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Falcon shares set for Beetaloo boost if fracking programme proves a success

We take a closer look at Falcon Oil & Gas and the upcoming drill and frack programmes in Australia's Beetaloo Baisn,
Drill rig shot from the base up, moving to a vanishing point.
The drill rigs will be turning, results will be interesting.

The past three months have been stellar for Falcon Oil & Gas PLC (LON:FOG), whose shares are up 70% in a period when fellow explorers have struggled.

A lot of volume was seen in early April as investors cut their losses on certain AIM-listed stragglers and diverted what was left of their cash into the more exciting natural resources plays.

But what was it about Falcon that caught the eye, and more importantly, after the recent rapid ascent, does the stock have any further to go?

Falcon is sitting on US$12.7mln in cash, which would be enough to fund it through the next three years.

It is also fully carried on a drill programme in the highly prospective Beetaloo basin that’s worth US$200mln.

Here, it has 30% of what is shaping up to be an exciting gas project and is partnered with Aussie firm Origin Energy and South African gas to liquids specialist Sasol.

The Australian permits cover 4.6mln acres that are estimated to be host to 162 trillion cubic feet of gas.

The progress made to date has been significant, with operator Origin well ahead of where it expected to be when it drew up the work programme.

It is fair to say drilling to date on the Kalala and Amungee wells, which are 25km apart, have delivered the expected results. Importantly they confirmed the potential of the Middle Velkerri shale reservoir.

Key findings – such as the porosity and permeability, gas saturation and the pressure readings - point to something that, if it all hangs together, could be really special, analyst say.

In fact the Beetaloo could turn out to be the largest unconventional acreage outside the US.

That in itself goes some way to explaining the stampede of investors into the stock.

But what’s going to keep investors interested?

Near-term, preparations are underway to case the horizontal section of the Amungee well on the Beetaloo acreage. A multi- frack operation will then be carried out to assess the full potential of the shale.

It will be interesting to see the production reading once the horizontal frack is underway.

Investor bulletin boards are buzzing with all sorts of figures. 

Two million cubic feet a day looks a little fanciful, but anything around one million mark would have people sitting up and taking notice.

The horizontal frack is expected to get underway in early July.

Around the same time Origin will start spudding the Beetaloo W-1 vertical well, some 85 km south of the two earlier wells.

Obviously, this is more than a step out. So if the Middle Velkerri shale characteristics mirror those found in the earlier holes, the Beetaloo then becomes a very big deal.

Our sources suggest Origin will brief the industry’s movers and shakers on what it has discovered in Australia’s Northern Territory at Association of Petroleum Geologists’ annual shindig in Calgary, which takes place June 19-22.

This coincides with Falcon’s annual meeting in the Canadian city on June 21. Would it be too much to hope that Origin will be at this gathering too?

Anyway, drilling doesn’t end in July. No, after that the crew will head to the northern flank of the Beetaloo basin.

There in September it will target the shallower, condensate-rich mature sections of the Middle Velkerri.

While the hope is to uncover liquids there won’t be too much disappointment in the Origin-Sasol-Falcon camp if dry gas is discovered.

The decision then, as 2016 draws to a close, is whether to head north or south on the Beetaloo acreage to carry out second frack of the year.

That will all depend on the results of the two new verticals.

Looking at the broader picture, it is helpful to be a gas producer in Australia with rapacious neighbours in Asia ready to scoop up excess supply.

The obvious destination for Beetaloo production would be the US$34bn Inpex-Total liquefied natural gas trains under construction in Darwin.

That said a new 600km pipeline is being constructed that could carry output from the Northern Territory to Australia’s east coast conurbations.

Now, back to the question posed at the start of the article: is there enough excitement there to sustain interest and propel the shares further?

Well, the Falcon team would argue emphatically, yes there is.

One London broker, Cantor’s, probably provides a more objective assessment.

Its price target of 19p a share suggests the stock has a lot further to go from its current base of 8.35p – even after the recent spike.

“Our valuation illustrates that the market currently does not attribute value to a significant proportion of Falcon’s asset base despite attracting leading industry partners across its portfolio,” said analyst Sam Wahab in a recent research note.

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