Tamboran Resources Ltd (TBNRF)

[Ebenezer3]

Very interesting Seeking alpha article:
What We Talked About Today: Falcon Oil & Gas, Tamboran Resources, And Bryan Sheffield In Beetaloo Shale Gas Play

Sep. 27, 2022 3:46 PM ETFalcon Oil & Gas Ltd. (FO:CA), FOLGF, TBNRFHP, OGFGF, OGFGY, PXD1 Comment
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Deep Value, Growth At A Reasonable Price, Natural Resources

Contributor Since 2015

As a natural resources industry expert with years of successful investing experience, I conduct in-depth research to generate alpha-rich, low-risk ideas for the member of The Natural Resources Hub (TNRH). I focus on identifying high-quality deep values in the natural resources sector and undervalued wide-moat businesses, an investment approach that has proven to be extremely rewarding over the years.

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Summary
This piece was first presented to The Natural Resources Hub members on September 19, hours after the breaking news of Origin Energy selling its Beetaloo stake.
The article was posted just on time for TNRH members to buy the steep, knee-jerky selloff and reap a 30% gain within 12 hours.
The article is reproduced here not only to highlight the exceptional value of our research to TNRH members but also because it is still valid for Beetaloo speculators.

EIA and ARI, Inc.

Today (September 19, 2022), Origin Energy (OTCPK:OGFGF) sold its 77.5% stake in the Beetaloo Basin JV, Northern Territory, to a 50:50 partnership between Tamboran Resources (OTCPK:TBNRF) and Bryan Sheffield.

Origin
Origin gets A$60 million ($40 million) upfront in cash, and a 5.5% royalty on future production of the Tamboran-Sheffield JV from the permits and the offtaking right to 36.5 petajoules of gas (or 34.6 Bcf) per year for 10 years. Given Beetaloo is yet to be fully delineated and has an uncertain development schedule, it is not an easy task to assess the value of the 5.5% royalty. As such, it is premature to judge whether Origin managed to extract a fair deal or had a fire sale.

Origin, like most oil and gas companies, is pivoting to short-cycle projects for immediate cash flow, despite its spin of a focus on renewable energy. For a large-cap producer, Origin must decide between a host of competing projects (including the lucrative Australia Pacific LNG and coalbed methane supply to APLNG), and Beetaloo as an exploration-stage venture probably ends up on the back burner in a shift toward short cycle capital spending.

However, Origin is committed to spending US$46.38 million in stage 2 and US$44.52 million in stage 3, following its takeover of Sasol interest in Beetaloo.

To resolve the conundrum, Origin decides to exit, as its CEO Frank Calabria put it:

"We felt given ... these are long-dated, they're in exploration phase, they'll be more capital intensive over time, that this was a good way forward for us in terms of getting the benefits of it without that capital intensity over time."

Origin's move should not be construed as lost confidence in Beetaloo shale gas play. Calabria allowed, "it doesn't change our view on gas. Gas is still going to play a critical role." Origin is also looking to exit from its exploration permits in the Canning Basin in Western Australia and the Cooper-Eromanga Basin in Queensland.

Tamboran Resources
After the completion of the acquisition, Tamboran will hold a 38.75% operated interest, Bryan Sheffield - ex-CEO of Parsley Energy, now part of Pioneer Natural Resources (PXD) - will have a 38.75% non-operating interest, and Falcon Oil & Gas Ltd. (OTCPK:FOLGF) will retain a 22.5% non-operating interest in the three permits (EP 98, 117 and 76).

