Official developments should see progress in South African operation

DAVY VIEW - October 14 2013

Karoo is third area of unconventional gas interest

Falcon Oil & Gas has unconventional projects in three regions: Europe, Australia and South Africa. So far, news has centred on the European and Australian projects but there are some indications that activity may not be far off in its South African project.

Falcon has a technical co-operation permit covering some 7.5m acres in the south-west Karoo Basin. Work on this project was frozen in February 2011 following a moratorium by the South African state on processing of applications to exploit shale gas in the Karoo Basin. In September 2012, a decision was taken to lift this moratorium subject to the publication of new regulations governing the exploitation of oil and gas resources. The cabinet approved the new regulations on October 9th and the regulations have been gazetted for a 30-day period during which public consultation can take place.

Chevron agreement

In December 2012, Falcon agreed with Chevron to enter into an exclusive co-operation agreement. The agreement applies for five years and addresses joint efforts to obtain exploration permits. Our working assumption is that Chevron will at some stage become involved in the conversion of the existing technical co-operation agreement held by Falcon to a full exploration licence. From a market perspective, the commercial terms that will apply to such involvement by Chevron will be a benchmark value for the acreage position held by Falcon.

We value the stock at 17.4p per share, an estimate that includes a 4.8p contribution for its large South African acreage position. We suspect that the market has for the most part applied only a nominal value to the South African project, so progress in this region should lead to improved price performance.

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