Fracker Falcon Oil & Gas hunts a major payday for investors

Philip O’Quigley, the chief executive of Falcon Oil & Gas, leans back in his chair on the balcony outside his Dublin office, balancing it momentarily on two legs. It’s a scorcher out, as he pensively casts his eye across the city sparkling below in the sunlight.

“You know, people haven’t invested in Falcon for a nice, steady dividend,” says the Carlow accountant, bringing the four legs of the chair back to terra firma.

O’Quigley is at times a likeable, jocular sort of character. Facetious, even. To his credit, he doesn’t get all tongue-tied in corporate babble talk, although he clearly strives to say the right things, even when he’s got that twinkle in his eye.

But he’s as serious as stone as he lays out his plan for Falcon, the would-be fracker that is the latest darling of the Irish small-cap exploration circuit, an industry that has often flattered to deceive in this country.

“Shareholders don’t want to wait 20 years for a payback. We’re setting ourselves up to sell. Ultimately, that’s what we want to do. Shareholders want a big return and they want a quick return.”

No pressure, then, as he might say himself in one of his more whimsical moments.

The company is chaired by industry veteran John Craven, who sold Cove Energy for £1.22 billion (€1.7 billion) in 2012. Falcon is his next big hope. O'Quigley was the chief financial officer of Tony O'Reilly Jr's Providence Resources until Craven came calling following the Cove deal. They go back more than 20 years.

Craven aside, Falcon, with a market capitalisation of €134 million, has some big-time backers. Its biggest shareholders include Viktor Vekselberg, according to Forbes the fourth-richest Russian oligarch with a fortune of $14.2 billion.

Immediately after our interview, O’Quigley was due to head straight to the airport for a two-week mini roadshow visiting investors across Canada, where Falcon has its origins, and the US.

Local farmers

He is also due to spend the last two weeks of this month in South Africa. Some of that time is allocated to listening to the concerns of local farmers who are dubious about the possibility of future fracking – the process of injecting liquid into rocks far underground to release built-up fuel.

Falcon is Canada-domiciled, Dublin headquartered, and London, Toronto and Dublin-listed, so O’Quigley spends much of his time travelling. The company also has three distinct fracking plays on three different continents: in Australia, South Africa and Hungary.

Its most exciting bet is a 30 per cent stake in a licence covering a swathe of the Beetaloo Basin in Australia. The area is the size of Wales. The operator of the fracking project is Origin, which owns while 35 per cent. South African company Sasol owns the other 35 per cent. Drilling, which will cost Falcon nothing for the first five wells, has just started.

All this corporate globe trotting is a long way from O’Quigley’s youth, studying commerce in UCD and working summers on local farms in his native Carlow.

He trained as an accountant in Ernst & Young and his first proper job was in a would-be IFSC bank, but O'Quigley maintains he was always destined for a career in resources. One of his college lecturers was John Teeling, the veteran industry investor.

“I got my first trading account in Davy stockbrokers when I was in college, back in the days when you could walk in off the street and hand money over the counter. I bought resource companies.”

Drilling projects

He worked for several years in a resources business owned by the IFG group, raising funds for development drilling projects. He also had a stint in the mining company, Glencar.

In 2006, O’Quigley was appointed as finance director of Petroceltic, where Craven was then chief executive. The company was trying to develop an asset in Algeria, which almost a decade later still accounts for the bulk of its value.

O’Quigley left after less than a year, and once jokingly told another interviewer he would explain the circumstances of his departure “after a few beers”.

So, will we got for a pint and you can tell me why you left Petroceltic?

“We’re on water today and I’ve given up beer... We’re not going there.”

After Petroceltic, a stint followed helping a South American-focused resources outfit, Andes Energia, float in London, before O’Quigley joined O’Reilly at Providence in 2008. He left in 2012 when Craven asked him to run Falcon, although he still sits on Providence’s board.

Falcon's legacy asset is in Hungary, which it seems likely to sell off at some stage in the future. Prior to O'Quigley's appointment, Exxon Mobil was its partner in a Hungary exploration project , but quit in 2010 after a dry run with the drillbit. Falcon lost a fortune, prompting the restructuring that O'Quigley was brought on board to oversee.

The current juice in the company’s bottle is Australia. O’Quigley sealed a 200 million Australian dollars (€135 million) deal to bring Origin and Sasol on as partners ast year, after refusing an extension for Hess, its previous partner, to decide whether it would fund a drilling programme.

Hess walked away in 2013 from the Beetaloo project after spending $80 million on Australia’s largest-ever seismic programme, which Falcon got for free.

