Falcon is an international oil and gas exploration company with a portfolio of assets in Australia, South Africa, and Hungary. The group is focusing on developing so-called unconventional assets.

These are typically defined as prospects where the resource can’t be extracted economically through a vertical well. To extract oil and gas, producers therefore have to use hydraulic fracturing. 

Unconventional assets

Hydraulic fracturing, or fracking, can be an efficient way of extracting resources. Some large US shale oil producers achieve huge returns on their drilling investments when wells start flowing. But in many cases, these companies benefit from existing infrastructure in the region where they are drilling. 

Falcon is concentrating its efforts this year on the remote Beetaloo Sub-basin in Australia. This is a relatively underexplored onshore basin of the Proterozoic age within the larger McArthur basin.

Earlier this year, the group outlined what it called an “exciting work programme” for the remainder of 2021 at this prospect. The work programme covers three different plays across the Beetaloo basin, designed to help determine the company’s future appraisal and development plan. 

As part of this programme, Falcon moved ahead with testing its Amungee NW-1H well. The results from this well were announced at the beginning of September. They were incredibly positive, suggesting a normalised gas flow rate equivalent of between 5.2 to 5.8 MMscf/d per 1,000m of horizontal section. The stock jumped 200% on this news. 

Along with the company’s joint venture partner, Origin, Falcon is now working on the following stages of this prospect. 

Since the firm issued this update, the company has issued further positive updates from its Velkerri 76 S2-1 Well, which were “very encouraging“.

Falcon share price risks

Falcon set out in 2021 with a fully-funded exploration programme, and it looks as if the company has achieved what it wanted to. Further testing and development will be required before the corporation can reach the production stage. 

As of yet, the group is not producing any revenues or profits. This is concerning. Developing oil and gas prospects can be incredibly expensive and time-consuming. Although Falcon’s programme for 2021 was fully funded, at this point, it is not easy to estimate the company’s funding requirements for the next few years.

This is probably the biggest challenge facing the group today. It needs money to start production. Teaming up with Origin will help alleviate some of the strain, but it will not remove all of the financing risks. 

As such, I think this is a high-risk investment. It may not be suitable for all investors for that reason. What’s more, I do not believe it will fit into my portfolio, considering the risks and uncertainties of oil and gas exploration.

That is why I will not be buying the stock after its recent declines. 

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. 

Falcon soars

On 27 January, in the middle of the oil stock rout, I said that Falcon Oil And Gas (LSE: FOG) looked tempting for those who are bullish on the oil price recovery, concluding that: “There’s a strong bull case to be made, but only for speculative investors.” I hope you speculated. At the time, it traded at 5.5p. Today you pay 8.5p, a rise of 55%.

I admired Falcon for its high-quality assets, fully-funded Australian drilling programme, and debt-free balance sheet, which also boasted $9.8m in cash. Rather than drilling through its cash pile, like many other explorers, Falcon has been adding to it and it totalled $12.7m at year-end. Costs are under control, helped by a successful campaign of slashing administrative expenses, which fell 38% last year from $4m dollars to $2.5m. All this and $50 oil too! If you believe oil is due another leg up, Falcon could be a safer way to play it.

Petro flops

Oil services specialist Petrofac (LSE: PFC) is a rare damp squib in a sector that has been on fire lately, so what went wrong? Scandals never help, and Petrofac has been embroiled in a global bribery scandal, following claims a former executive paid $2m to clinch a major oil deal in Kuwait. It was also hit by results in March showing a sharp drop in annual profits due to delays and cost overruns at its Laggan-Tormore plant.

Last year, it booked a huge $430m charge on the project and last month announced a further charge of £70m, but at least this is a final settlement and should draw a line under the saga (at a total cost of $800m). With a strong order book, valuation of around nine times earnings and yield of 5.74%, Petrofac looks poised to start playing catch-up.

Here Weir goes

Glasgow-based pump maker Weir Group (LSE: WEIR) hit a low 807p in January, but today trades at 1,185p, a rise of 47% for those who bought at the very bottom. This offers much-needed relief as the company had been through a torrid time due to falling demand from US shale clients, which also knocked its supposedly resilient after-sales market. US rig count is now down from a peak of more 2,000 to around 300, so the future still looks challenging.

