The Falcon Oil & Gas (LSE: FOG) share price has been on a bumpy ride over the past year. In the last 12 months, shares in the hydrocarbon company have declined by around 30%. However, following a sudden spike at the beginning of September, the stock is off just 5% year-to-date.
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.
