Hess looked for extension to conclude its own third-party farm-out
Hess looked for a one-month extension to its arrangement with Falcon to conclude its own farm-out deal with a substantial third-party partner. Falcon did not grant this extension for a number of reasons. It was the second extension sought. Also, the reversion of full equity in the project meant that shareholders would have exposure to encouraging results from the recent seismic programme and the identification of a shale oil play in the northern part of the licence. Lastly, the fact that Falcon has received unsolicited interest from a number of other companies, assuming this can be crystallised, provides a more advantageous route to financing the work required to realise the value of the acreage.
Better deal should be possible
When the original Hess deal was negotiated there were only sparse data available for the basin. Since then, entry costs and a substantial seismic programme, which together are likely to have cost Hess in the order of $80m, have materially improved the data available. These data illustrate and substantiate the significant prospectivity of the basin, so it is reasonable to suspect that a higher entry cost will now be required to get involved in the area. This ultimately should mean a better deal for shareholders.
Valuation implications
Prior to this we valued the licence at $40 per acre or a total of 3.7p per share. This assumed a certain level of risk and was based on the implied value of the initial work and the drilling of an additional five wells by Hess. While there is clearly a period of uncertainty at present, we think it reasonable to assume that Falcon will achieve a farm-out on at the very least similar terms. So for now we will leave our group valuation unchanged at 17.8p per share and reaffirm our ‘Outperform’ rating.
