2013
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I’ve been watching Falcon Oil & Gas (FOG) since it came to AIM and the ESM (FAC) on 28th March this year. So it was with delight that I forced myself onto the Falcon radar by turning up unannounced to interview/chat with its CEO Phillip O’Quigley last week at one of the Proactive Investor forums.
Falcon Oil & Gas is an international oil and gas company engaged in the acquisition, exploration and development of unconventional and conventional oil and gas assets.
The Company is partnered with large, credible multinational energy companies. Hungary; NIS, (Serbian oil and gas 56% of which is owned by JSC Gazprom Neft.) South Africa; Chevron. Australia; Hess. Important points. Falcon is partnered with several big hitters who are spending real money on their assets. The Board of Directors are all proven players when it comes to oil exploration. The management consists of Individuals from Providence Resources, Cove Energy and Gazprom to name but three.
Falcon’s strategy is to leverage the Group’s expertise in the unconventional oil and gas industry to acquire interests in licences covering large areas of acreage. Falcons’ game plan seeks to add value to its assets by entering into farm-out arrangements with major oil and gas companies that will fully or partially carry Falcon through seismic and drilling work programmes. Falcon is not an operator but a holder of assets, seeking partners to pony up the cash to prove up its assets; of course there’s a cost in terms of losing portions of the asset cakes but the potential is truly phenomenal.
The Falcon land asset base is measured in many millions of acres. The Group’s principal interests are located in two major under explored basins in Australia and South Africa with Hungary, covering approximately 14.75 million gross acres in total.
There are various CPR’s out there but for the purposes of clarity I’ll stick with RPS Energy. RPS estimated gross recoverable prospective resource potential for the Group’s Beetaloo Exploration Permits in Australia of 162 trillion cubic feet of gas and 21,345 million barrels of oil (P50), (That’s 21 billion barrels) with gross recoverable prospective gas resources in the Algyö Play of 568 billion cubic feet (“Bcf”) (P50) and gross recoverable contingent resources in the Deep Makó Trough of 35.3 Tcf of gas and 76.7 Mmbo of oil (P50), both in Hungary. Remember P50 Probable reserves – ARE defined as oil and gas “Reasonably Probable” of being produced using current or likely technology at current prices, with current commercial terms and government consent – Some Industry specialists refer to this as P50 – i.e. having a 50% certainty of being produced. – This is also known in the industry as 2P or Proven plus probable. I’m not a big fan of these CPR’s as they are open to abuse by deceitful Directors however the Board here is above and beyond reproach.
Falcon is going to come on the wider PI radar very shortly. And I’ll tell you why. Put to one side South African & Hungarian assets and focus on Australia. The decision by Hess to exercise its option to acquire a 62.5% working interest is critical. Under the terms of the “Hess Agreement”, Hess has the option until 30 June 2013 to acquire a 62.5% working interest in the Hess Area of Interest, by committing to drill and evaluate five exploration wells at Hess’ sole cost, one of which must be a horizontal well.
In the event that Hess decides not to drill and evaluate five wells, its obligations under the Hess Agreement will cease and Falcon Australia will become responsible for 100% of any exploration and development costs of the Hess Area of Interest. It’s also known by BMD that Falcon have several other major suitors chomping at the bit should Hess pull out. A decision by Hess not to exercise its option would have a material adverse effect on the Group’s prospects even if as suspected there are “others” chomping at the bit.
Now here’s the thing. My interpretation is that Hess (A multi-billion dollar operation) has spent approx.’ $80 million dollars thus far on the Australian Beetaloo Basin. At the then “run rate” of 25km of 2D seismic per day, Hess was on target to complete the acquisition of the entire 3,600km before the end of 2012 and increased its capital expenditure to the program from $40 million to an anticipated $57.5 million. Falcon remained fully carried throughout the seismic program. Hess has until 30 June 2013 to commit to the drilling of five exploration wells on EP’s 76, 98 and 117 to earn 62.5% in the exploration permits. This was a revised date agreed with Falcon which allows Hess adequate time to complete the acquisition and processing of the 3,600km of 2D seismic. Should Hess commit to the drilling of the exploration wells, Falcon’s interest in EP’s 76, 98 and 117 will reduce to 37.5%, but Falcon will be fully carried through the drilling of all five wells.
In addition to carrying Falcon on the five well exploration program, should Hess elect to proceed to the “development phase”, Hess has also agreed to carry Falcon, on the first development well, up to a gross cost of $10 million. Hess has already invested over $80 million dollars here. Falcon is very confident that Hess will elect to carry on.
Remember, Falcon has just announced the Purchase of the Sweetpea 24% Minority Interest in Subsidiary Falcon Oil & Gas Australia which gives it 96.90% of the Beetaloo basin. Falcon is consolidating its Beetaloo Basin holding prior to the Hess announcement, which if positive could set this share-price on fire. At 13.5p Falcon has a market cap of £105 million.
One error from the fast talking Phillip O’Quigley. He gave me his card and told me to phone him for a full interview after Hess had come on board. Mistake? Maybe? Maybe not!
Brokerman Daniel writes on the bull and bear tack on smaller resource stocks. You can follow his work at www.guerillainvesting.co.uk and follow him on Twitter @brokermandaniel
– See more at: http://www.shareprophets.com/analysis/480#sthash.BXs7UUf0.dpuf