Farms out its Australian unconventional acreage

DAVY VIEW

Deal metrics

Falcon has farmed out 70% of its interest in the Beetaloo Basin, located in the Northern Territories in Australia. Sasol and Origen have each taken a 35% share in the package of licences. Falcon will be paid AU$20m in back costs with up to another AU$165m by way of expenditure committed to the licence package. Falcon will be carried for this amount of gross expenditure. In addition, the groups farming in have undertaken to contribute their share of the remaining payments ($14m) due to remove the overriding royalties that were attached to the licence package.

The work programme is structured to broadly match two phases with early scientific and data-based acquisition moving to testing the commercial viability of the play.

Demonstrates model

Falcon has a strategy to identify and acquire large prospective acreage positions and then use this large equity position to enter into farm-out arrangements that keep future capital expenditure to a minimum. The Australian farm-out shows how this strategy can work as the group will now participate in a detailed exploration and appraisal programme at minimal cost. We expect a similar approach and outcome will be looked for on its 7.5m southern Karoo basin acreage in South Africa.

Valuation implication

We estimate that this deal has limited implications for valuation metrics. The new partners have committed a larger total spend ($185m versus a potential $150m by Hess, its former partner), so the valuation, measured by expenditure commitment, per acre has increased: $43/acre versus $57/acre. But the relinquishment of one licence and somewhat lower final equity position (30% compared to in the net acreage outcome of 37.5% in the former Hess deal) results in a largely unchanged group valuation per share of 17.0p, albeit now underpinned by a recent Australian farm-out.