GMP Securities Oil & Gas

Falcon Oil & Gas

A huge unconventional deal

Rating SPECULATIVE BUY Target 27 (GBp)

Unconventional plays are in demand. Falcon has capitalised on this by securing an impressive nine-well carry from Origin and Sasol for its unconventional acreage in the Beetaloo basin in Australia. The A$200m deal, which includes A$20m cash, represents 145% of Falcon’s current market cap, and is the basis of our initiation of coverage with a Speculative Buy rating. The speculative designation reflects the early stage nature of Falcon’s exploration activities. Our target price of 27p/sh is set in line with risked NAV. The next leg in the story could be a farm- out deal in the Karoo in South Africa that builds on Falcon’s existing partnership with Chevron. Beetaloo: investors can now gain exposure to a visible, funded work programme. Of the nine wells, five will be horizontal. This trumps the previous five-well deal brokered with Hess and is vindication of management’s previous decision to reject Hess’ request to extend an option deadline, and hold out for a better deal. We view the deal as having transformed Falcon’s ‘stalled’ equity story. Drilling could start as early as this year.

Karoo catalysts: progress on the moratorium and energy bill will determine timing of award of exploration rights and subsequent farm out of Falcon’s unconventional portfolio in South Africa. With Falcon now fully funded for its drilling plans in Australia and Hungary, a farm-out in South Africa could be the next big catalyst.

The size of the prize is big relative to market cap: valuing a nascent unconventional portfolio at the early exploratory phase is inherently uncertain. In Falcon’s Beetaloo permits in Australia, RPS Energy, a third-party resource evaluator, estimates gross recoverable resource potential at the play level at 162tcf gas and 21.3bnbbl oil (P50 estimates). We provide a valuation scenario of 27p/sh based on the size of Falcon’s acreage, one that demonstrates the upside potential if a successful unconventional shale play is proven. We estimate Falcon will have $16m in cash (1p/sh) and no debt upon completion of the Origin/Sasol deal, which we expect to occur in Q3 2014.

SPECULATIVE BUY

FOG-LON, FO-TSXV 8p Price Target 27p