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https://seekingalpha.com/article/4504434-beetaloo-shale-australia-marcellus-play-falcon-origin-focus. The Emerging Beetaloo Shale: Why It May Be Australia's Marcellus Play; Falcon, Origin In Focus
Apr. 28, 2022 9:30 AM ETFalcon Oil & Gas Ltd. (FOLGF), OGFGF, FO:CAEEGUF, IPXHF, IPXHY, OGFGY, STOSF, TBNRF25 Comments
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Summary
The Beetaloo Basin in NT, Australia, is emerging as the most exciting shale gas province in the world. It is poised to become Australia's Marcellus shale play.
In this article, I first presented a review of the Beetaloo shale gas play: what it is, and why it has enormous potential.
I next analyzed the competitive landscape in Beetaloo, and then went on to name what stocks I believe would give investors an advantageous exposure to this possibly generational opportunity.
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Shale gas
amandine45/iStock via Getty Images

Shale Gas Development
According to EIA, worldwide there are 95 basins in 41 countries that are prospective of unconventional petroleum, containing some 345 billion barrels of shale oil and 7,299 Tcf of shale gas in technically recoverable shale resources (Fig. 1).

A map of basins with assessed shale oil and shale gas formations.
Fig. 1. A map of basins with assessed shale oil and shale gas formations. (U.S. EIA)

So far, shale gas development has taken off only in the U.S. with some limited success in the Vaca Muerta shale play in the Neuquen Basin, Argentina. Why is shale development so limited? I believe there are a number of reasons:

Firstly, in the U.S. the landowner has mineral rights to the subsurface hydrocarbon resources, which promotes the extraction of oil and gas therein. Elsewhere in the world, governments own subsurface mineral rights.
Secondly, the U.S. regulators provide a comparably friendly business environment for oil companies, with political stability, amicable fiscal regime, legal certainty, and a clear pathway to permitting, which collectively lead to a greatly-reduced above-ground risk.
Thirdly, the U.S. has a well-developed infrastructure network (pipelines, storages, terminals, and refineries) to handle the extraction and transportation of hydrocarbons, which saves E&P companies large up-front investments.
Fourthly, the U.S. shale basins have the advantage of being proximal to the world's largest natural gas market.
Lastly, the U.S. oil industry has unparalleled access to capital and technical expertise.
Beetaloo And Shale Gas Development
Outside of the U.S., it seems that Australia comes close to matching the above conditions, and that its Beetaloo Basin in the Northern Territory (aka, NT) is indeed emerging as the new darling for shale gas development.

Petroleum rights and licenses
In Australia, subsurface resources belong to the Crown. This means that the NT government owns all reserves of petroleum onshore and in coastal waters. In return for the right to extract petroleum, licensees pay the NT government royalties on production at 10% of gross value at the wellhead.

There are three types of petroleum titles: petroleum exploration permit, petroleum production license, and petroleum retention license or lease. An oil company will need to pay landholders for land access for E&P activities, under certain land access guidelines.
The NT government suspended hydraulic fracturing operations in September 2016, citing environmental damage concerns. The moratorium was lifted in April 2018, following an independent scientific inquiry.

'Gas-fired recovery of Australia'
As Australia emerged from the Covid-19 pandemic, the federal government rolled out the plan of gas-fired recovery in September 2020, aiming to unlock gas supply, deliver an efficient pipeline and transportation market, and empower gas customers.

To encourage the private sector to step up and make timely investments in the gas market, the government allocated A$28.3 million for E&P projects in five key gas basins, including the Beetaloo Basin.

Beetaloo Strategic Basin Plan
Under the plan of 'gas-fired recovery', the Minister for Resources, Water and Northern Australia announced in January 2021 the Beetaloo Strategic Basin Plan, believing Beetaloo has the potential to be a world-class gas province and become a supplier to a variety of gas markets.

The plan provided >A$220 million in new funding as part of the 2020-21 federal budget to support Beetaloo development. Some A$50 million was committed over two years from 2021–22 to 2022–23 for the Beetaloo Cooperative Drilling Program to support exploration activity, which will see ~10 additional wells co-funded by private enterprises.

The remote Beetaloo region has limited existing infrastructure to support development. The region requires significant investment in upgraded roads, rail, pipelines, waste and medical assets, to be ready for gas development. The government is committing A$174 million for the NT gas industry roads upgrades.

