Hi this is from 2014 but very interesting re value Falcon Oil & Gas (FOG) is stuffed with potentially rich, debt-free assets which bigger partners will pay to develop, and out in the Northern Territory of Australia has massive acreage in Beetaloo which could turn out to be a real lulu. That emerges loud and clear from a detailed 43 page initiation note from broker Charles Stanley. Written with the shares at 8.7p (currently 8.9p), it sets a target price of 19.7p, with the prospect of raising that 2.5-fold to more than 51p, and then some. What follows is a series of lightly edited extracts from the Charles Stanley note, starting with the introductory section. 'Falcon has exposure to world class shale resource plays in Australia, South Africa and Hungary. Our price target is based only on the Australian assets which the company has farmed-out to Origin and Sasol in return for a full carry on a catalyst-rich nine well appraisal programme. Total funding from the farm-in partners is expected to amount to circa $A200 million, of which $A20 million will consist of cash to Falcon on completion (expected imminently). In South Africa, Falcon and Chevron have a co-operation agreement in respect of Falcon’s interest in the Karoo Basin, which we expect to be transformed into a farm -out pending a credible tax and regulatory regime in that country. The company is 100% carried on a three well exploration campaign in the prolific Mako Trough in Hungary targeting conventional targets. Thus far, no clear success has been announced in Hungary and we hope for an agreement to divert capital towards appraising the unconventional resource potential in the deeper part of the basin.  Catalysts: We believe the first four wells in Australia, expected in 2015 and 2016, can reasonably be expected to increase our valuation and target price by 2.5x on success. Success with the subsequent five planned horizontal fracked wells would propel value beyond that.  Funded: After closing the farm-out with Origin and Sasol, the company will have cash of $19.0 million. Unlike most of its peers, we expect Falcon’s major forthcoming capital expenditures to be fully carried by major oil companies.  Australia: Australia is one of the most attractive countries for developing shale gas and shale oil due to its geology, tax regime, political environment, oil services sector and low population density.  Strong technical case: The assets present a strong technical case based on significant well data that has already been acquired. Investment case Falcon is successfully acquiring large acreage positions in geologically prospective unconventional oil & gas plays with the objective of creating value by advancing the acreage towards commerciality, reducing financial exposure through farm-outs that offload the expected funding onto major oil companies. The company expects to monetise its assets after they have been advanced towards commerciality by significant multi-well appraisal programmes.  Assuming the first four wells of the work programme in Australia are successful (drilled in 2015 and 2016 and fully funded by Origin and Sasol), it would be reasonable to increase our valuation and target price by 2.5x. We premise this valuation uplift on a $/acre assessment ($902/acre) of a comparable Australian asset acquisition by Chevron in February 2013 for $349 million.  The first three wells in the Beetaloo Basin are to be drilled over in 2015 and are designed to prove regional continuity of the target formation based on detailed core analysis. The fourth well is to be drilled in 2016 to establish the capacity of the target formation to produce gas and/or oil to surface at a stable and measurable rate after inducing hydraulic fractures. Combined, the first four wells have the objective of acquiring sufficient technical data to engineer a horizontal well and its completion by hydraulic fracturing as a next step. Results from these wells will provide inflection points in Falcon’s value.  The fifth well (expected to be drilled in 2016) is a horizontal well that will be hydraulically fractured. Testing this well will be the “moment of truth” for the targeted formation in the Beetaloo. This will represent a critical inflection point and a wide range of outcomes is possible. We will refrain from estimating the potential value impact until the engineering inclusive of the determination of the well’s objectives take form.  Over 2017 and 2018, we expect the final four horizontal and hydraulically fracture completed wells of the nine well work programme to add value by confirming the repeatability of the target formation’s capability to produce when hydraulically fractured and by gaining longer term (90 day) production test data. The production test data can be expected to allow for initial decline curve analysis, which should in turn allow for a better understanding of the formation’s economics.  The growth of shale gas and shale oil in Australia is a matter of when, not if. Significant M&A activity involving many of the world’s largest and most technologically advanced oil & gas companies supports this and suggests that if the assets deliver successful results (over the nine-well campaign) Falcon will be able to readily monetise its Australian acreage.  The company’s South African and Hungarian assets represent free options pending political and commercial developments respectively. In summary, Falcon holds a massive land position in a basin where the entirety of the known technical data suggests the basin has potential to be commercially viable for unconventional oil & gas. The Beetaloo Basin is massive and compares in scale to the largest unconventional resource basins in North America. Excluding production from the Canadian side of the border, according to the US Energy Information Administration, the Bakken field produced at a rate of 1.0 million barrels per day for the first time in 2014. There are currently circa 180 rigs working full time in the Bakken. Thus far more than $100 million has been invested in the licence area since 2009, which relates to the seismic campaign undertaken by Hess and the Shenandoah-1 well by Falcon. The significantly improved farm-out agreement with Origin and Sasol is a clear vindication of the decision not to proceed with Hess. We believe that after drilling the fourth well FOGA’s acreage would be at a comparable stage of development as the acreage sold to Chevron for $902/acre. We believe that there is a 75% chance of success that the first four wells will establish the regional continuity of the targeted formation in terms of lithology (tight sands interlaid between organic rich shales), petrophysics (rock and fluid properties) and mechanical properties (behaviour under stress based on lab testing). We believe that there is at least a 50% chance of success that the fourth well will flow gas at a stabilised and measureable flow rate. Combining the two probabilities of success, we have included 37.5% (75% x 50%) of the $902/acre valuation in our current target price, which we expect to adjust based on the forthcoming well results. In a success case, we expect that the final five wells of the nine well programme would increase our valuation above $902/acre. Therefore, in a success case, the fifth well would push the value of FOGA’s 1.355 million net acres above a value of $1,222 million. To reflect that the equity market typically discounts valuations based on acquisition multiples, we have included only 66.6% of the risked (37.5% CoS) value based on the $902/acre valuation. This equates to a target price of 19.7p/share. After a successful four well programme a reasonable price target would be circa 51.2p/share and if the company were acquired after a successful four well programme we estimate a fair price would be 76.3 p based on what we believe is the most comparable transaction. As a side note, we believe that the Beetaloo has the following advantages relative to the Cooper Basin: it is closer to Asian LNG import markets, it has simpler structural geology and the major partners in the licences have a core competency in creating demand for natural gas. In contrast, the Cooper Basin (where the $902/acre metric is from) has the advantage of having more existing infrastructure. On balance, we believe that that our point of reference to value FOGA is the best available. Wells are expected to be drilled between May and November. Outside of that, the Beetaloo experiences a wet season when moving heavy equipment is not possible. We generally expect initial results shortly after drilling the wells to target depth with lab results and interpretative results announced months later. In between the key catalysts mentioned there could be significant, but potentially less price material announcements. For example, well design and completion plans should capture attention. M&A activity in Australia is also relevant and we note that on 12 August 2014, Origin announced the acquisition of gas assets from Karoon Gas for upfront cash of $US 600 million with another $US 200 million on specified milestones. Generally a large volume of M&A news flow can be expected in Australian oil & gas, some of which may have pricing implications for Falcon.