Tamboran has committed to solely fund the remaining work commitment of Origin for Stage 3 farm-in, including two horizontal wells at an estimated cost of A$80 million and back costs to the effective date of July 1, 2022.
Tamboran Resources plans to raise A$138 million (US$89 million) at A$0.21 per share, which represents a 22.2% discount to the close price of September 14, 2022, to fund the acquisition of the Origin Assets and planned drilling program. The placement will include two tranches: The first tranche of A$39.2 million is not subject to shareholder approval, while the second tranche of $98.8 million will be subject to shareholder approval at a general meeting scheduled for October 25, 2022. Longview Petroleum, the largest shareholder (19.6% pre-raise), favors the equity raise. As to the resultant equity dilution, Tamboran CEO Joel Riddle said,

"No one wants to take dilution, of course. But when you look at the opportunity, by acquiring the Origin assets this is hugely accretive."

Some A$98 million will be raised in a private placement to strategic partners and US cornerstone investors. Of those A$98 million, A$31.1 million will be co-investment by Sheffield to acquire a 38.75% net interest post-completion; A$22.2 million will be grant to Sheffield of a 2.3% overriding royalty interest covering EP 136 (Tamboran 100%), EP 161 (Tamboran 25%) and the Origin Assets (Tamboran 38.75%); and an additional A$22 million (106.0 million shares) will be raised from Helmerich and Payne, Inc. (HP).
Tamboran has completed an additional equity raising of ~A$40.0 million, and intends to undertake a non-underwritten share purchase plan aiming to raise ~A$3.0 million or no more than A$5.0 million after oversubscription, at A$0.21 per share, on the same terms as with the strategic investors.
In exchange for its A$22 million strategic investment, Helmerich & Payne gets a firm drilling contract for the 2023 proposed drilling campaign, under which it will mobilize a super-spec FlexRig® for a two-year term. In addition, the drilling contractor will have the right of first refusal until 2033 to provide all subsequent rigs required to develop Beetaloo. Helmerich & Payne essentially blocks out any competitors that aspire for a piece of the Beetaloo pie.
Upon closing the acquisition, Tamboran will emerge with a dominant position in the Beetaloo play (Fig. 1; Table 1). Underpinned by the offtaking agreement locked in with Origin, Tamboran plans a pilot project with a proposed drilling campaign in 2023, looking to sanctioning of the proposed Amungee pilot development by the end of 2023 and produce first gas in 2025.

It is worth noting Tamboran will focus on the Amungee permit acquired from Origin, not any permits it previously held. That confirms our favorable view of the Falcon permits.
A map showing permits in the Beetaloo Basin, NT, Australia
Fg. 1. A map showing permits in the Beetaloo Basin, NT, Australia (Falcon Oil & Gas)

Tamboran Resources corporate overview
Table 1. Tamboran Resources corporate overview (Tamboran Resources )

Bryan Sheffield
Sheffield Holdings LP - the investment firm of Bryan Sheffield - has investment in Falcon as well as Tamboran:

Sheffield Holdings recently boosted its stake in Falcon to 90,443,607 common shares (8.66%), by investing an additional US$10 million at C$0.20 per share. Sheffield also paid an additional US$6 million to Falcon for a 2% overriding royalty interest (or ORRI) over its 22.5% interest. Falcon used the US$6 million to exercise call option so as to reduce the existing ORRI with the TOG Group from 3% to 1%.
Sheffield Holdings held 69,540,970 common shares (9.3%) in Tamboran as of February 2022. Sheffield has committed to acquire 141.1 million shares for A$30 million, which takes his total number of shares in Tamboran to 214.1 million (15.2%).
It typically takes up to 5-7 years for a PE firm to launch or turn around an operation and shepherd it to profitability; but it usually takes a decade or longer for an entrepreneur to build a company. Sheffield, as a company builder, may have a time horizon even longer than any PE firms. That is something we retail investors should bear in mind in understanding Sheffield's strategic intention.

Sheffield has patiently built up a significant position in the Beetaloo play. The important question is whether he will exert his power as a major shareholder to intentionally depress the share price of either Falcon or Tamboran in an effort to accumulate more shares. I believe the primary focus of Sheffield at this time is likely to be uniting various parties and attracting more participants in the Beetaloo play, rather than squeezing out existing partners.