Everybody is waiting to see what will happen to shale if the oil price climbs higher. Will flexible drillers swing back into action? If so, Weir could fly even higher. HSBC recently upgraded the stock to buy saying it’s particularly sensitive to the oil price, and will do particularly well if the oil price continues to climb. Trading at 13.7 times earnings Weir is no longer that cheap, but the yield compensates at 4.97%.

Soco Could Go

Vietnam-focused Soco has endured a tricky year, its share price falling 50% in that time. Last time I checked it out, in November, it had just published a disappointing production update showing that its H5 well producing just 9,000 barrels of oil equivalent per day (boepd), against initial hopes of as much as 12,000. That knocked 16% off its share price, although it was hardly panic stations, with solid forecast revenues of around £140m for 2016 and pre-tax profits holding steady at around £38m. 

A new trading and operations update has delivered more positive news, with a year-end cash balance of $104m with no debt, despite a generous $51m dividend splurge last June, and capex totalling $82m. Net production (including its TGT field) averaged 12,000 boepd realised at an average price of $54 a barrel, bringing in $215m of revenues. Better still, cash operating costs were under $10 per barrel.

Story Time

Chief executive Ed Story had a good tale to tell, with “low cost production, no debt and our disciplined approach to capital allocation”, which he claimed puts Soco is in a good position to weather a prolonged industry downturn. Markets broadly welcomed the news, with its share price up nearly 7% in the last week, although today’s 136p it is still well below the stock’s 52-week high of 134p.

Management is talking of being “frugal”, which is sensible right now, and the next dividend payout is unlikely to be as generous as the last one, but forecast earnings per share growth of 54% this year looks promising, and Soco’s low production costs give it a cushion in case oil falls further.

Falcon May Fly

Falcon Oil & Gas is down 26% over six months but in November I said it was more promising than most oil explorers and it still looks that way today. I was encouraged by its drilling success in the Beetaloo Basin, Australia, with positive early results from its nine-well programme indicating favourable shale properties and excellent gas shows. Falcon is also debt-free, with $9.8m in cash. Experienced partners Origin and Sasol supply much-needed expertise in unconventional shale and gas to liquids

High-quality assets and a fully funded drilling programme do not guarantee success in today’s world, especially with analysts warning that natural gas is next to collapse. Falcon management is also being frugal, with expenses falling by 41% in the nine months to September 30, at US$1.8m. Broker FinnCap just named it a buy with a target price of 23p, which suggests a potential upside of 460% on today’s 5p.

Both Soco and Falcon look tempting for those for those who are bullish on the oil price recovery, especially since both seem equipped to survive if the price stays lower for longer. There is a strong bull case to be made, but only for speculative investors.

That Petrofac Emotion

As far as oil sector stocks go, Petrofac (LSE: PFC) has had a decent year. Its share price is down just 6% over the last 12 months, a relatively solid turn in this blighted sector. It has been shielded by its success in winning new business, securing an extra £6bn of projects and taking the group’s backlog to a record $20.9bn. This includes November’s contract win to build a sulphur recovery plant for Saudi Armco.

This doesn’t mean Petrofac can withstand cheap oil forever, especially given major investment in flagship projects, such as its billion dollar offshore installation barge. With revenues forecast to top £5.07bn next year, up from £4.54 in 2015, the future looks pretty bright, especially given the cost-cutting and project scrapping across the oil and gas sector. Earnings per share look set to soar a massive 177% next year, as pre-tax profits rise from £150m to £391m. Imagine what a rise in the oil price would do.

It would certainly turbo-charge the share price. Despite its impressive recent performance, Petrofac trades at an affordable-looking seven times earnings. Its yield is a rewarding 5.5% and unlike other dividends in the oil sector, it looks pretty safe, comfortably covered 2.6 times.

Time To Swoop?

Last time I looked at Falcon Oil & Gas (LSE: FOG) I thought it was more promising than most oil explorers after its recent drilling success in the Beetaloo Basin, Australia. Its nine-well programme runs until 2018 and last week it reported encouraging preliminary results from the drilling of the first three Australian wells, which indicated “favourable shale properties with excellent gas shows indicating the likelihood of high levels of gas saturations”.

