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.
tagsOIL AND GAS
General Information Only
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.
Conflicts of Interest Notice
S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.
Publication Notice and Disclaimer
The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.
Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.
This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.