Is time running out to buy Falcon Oil & Gas Ltd after 40% surge?

Shares in Falcon Oil & Gas (LSE: FOG) are surging higher today, continuing a run that began on Wednesday after the company said drilling results from its Beetaloo Basin project in Australia’s Northern Territory indicate a material shale gas resource at the site.

Since issuing this news, the company has also participated in an investor Q&A on its discovery, which has helped shed more light on the prospect and what it means for investors. 

An enormous prospect 

According to the Q&A and the data published by the firm mid-week, the 16k square kilometre (around the same size as Wales) Beetaloo Basin prospect holds a prospective 496trn cubic feet of shale gas, which works out at around 82bn barrels of oil equivalent. However, these figures are ‘best case’ numbers and the potential recovery figure is only 85trn cubic feet, around 16% of the total. 

Of this, 6.6trn cubic feet has been classified as contingent resource across an area of just 2k square kilometres. Contingent resources are estimated to be potentially recoverable from known accumulations based on current assumptions. 

On the road to growth 

These figures are fairly vague and there’s still plenty of work to be done to confirm that the resources below the surface can actually be extracted profitably. Still, it’s very clear Falcon is sitting on a huge resource base and the market is marking the shares higher as a result. 

That being said, it could be years before Falcon begins production or generates sales. Oil & gas exploration is a notoriously unpredictable, time consuming and expensive business and while Falcon may look well positioned to extract profit from its massive discovery today, over the next few years the company may struggle to turn its dreams into reality. 

With such an unpredictable road ahead, there’s no need to rush to buy shares in Falcon. In fact, the company’s larger more established peer Genel Energy (LSE: GENL) may be a better investment as it has a more predictable outlook. 

A solid bet on oil prices 

I believe Genel is one of the best and most conservatively run oil companies trading in London today. As the oil industry has grappled with a cyclical downturn during the past few years, Genel has been able to escape most of the industry’s troubles thanks to its cash rich balance sheet and low production costs. What’s more, the group’s experienced managers have proved to be a steady hand on the tiller during these stormy times. 

Indeed, during 2016 to conserve cash in lean times, Genel cut capital spending to a range of $90m to $110m but thanks to better than expected cost savings, spending came in at $61m for the year. For 2017 capex is expected in be in the region of $125m, although based on past performance I wouldn’t rule out a lower figure at the end of the year. 

To fund spending, as well as cash generated from operations, Genel reported an unrestricted cash balance of $408m at year-end. Company production guidance for the year is 35k to 43k bopd. 

Unfortunately, City analysts aren’t expecting Genel to report a profit until 2018 but rising oil prices could change this forecast. And if the company reveals better than expected numbers over the next few months, the shares could quickly re-rate higher. Put simply, time could be running out to buy Genel.