WTI $103.53 -53c, Brent $110.24 -76c, Diff $6.71 -23c, NG $4.22 -18c

Oil price

In the absence of further serious military activity in Iraq, which continues to produce and export at full capacity, and with the likelihood that the increasing flow of oil from Libya is for real oil markets continue to retreat. Yesterday my trading contacts said that despite being a quiet day post the holiday weekend stateside spot prices broke down and Brent for example took out the support levels at $111 and $110.50 closing near the lows. As you know my main worry on the downside is actually not just technical but also that the market is heaving with punters who  are long and wrong and for whom this market is not their normal habitat. When that happens the usual pattern of behaviour is more likely to be a cutting of losses rather than to double the bet, I look forward to seeing the stats about random betting on the oil price as it comes through, Brent is now over $5 off the recent peak you know…

Watch out too for the Natural Gas price which has belatedly started to head towards $4, topping up inventories after the cold winter has held it firmer than many expected but the next month or two will be quite interesting.

Falcon Oil & Gas

I finally managed to get a one-to-one meeting with Falcon last week, spending some quality time with CEO Philip O’Quigley and CFO Michael Gallagher. Falcon is chaired by John Craven, amongst the most well known and respected oil men around town having had significant success at Cove Energy and the corporate strategy here is remarkably similar to that successful model. This is a simple and well known mantra, acquire large positions in geologically prospective oil and gas plays, focus on countries that support drilling, reduce exposure through farm-outs of seismic and work programmes and monetise by selling early enough in the cycle to avoid the bigger development costs.

Falcon’s assets are primarily in Australia and South Africa with interests in Hungary as well and the portfolio size is substantial amounting to over 12 million gross acres. Falcon came to at lot of peoples attention, certainly mine, when they ‘lost’ their former partner in Hess and did an excellent farm-out deal on their acreage in the Northern Territory in Australia bringing in Origin and Sasol. Without over-egging the pudding this deal transformed life for Falcon, in Origin they found an enthusiastic and domestic operator, they received upfront, A$20m in cash and a valuable carry, increased their drilling programme and focussed on the unconventional play in the area. More importantly the private overriding royalties, previously thought to be a deal-breaker, were removed and either bought out or in one case switched to a five year call option that will only cost $20m and on success. With the farm-out completed the timeline can now be put in place and should permitting be forthcoming three wells may be drilled this year, if not next year will see a very active programme. The M&A scene in Australia has been very active in the last year or so and Falcon have done a very smart deal here, I would be most surprised if this asset didn’t turn into a company maker.

Falcon also has assets in the Karoo Basin in South Africa, this is a shale gas play with a technical cooperation permit and is adjacent to the Shell permitted land. In the basin Falcon have a 5 year exclusive cooperation agreement with Chevron which was signed in 2012 and gave them $1m of past costs contribution. It should be warned that in April 2011 there was a moratorium placed by the oil ministry and  whilst it was passed unsurprisingly by Parliament, recent changes in personnel have led to new technical regulations being proposed.  The new Minister has removed the ‘hostile parts’ of the legislation and it is hoped that activity will continue as proposed. As a result of this Falcon expects to receive the award of an exploration permit in the second half of this year to be followed by a number of announcements regarding the permit. It would not come as a major surprise if Chevron as an ‘exclusive partner’ was not somehow involved in this wheeling and dealing and if Falcon could make around $200m from this then further value would be franked.

I do not intend now to go into detail of the Hungarian assets although they may feature in future notes, they are a mix of high and low risk plays and I would expect to see a potential farm-out of the deep Trough at some stage although drilling continues in the shallow this year.

With smart farm-out deals which I always reckon underpin equity valuation, Falcon should be carried for some time for nothing giving the potential to create significant value should the necessary scale of discoveries be made. If the company achieve success with the drill bit, and these do need to be of a certain size in Australia, then they will have created that value through early entry and successful monetisation, the model will have worked. Falcon have a solid base of supportive shareholders and due to the legacy of the TSXV listing a large retail following in North America, whilst this is not ideal and means that there is always the likelihood of a tap on the market the management spend a lot of time with them and they seem to appreciate the investment case. An acquisition in North America for producing assets with some upside might just be the answer to this particular problem…

Watch out for the South African situation and of course permitting for drilling in Australia, either way with a sub £100m market cap and a potentially substantial value proposition, Falcon is most definitely one for the watch list.

Sundry

BP has sold a package of Texas natural gas assets to Pantera for $390m, also you might have seen in the weekend press that a group of European Asset Managers have received clearance to sue BP over the Macondo loss of value.

Exxon has reportedly farmed into an oil and gas block in the Neuguen block in Argentina, this is where the famous Vaca Muerta is and this can only be good news for Andes Energia. Whilst the political storms continue over the country’s debt I can understand why investors are standing back but mark my words some people are going to make a lot of money out of Andes at some stage.

And Petroceltic has completed the Algerian farm-out, another good piece of work albeit slow as ever there but value creating all the same. More on Petroceltic in due course but I remain most worried about the governance here following the removal of independent directors by Worldview.

And finally…

A brief lull in the sporting summer as we prepare for the final stages of the World Cup, tonight Brazil face Germany who are in their 4th consecutive semi-final and Brazil may now not be favourites which may not be a bad thing.

Alfredo Di Stefano is a name from the most famous of all players, even though just before my time he was a legend in that Real team who couldn’t lose.

And ‘Cashley’ Cole has signed a lucrative contract with Roma having fallen out with Chelsea, not quite far enough away for my liking…

And a great end to three days of the Tour de France as hundreds of thousands lined the route to London and gave better support than that exists in France I understand.