Falcon
Falcon - first mover in the Beetaloo play - holds a 22.5% interest in 4.6 million gross acres in permits EP76, EP98, and EP117 in core Beetaloo play (Fig. 1).

Under the terms of the joint operating agreement, Falcon has a right of first refusal to notify Origin, with 30 days of any proposed change of control, its intention to acquire the 77.5% stake held by Origin. Falcon has not decided on if it will use its ROFR although I do not believe it will.

Falcon is being carried up to A$263.8 million on gross costs for stage 2 and stage 3. Thanks to the carry, Falcon will subject shareholders to less equity dilution than Tamboran.

I believe Tamboran (the operator), Falcon (non-operating partner), Origin (royalty holder through Tamboran) and Sheffield (equity investor in both Tamboran and Falcon and royalty holder via Falcon) can have a constructive relationship. Multi-party joint ventures are a common practice in the oil industry since its infancy.

Near-term catalysts and risks
In the remainder of 2022, Tamboran will drill vertical well Maverick 1V in EP 136 and horizontal wells Amungee 2H/3H in EP 98 near the existing McArthur River Gas Pipeline infrastructure. Maverick 1V will potentially increase the total net 2C contingent gas resources to ~2.0 Tcf.

In 2023, Tamboran plans to drill, fracture stimulate, and flow test those two horizontal wells in EP 98, with a potential of delineating net 2C contingent gas resources of ~2.9 Tcf and booking ~0.7 Tcf 2P gas reserves underpinned by the 10-year, 34.6 Bcf/year offtaking agreement with Origin and sanctioning of the proposed Amungee pilot development in EP 98.

By 2025, Tamboran targets to book ~5.0 Tcf net 2P gas reserves via a proposed 2.2 Mtpa LNG tolling agreement.

The above are supposed to de-risk the Beetaloo project and drive the appreciation of Tamboran and Falcon share prices.

Investors are exposed to multiple risk factors, including the inevitable subsurface uncertainty and lack of infrastructure, which I discussed more fully in a previous article. Anyone who does not have a time horizon longer than 5-7 years may not be in Beetaloo since it takes a lot of patience to watch the investment thesis to work out over a lengthy period of time. Both Falcon and Tamboran do not trade on a major U.S. exchange; they trade in the U.S. on the OTC board, where liquidity may be limited.

Investor takeaways
The transaction between Origin and Tamboran-Sheffield has changed the competitive landscape in the Beetaloo Basin. The deal does not diminish my bullishness on this emerging shale gas play. Origin exits to pursue shorter-cycle projects, not out of a disappointment at the subsurface geology, and apparently not in a fire sale. From now on, Beetaloo will not be competing for capital and manpower with other projects on Origin's portfolio since it will be the sole focus of Tamboran. As a result, project execution will likely be accelerated.

Tamboran is going all out with Beetaloo, hoping the shale play to be its company maker. In contrast, Falcon is being carried in the foreseeable future, thus exposing shareholders to lower risk.

I have a long-term hold position in Falcon, which I plan to continue to hold. Should the market offer Falcon shares at a bargain price, I may even add to it.
However, those who are still on the sidelines may also consider Tamboran as a speculative bet on an opening shale gas province.
Disclosure: I/we have a beneficial long position in the shares of TNRH Live Portfolio either through stock ownership, options, or other derivatives.

Additional disclosure: In any case, please be reminded that it is your personal call to decide whether and when to invest in any securities. You risk losing money by deciding to invest in any securities. I fully disclose my positions but I may change my holdings anytime in the future without prior notice. My time horizon and risk appetite may differ substantially from yours. In addition, I am not an investment advisor; nor do I pretend to be giving anyone any investment advice; this article and any other articles written by me just reflect my opinion derived from my research based on the publicly available information. You should consult a certified investment advisor and take full responsibility for your investment decisions.


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