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Farm-in Agreements Explained

Published 16-FEB-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.

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S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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