Falcon is debt-free, with $9.8m in cash. Chief executive Philip O’Quigley has also highlighted the company’s “strong cash position, fully funded drilling programme and high quality assets”, which bodes well for 2016. The oil industry may be in a fog, but Falcon’s future is clearer than most. That said, the share price is down 32% in the last six months, so plenty of risks remain.

So Xcited

This has been a tough year for AIM-listed oil appraisal and development company Xcite Energy (LSE: XEL). At today’s 18p, it is well below its 52-week high of 44p. Its flagship Bentley heavy oil field in the Northern North Sea looks exciting on paper, with “proved plus probable reserves” worth $2.3bn. In a retrenching industry, securing development partners and financing to develop the field is proving challenging. The only upside is that falling industry costs should reduce its outlay if it can find the funds to drive the project.

Q3 results showed a net loss of $0.3m to 30 September, but that is down from $4.3m in Q3 last year. Its cash balance is now $27.9m, slipping from $34m at the end of June, so it still has some breathing space. What it needs is a partner, but suitors are in short supply in today’s market. Xcite says it has completed technical and economic due diligence with a potential partner, which has now moved towards commercial discussions, but nothing has been firmed up yet. Xcite would be risky at the best of times, and these certainly aren’t the best of times.

Over the last year OPEC, or rather swing producer Saudi Arabia, has collapsed the oil price to $45 to punish the US for threatening to become energy self-sufficient thanks to shale. This risky strategy is hurting fellow OPEC members, slashing their annual income from around $1 trillion a year to $550 billion, and even Saudi itself, which has been cutting state spending and issuing bonds to cover the lost income.

Black Gold

Saudi will come under massive pressure to shift its supply stance at the next OPEC meeting in December. If it caves into external – and internal – pressure smaller oil explorers will breathe a sigh of relief. As will the investors who hold their beleaguered stocks.

Pricier oil can’t come too soon for North Sea heavy oil appraisal and development company Xcite Energy (LSE: XEL). Trading at 20p, it is well below its year-high of 54.50p. Few are quibbling about the quality of the assets in its flagship Bentley oilfield, or the quantity, for that matter. The problem is raising the investment it needs given frazzled oil investor nerves.

Future Shock

Xcite reckons it can still pump up black gold with projected costs of $35 a barrel, but the margins are becoming thinner every time oil falls. If OPEC does gift the industry a higher oil price in December, Xcite might find it easier to fund its planned mobile offshore production unit, floating storage and offloading vessel. This week’s tie-up with Azinor Catalyst will help to de-risk the project as its new partner will take on many of the costs, but production and profits are still years away. Where will oil be then?

Falcon Oil & Gas (LSE: FOG) looks more promising than most oil explorers following its recent drilling success in the Beetaloo Basin, Australia, where it retains a 30% stake with co-venture partners Origin and Sasol. With no debt and a nine-well programme running until 2018, this looks safer than many in the sector, and an OPEC-fuelled leap in the oil price could lead to a spike in its share price as investor confidence returns. Less risky than most, but still risky.

Premier League?

Investors in Premier Oil (LSE: PMO) will grab any gift from OPEC with both hands, as the share price continues to tank, down 13% in the last week alone. Like every oil company, it is slashing capex and production investment to stay afloat, although the hit to production may be mild as Solan development is now complete and Premier has limited committed expenditure beyond its ongoing Catcher project.

As chief executive Tony Durrant pointed out this week, Premier also benefits from stable production and valuable hedging contracts. Barclays reckons it can “navigate a prolonged sector downturn” despite its growing debt levels, but says there are more compelling investment opportunities elsewhere. OPEC could change the market’s view of Premier in a moment. For that we must wait until its meeting in Vienna, Austria, which begins on 4 December. The world will be watching.

Shell Sinks

Shell’s write-offs have cleared most of the bad news out of the way, but it doesn’t resolve the underlying problem of the oil price collapse. Like BP,  downstream profits are holding up, but cheap oil has cost Shell billions in upstream impairments, redundancy, restructuring, abandoned projects, not to mention its Napoleonic retreat from the frozen wastes of Alaska.

