Farm-in Agreements Explained

  Educational Article

PUBLISHED: 16-02-2022 16:27 p.m.

1 minute read

Oil and gas exploration is expensive.

Generally starting from $10M for on-shore drilling, some oil and gas drilling can cost up to $100M - like Pura Vida’s $137M deep offshore drilling in 2014.

Cost depends on a lot of factors, such as the accessibility of the drilling location (onshore/offshore), the depths that need to be drilled down to and the risks involved in drilling.

Whilst the rewards are high, this expense can make or break a project, and companies don’t always want to tap the public markets for dilutive funding.

This is where a farm-in agreement comes into play.

A farm-in agreement is a partial sell-down in ownership of the project in exchange for exploration funding.

Often, company’s will look to sophisticated financing partners looking to ‘farm-in’ to the project so that exploration activities can be supported.

It is important to find the right farm-in partner, with expertise and track record of success in a particular area.

Financing can always be secured through debt or capital raising, expertise and experience on the other hand is unique and hard to find.

Farm-in agreements mitigate the ‘finance risk’ of a project.

The ideal farm-in agreement is where the company decides to fund the entire cost of the exploration in exchange for 50% (or less) of the project.

If this is the case, the company is ‘free carried’ into exploration and gets a ‘free hit’ on the exploration drill.

Company’s may have the opportunity to ‘buy back’ the portion of the project that has been farmed-out, as was the case with our investment 88 Energy (ASX:88E), with its Alaskan oil and gas project.