Gas infrastructure
Three key gas pipelines cross or lie near the Beetaloo region (Fig. 2):

The Amadeus Gas Pipeline links Alice Springs to Darwin;
The McArthur River Gas Pipeline links the McArthur River mine to the Amadeus Gas Pipeline;
The Northern Gas Pipeline passes to the south of the Beetaloo and links the Amadeus Gas Pipeline to the Carpentaria Gas Pipeline at Mt Isa, which provides a link to the east coast market, despite the limited capacity.
These pipelines make it possible for Beetaloo shale gas to access, among a variety of commercialization options, the positive pricing dynamics of the east coast market or the Northeast Asian market via onshore LNG processing terminals at Darwin, including Ichthys (operating since 2018, with a capacity of 8.9 Mtpa of LNG and 1.65 Mtpa of LPG, and 100,000 b/d condensate) and Darwin (sale of LNG since 2006, 3.7 Mtpa).

A map showing infrastructure in the Beetaloo Basin and surrounding areas, NT, Australia.
Fig. 2. A map showing infrastructure in the Beetaloo Basin and surrounding areas, NT, Australia. (Australian Ministry for Resources, Water and Northern Australia)

Beetaloo Geological Potential
The 28,000 sq-km Beetaloo Basin is a structural component of the greater McArthur Basin. The Beetaloo Basin mainly consists of a sequence of ~3,000m (locally up to 5,000m) mudstone and sandstone formations called the Roper Group that was deposited in Proterozoic between 1,500 million and 1,430 million years ago (Fig. 3).

The gas-bearing intervals are primarily the Velkerri shale (including the Velkerri A, Intra A-B, B and C shale) and secondarily Kyalla shale, giving Beetaloo a multi-stacked pay potential (Fig. 4).

The Beetaloo Basin, shown with the depth to the top of the Middle Velkerri.
Fig. 3. The Beetaloo Basin, shown with the depth to the top of the Middle Velkerri. (Tamboran Resources)

Stratigraphy of the Beetaloo Basin, NT, Australia, especially the gas-prone the Velkerri Formation.
Fig. 4. Stratigraphy of the Beetaloo Basin, NT, Australia, especially the gas-prone the Velkerri Formation. (PESA News)

Geologically, Beetaloo is analogous to the Marcellus shale gas play in the U.S. (Fig. 5). Although estimates of gas resource in the basin vary widely due to limited exploration, Beetaloo is viewed as Australia’s largest undeveloped gas resource province.

The USGS estimated in 2018 undiscovered, technically recoverable mean resources of 429 MMbbl of continuous oil and 8 Tcf of continuous gas in the Beetaloo Basin.
The NT government estimates that there are over 200 Tcf of gas in place in Beetaloo in the NT Geological Survey Record 2017-003. At a conservative recovery rate of 10%, the basin has some 20 Tcf recoverable. As a reference, Australia consumed 1.44 Tcf of natural gas in 2020.
A comparison of the Mid-Velkerri B shale in the Beetaloo Basin with the Marcellus shale in the U.S.
Fig. 5. A comparison of the Mid-Velkerri B shale in the Beetaloo Basin with the Marcellus shale in the U.S. (Tamboran Resources)

Exploration drilling
In 2015-2016, Origin Energy Ltd. (ORG.ASX)(OTCPK:OGFGF) and Falcon Oil & Gas Ltd. (FO.TSX-V)(FOG.AIM)(OTCPK:FOLGF) drilled three wells in the Beetaloo Basin (Fig. 3):

Beetaloo W-1 vertical well penetrated three organic-rich mudstone intervals in the Middle Velkerri (A, B, and C) from 2,593.3 to 3,145.9m and the Kyalla silty mudstone. Kalala S-1 vertical well intersected the organic-rich Middle Velkerri A, B, and C between 2,064 and 2,572m.
The Amungee NW-1H well went through 11 hydraulic stimulation stages in a 1,000m horizontal section in the Middle Velkerri B shale zone, and tested flowing 1.23 MMscf/d over a 57-day period, proving shale gas accumulation in the region. Importantly, the majority (85-95%) of these flows came from only a 200m portion of the well, suggestive of a normalized gas flow rate equivalent of 5.2-5.8 MMscf/d per 1,000m of lateral section. Amungee NW-1H well thus opened the Beetaloo shale gas play. Origin commented "this result indicates the Velkerri dry gas play may be in line with commercial shale plays around the world, based on normalized production rates." Based on these test results, Origin estimated that its license area in the central part of the basin contains 6.6 Tcf of 2C contingent gas resources in the Velkerri B shale.
In 2019, Origin drilled the Kyalla 117 N2 exploration well and the Kyalla 117 N2 horizontal appraisal well. Both wells confirmed the continuation of the shale play.
In 2022, Santos Ltd. (STO.ASX)(OTCPK:STOSF) and Tamboran Resources Limited (TBN.ASX)(OTC:TBNRF) drilled two horizontal wells, and tested flowing gas during extended tests of the Middle Velkerri B shale zone:

