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Falcon Oil & Gas Ltd: THE INVESTMENT CASE
INVESTMENT OVERVIEW

Falcon Oil & Gas ready to reward patient investors as shale project can now advance

Falcon's shale project is now clear to advance now that a ban on fracking has been lifted in Australia's Northern Territory.
oil and gas operations
INVESTMENT OVERVIEW: FOG The Big Picture
Drilling is likely to start again in 2019

It is expected that patient Falcon Oil &Gas Ltd (LON:FOG) investors will be rewarded now that the AIM-quoted explorer’s Australian shale project was cleared to proceed.

The lifting of a moratorium on hydraulic fracturing is a significant breakthrough.

It allows Falcon and operating partner Origin Energy to get back to work in their pursuit of a major shale gas play in the Northern Territory’s Beetaloo basin.

The fracking hiatus came into effect in 2016 and it effectively cut off what had been a very encouraging programme of wells and flow testing.

READ: Cheap Falcon share prices won't be around long - CEO

Subsequent analysis of the first four wells saw some 6.6 trillion cubic feet (TCF) of gas identified within an area that spanned just an eighth of the whole Beetaloo licence.

Now, the partners plan to get back to work as soon as practical, meaning new drilling is likely to start in 2019.

It will mean that a nine-well programme originally set-out in a 2014 farm-out deal ought to be complete some time in 2020.

Significantly, because of the farm-out, Origin is covering some US$101mln of Falcon’s costs for the remaining wells - it is possible that the majority if not all the well costs will be covered by Origin.

Falcon chief executive Philip O’Quigley, in a video interview with Proactive Investors, said Origin will be back on the ground as soon as possible and the initial efforts will be focussed on civil works, building road and designing drill pads.”

Drilling plans

The anticipated schedule will see drilling start with a vertical well, and Falcon’s share of well costs will be entirely covered by Origin.

After that, the carry on the next two wells will be capped at a total of US$53mln. These two wells will be drilled horizontally.

The fourth and fifth wells in the programme will also be horizontal, and Origin will cover Falcon up to a maximum of US$48mln.

Capital costs in beyond the farm-out budget will be shared, with Falcon responsible for 30% of the additional spend.

In terms of timing, O’Quigley said: “Whether we’ll get out and drill in 2018 is still a little uncertain.

“It is less likely than it would’ve been because there are a lot of processes we’ll have to go through now, a lot of permitting and consents need to go through.

“Either way, we’re back in action. Work will start. Drilling may not happen immediately, but, certainly it will be a big programme that we’ll be talking about in the very short term.”

Analysts welcome the good fracking news

Job Langbroek, analyst at Dublin based Davy, described the lifting of the moratorium as “obviously positive” news.

“The lifting follows on from the clear and concise outcome of the special scientific inquiry into the impact of fracturing as a method to recover oil and gas,” the analyst told investors.

“While this outcome was based on science and evidence, the decision to lift the ban was political.

“Consequently, we do not think it was possible to be certain of this outcome so we believe the lifting of the moratorium is not reflected in the share price.”

Elsewhere, oil companies expert Malcolm Graham Wood said it was “excellent news”

“Even more exciting is the accompanying release from Origin suggesting they are keen as Colmans to get going with the project.

He added: “they have been keeping the project warm but with a lot of preparation needed to be done now they should be in a position to spin the drill bit next year.

“Patient holders of Falcon are now rewarded and it’s not too late to join this caravan which should be a major play for a very long time, not least as Australia is ironically domestic gas short.”

Modest response for the share price

Falcon’s shares rose no more than 10% in the morning’s deals and at around 11:00am were changing hands at 24.9p, up only 5.96%.

If investors were expecting a bigger boost to the Falcon share price, they were not alone.

“I would’ve imagined it would be much higher … and I think it will in the next few days when people realise what this really means,” Falcon chief executive Philip O’Quigley said in an interview with Proactive Investors.

“It is not just a lifting of moratorium."

O’Quigley added: “We’re going back to go after what is already a huge resource, 6.6 TCF just on one zone in one eighth of the whole area, and there’s much more to go after.

“I think people, in time, will realise that this is a huge play and it is a really attractive asset.

“Falcon are fully carried for the next five wells, so there’s no issues, we’ve got US$9mln cash in the bank, so we’re not looking to raise any money any time in the next two to three years.

“People will realise that this is the only time you’re going to get in at these prices, today, and hopefully we’ll see the market appreciate that over the next few days.”

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