In some parts of the industry, Falcon’s eyeballing last year of the US giant, which has a market capitalisation of almost $19 billion, was seen as a gutsy move. O’Quigley seems rather chuffed at that description.

“Hess came to us within 24 hours of the ‘drill or drop’ date having given us positive indications, but said they wanted an extension. I gave a gasp down the line.”

Hess wanted more time to bring on board another partner, but Falcon could have been left twiddling its thumbs while it waited on a deal to be struck. “I asked what was in it for Falcon. I had a veto on a new partner, and we didn’t know how long their discussions might take. But I actually didn’t think they’d walk away.”

O’Quigley consulted with the board, and the company remained convinced of the technical merits of the Beetaloo exploration project, which potentially holds large amounts of oil and gas. He decided to call Hess’s bluff.

He concedes, however, that he had a few “oh sh*t” moments as he tried to get a deal over the line for a replacement partner.

“I woke up a few times afterwards and thought: ’What have I done?’ It was a board decision, but my neck was on the line.”

Within a few months, he says, he had four written offers to replace Hess. Falcon started working on the Origin deal over Christmas, and it was announced last May.

’Key attributes’

Origin is committed to drilling three wells by the end of October, as it searches for “key attributes” in the shale that it hopes contains commercial quantities of hydrocarbons. Next year, it will drill a vertical and a horizontal frack well.

At that stage, Origin and Sasol can walk away if they don’t think it is worth further investment. Or they can go forward into 2017 and test the project further.

So, what if they walk away?

“It will be a bad day at the office. We’d get a small payment and you’d look to farm it out again, but it would be on a totally different dynamic. We’d be trying to salvage something.”

Falcon’s South African project is at a much earlier stage.

It has a technical permit to assess a large shale gas prospect in the much-vaunted Karoo basin, and the company hopes to be awarded an exploration licence by the end of the year. Chevron, another US giant, is currently its partner.

The South African government has been mindful of local opposition to potential fracking, and is carefully crafting the requisite fiscal and exploration terms. O’Quigley, perhaps mindful of the diplomacy required when dealing with a government faced with a sensitive issue, is careful what he says.

But he seems genuinely positive about how things are progressing and is deliberately effusive in his summation of the government’s handling of the matter, which he describes as “very smart”.

“Debate [over fracking] is healthy and we try to give people as much information as possible. But a lot of people don’t trust oil and gas companies,” he says, with a delicious twist of understatement.

Falcon’s philosophy, as enunciated by O’Quigley, is “get in early, work an asset up from a science point of view, farm it out, and then sell what we have”.

The company is currently looking at “two or three” options for its next project, with South America a likely destination.

“We won’t apply for licences, but we might look at licences currently held by others, who might not be able to fund it themselves.”

Falcon could, he says, do a “corporate deal, and take over another company” to get its hands on new licences.

“Or we might find someone with an asset that doesn’t fit their portfolio, and we might try to do a deal on it.”

Future prospects aside, many observers assume Falcon will get out of Hungary. That leaves it with decisions to make on its Australian and South African assets. If all goes well in Australia, it could sell its assets there within three years. O’Quigley says there is no point in selling until its free “carry” on the first five wells is over.

“2015 is all about checking the technical attributes. 2016 is all about checking the frackability of the shale. 2017 is all about checking if it’s commercial. When we get to that point, that’s when the industry might take some more notice.”

O’Quigley says it is likely a development decision will have to be taken on Beetaloo in 2019, and that’s when it steps up into the billions of dollars required.

“Somewhere before that point, Falcon will exit. Possibly in 2017. We’ll entertain offers, but they would have to be sizeable.”

A payday on its South African asset could follow three years after Australia, if all goes well. That is a very big “if”, however. There are many hurdles to clear before Karoo gets far enough down the track. But O’Quigley is sanguine.

“We might sell the company, or we might sell off the assets on a phased basis, asset by asset in a tax efficient way. Do I want to be here in 10n years time running Falcon? No. But it won’t be here as a company.”

Stepping back in from the balcony, interview finished, I admire the statue of what appears to be a majestic falcon – sure what else would it be? – perched on a mahogany table in O’Quigley’s office.

The rather grand furniture, he says, was left over from its previous head office in Canada. O’Quigley had it shipped over to Dublin when he undertook the restructuring. It is a salient reminder of Falcon’s difficult past, while O’Quigley marches it into what he hopes is a brighter future.

CV
Name: Philip O'Quigley
Position: Chief executive of Falcon Oil & Gas
Age: 51
Family: Married, three kids.
Something about him you might expect: "I average up to 20,000 air miles a month."
Something that might surprise: "I cook for relaxation. That'll surprise some people. As will the fact I'm from Carlow."