Tanumbirini 2H was fracked in 11 stages over a 600m horizontal section, and tested flowing a 14-day average of 1.7 MMscf/d or a normalized rate of 2.6 MMscf/d over 1,000m.
Tanumbirini 3H was fracked in 10 stages over a 600m horizontal section, tested flowing a 10-day average of 1.5 MMscf/d or a normalized rate of 2.5 MMscf/d over 1,000 m.
The test flow rate at Tanumbirini 2H and Tanumbirini 3H peaked at 4 MMscf/d and 10 MMscf/d, respectively, before a weather-related shut-in. Tamboran estimated the Middle Velkerri B shale can flow >5 MMscf/d per 1,000m using a model for optimizing effective fracture stimulation.
In 2020-2021, Empire Energy Group Ltd. (EEG.ASX)(OTCPK:EEGUF) drilled the Carpentaria-1 exploration well, which after a four-stage vertical fracking tested flowing 0.250-0.364 MMscf/d (or a peak rate of 1.6 MMscf/d). Empire followed with the Carpentaria-2H horizontal well.

The Carpentaria-2H well intersected 192m of liquids-rich shale gas net pay in the vertical hole, and has 1,345m horizontal section within the Velkerri B shale. Fracking and flow testing of the horizontal section are scheduled to starting the 2Q2022.
The Beetaloo Cooperative Drilling Program of Australian government has spurred exploration activities in the basin. Although it is still early in the exploration and appraisal phase, flow tests from the Velkerri B shale have confirmed a productive dry gas system in place, thus positioning Beetaloo as an emerging world-class shale gas basin and significantly de-risking the basin for further exploration and development.

Competitive Landscape
Falcon and Origin
Falcon, the first mover in the basin, received exploration permits EP76, EP98, and EP117 in 2005-2006. The three permits, totaling 4.6 million gross acres, cover the majority of the core Beetaloo Basin (Fig. 6).

In 2014, Origin and Sasol Limited (SSL) farmed in, each taking a 35% working interest for US$10.2 million in cash payment and US$29.69 million in stage-1 work commitment. Origin (the operator) and Sasol each hold an option to participate in stage 2 with a work commitment of US$23.19 million and stage 3 with a work commitment of US$22.26 million.
In 2017, the operator Origin acquired Sasol's 35% stake in the project. In 2020, Origin farmed in a further 7.5% working interest, committing to an additional A$150 million carry. As a result of the farm-out agreements, Falcon now holds a 22.5% interest and is carried up to A$263.8 million on gross costs for stage 2 and stage 3.
A map showing permits in the Beetaloo Basin, NT, Australia.
Fig. 6. A map showing permits in the Beetaloo Basin, NT, Australia. (Falcon Oil & Gas)

Peripheral permits
Immediately surrounding the three central permits of Origin and Falcon are additional permits that either covers part of the margins or the eastern depression of the Beetaloo Basin. These permits are:

EP161 (Santos 75% operating; Tamboran 25%) - shale gas has been struck in the eastern depression;
EP136, which covers part of the eastern depression, and EP143 and EP197 (Tamboran 100%);
EP354 (Santos 100%);
EP187, where some shale gas has been struck, and EP159 (Empire 100%);
EP318 (Inpex Corp. 100%);
EP153 (Jacaranda Minerals 50%, Hancock Exploration 50%).
Further away from the core of the basin are additional permits held by Empire, Inpex Corp. (OTCPK:IPXHY) and others.

Risk-Reward Analysis
In June 2002, Range Resources (RRC) drilled the Renz-1 well in Pennsylvania. Two years later, the Marcellus shale in that well was fracked, using a method that had first been tried in the Barnett shale in Texas, thus leading to the opening of the enormous Marcellus play, which ended up as the main growth engine of the U.S. shale gas revolution.

