Oil and gas play Falcon Oil & Gas (FOG:AIM) storms ahead 27.6% to 11p as it agrees a farm-out deal for its Beetaloo unconventional acreage in Australia worth some A$200 million.

Despite today's healthy rise the shares are still down 21.4% on last March's 14p issue price and 28.6% since its decision last June to reject an extension to US firm Hess' (HES:NYSE) option over taking a 62.5% interest in the asset. A hard-line stance which caused Hess to walk away. Today's announcement provides some vindication for Falcon's management.

Aussie firm Origin Energy (ORG:ASX) and South Africa's Sasol (SSL:NYSE) will each farm-into 35% of Falcon’s exploration permits in the Beetaloo basin for an upfront cash payment of A$20 million. Falcon is then fully carried on the costs of completing a nine-well programme on the acreage. This includes five wells over the next five years at a cost of around A$64 million. Sasol and Origin can surrender their interest back to Falcon after the drilling of the first five wells or after the drilling and testing of the first two horizontally fractured wells (cost A$53 million) scheduled for year four.

The final two wells in the programme, capped at $48 million, are expected to be drilled and completed in year five. The initial focus of evaluation will be on the Middle Velkerri formation which according to independent consultant RPS has prospective oil and gas resources of more than 12.7 billion barrels of oil and 74.5 trillion cubic feet of natural gas.

House broker Cantor Fitzgerald retains its 'buy' rating and puts its 25p price target under review. Analyst Sam Wahab comments: 'Falcon has secured a deal on far more favourable terms than that outlined by Hess last year, further validating management’s decision not to allow the major to defer its decision to farm-in. Origin brings considerable expertise to the table as an unconventional operator in Australia.

'In addition, Sasol, through its interest in the Montney unconventional shale play in North America, brings significant expertise in operating unconventional shale plays and is a world leader in gas-to-liquids. Therefore Origin and Sasol offer many potential options for the monetisation of any natural gas discovered on the permits, which would not have been the case with Hess in our view.'

Issue Date: 02 May 2014