We often talk about juicy yields on the Fool. Shell’s looks positively succulent at 8.71%, but unless oil dramatically reverses its collapse, it could leave a nasty aftertaste. Shell will do everything to maintain its proud post-war dividend record but, like Napoleon, it may finally meet its Waterloo. I have no idea where oil is going next but it needs to move upwards fast or Shell will end up going nowhere.

Falcon Swoops

Falcon Oil & Gas (LSE: FOG) has shown forward momentum lately, its share price defying wider market worries to rise 8% in the last month. Smaller oil explorers are mostly hurting in an era of cheap oil, but Falcon is flying on recent drilling success in the Beetaloo Basin, Australia, where it retains a 30% stake with co-venture partners Origin and Sasol. Better still, Falcon is fully carried for all 2015 drilling and evaluation costs.

Further success could drive the price higher, and Falcon has decided to start horizontal drilling at the site in the coming weeks, a year sooner than planned. With six more projects across Hungary and South Africa, investors have plenty to pin their hopes on.

Falcon looks attractive with no debt and a nine-well programme running until 2018. Better still, at 7.25p it is still trading well below its year-high of 10.75p. It may look like a rare point of light in a dark and troubled sector, but it remains risky. Last summer Charles Stanley called Falcon a buy with a target price of 19.7p. Ouch.

Premier Or Championship?

Last time I looked at Premier Oil (LSE: PMO) it was up 30% in a month on a more positive outlook for the oil price. Sentiment has slipped since then, and so has Premier. Its share price has now halved in the last six months. Oil needs to hit at least $60 a barrel to revive Premier but the signs don’t look good, and Goldman Sachs is predicting a rough start to next year as well.

Premier is on course to make a pre-tax loss of £95m this year, but that is forecast to convert into a £53m profit in 2016. As we have just seen, a slight rise in the oil price equals a sharp rise in Premier’s share price.Trading at just 67p, well below its year-high of 262p, this is a tempting buy for oil bulls. The problem is that nobody knows where the oil price will go next. Gambling is absolutely fine, as long as you only do it with a small chunk of your portfolio.

Last week’s news from Falcon Oil & Gas (LSE: FOG) was brilliant for the company. Falcon announced that partners had drilled another successful well in the Beetaloo Basin, Australia. On the back of another successful well, the shares rose up more than 30%; following this, the third well of the campaign is being brought forward by 12 months (Falcon is in the middle of a nine-well campaign over three years). The company has no expenditure and lots of exposure to drilling and, due to this, is one of my top picks in the sector. Recently the shares have been trading at 52-week lows, but any more success in the drilling campaign should cause the shares to re-rate. 

Premier Oil (LSE: PMO) is still struggling after taking large write-downs on various assets. Subsequently, the shares are performing in the bottom half of its peer group. The company will make another loss this year, and I don’t think the situation will get better any time soon.  Operating primarily out of the North Sea is also a negative in my view, due to the high costs involved. The balance sheet doesn’t look good, and although debt covenants have been moved back, the company needs oil to gain a few dollars in order to make a return.

Enquest (LSE: ENQ) is very similar to Premier Oil and needs an oil price of above $60 to really make a profit. Revenues are 12% down in H1 2015 even though the company increased production by 17% to 29,665 boepd. The company has some exiting developments to come on-stream in the next few years, but it looks as if Enquest needs the oil price to rise quite substantially. The balance sheet isn’t very healthy with a net debt of $1.28bn, but it can afford to wait it out and won’t be in any danger of breaching debt covenants. Production is forecast to reach between 33,000-36,000 by year-end with Alma/Galia coming online, and this should help the company keep revenues up. 

Investing in the oil & gas sector is risky at the moment but the reward is huge. In the case of Falcon Oil & Gas, I think it offers one of the best investment cases in the sector. The company has no large capital expenditure for years, and has exposure to the high-impact drilling campaign of which the first two of nine wells have been successful. Even after the share price rose last week on the back of good well results, I believe Falcon is a good bet for the future and should outperform.