From the dawn of the U.S. shale gas revolution to the late-2014 cycle peak, operators with large land positions in Marcellus saw their share prices skyrocketed. Range achieved a 27-bagger, while fellow Marcellus developers Cabot Oil & Gas Corp - now known as Coterra Energy (CTRA) - pulled off a 24-bagger, CNX Resources (CNX) a 17-bagger by 2008 or a 7-bagger by 2014, and EQT Corp. (EQT) a 6-bagger. Participation in the opening and development of the Marcellus shale gas play rewarded shareholders extremely well (Fig. 7).

Historical natural gas production from the Marcellus shale play in the U.S., and the stock performance of producers with significant participation in the Marcellus play.
Fig. 7. Historical natural gas production from the Marcellus shale play in the U.S., and the stock performance of producers with significant participation in the Marcellus play. (Laurentian Research modified after Wikipedia)

Today's Beetaloo is similar in terms of play maturity to where Marcellus was back in 2004. The Beetaloo shale gas play had just been opened, with a productive shale gas system with stacked pay potential being confirmed to be in place. On the other hand, appraisal of the shale play is still ongoing, and locally-optimal well drilling and completion techniques are yet to be found, which represents some additional risk.

Australian government seems to be doing all the right things to create a pro-business environment for operators in the Beetaloo Basin. Federal financial assistance to exploration drilling succeeded in attracting private capital. However, until the completion of infrastructure upgrade, E&P activities remain to be costly.

That the legal dispute Santos had with a large landowner in NT was quickly resolved indicates land access is well regulated in NT and not an unsurmountable obstacle as in some countries.

Australia has a strong oilfield service industry to support E&P activities in the basin. Furthermore, the know-how with regard to shale gas development the oil industry has gleaned in the U.S. over the past 20 years may be parlayed to Beetaloo.

Therefore, I would venture to say the operating environment at Beetaloo is similar to, if not more advanced than, what had been prevailing on the eve of the opening of the Marcellus play. I thus believe it is an ideal time to make an entry into the Beetaloo play.

The Best Pick
I screened the Beetaloo pack - including Santos, Origin, Inpex, Tamboran, Empire, and Falcon - for the best pick to get exposure to the emerging shale gas play.

First, I assessed how impactful its Beetaloo exposure will be to the company. The Beetaloo projects most probably won't move the needle for Santos and Inpex, which have a market cap of US$20 billion and US$15 billion, respectively. Origin has a market cap of US$8.6 billion but the ownership of 77.5% interest in 4.6 million acres in the central Beetaloo Basin definitely makes the stock attractive. Each of Tamboran, Empire, and Falcon qualifies as a Beetaloo pure-play, giving shareholders substantial exposure to the emerging shale gas play. The small market capitalization of those three companies, at US$167 million, US$162 million, and US$141 million, respectively, means a success in Beetaloo will end up being company making.
Next, I looked at the quality and quantity of the net acreage held by each Beetaloo participant. I prefer Falcon, which occupies the central part of the basin, and Tamboran, which holds acreage in the eastern depression, to Empire, whose land is mostly marginal in spite of the areal extent. Between Falcon and Tamboran, the former seems to own more Beetaloo net acreage than the later (Fig. 8).
The landholding situation with regard to the Middle Velkerri B shale in the Beetaloo Basin.
Fig. 8. The landholding situation with regard to the Middle Velkerri B shale in the Beetaloo Basin. (Tamboran Resources)

I thus narrow down the selection to Origin and Falcon; Origin for those who tend to lose sleep over non-large-cap stocks, and Falcon for those who prefer a small-cap Beetaloo pure-play.

Falcon
Adjusted for flowing production, Range Resources and EQT are priced roughly at US$15,400-17,500 per net Marcellus acre. Once it succeeds in becoming an established producer like Range or EQT in a few years, even if it captures only 1/5 of their valuation metric, Falcon would be worth US$3.3 billion, which implies a 27-bagger from the current market cap. Investors will take moderate risk for an exposure to such an enormous upside since Falcon is carried up to A$263.8 million on exploration spending.

Falcon is estimated to remain ~75% carried for 2022, with the remaining costs to be funded from cash in hand, which currently stands at US$18.4 million. The company may need to raise funds going into 2023, which will result in equity dilution.
With the afore-discussed risk-reward profile, it is no wonder that Sheffield Holdings LP - the investment firm of Bryan Sheffield, the founder and CEO of Parsley Energy before its US$7.6 billion acquisition by Pioneer Natural Resources (PXD) - picked Falcon to invest in, after having made a slightly smaller investment in Tamboran Resources.

Sheffield Holdings recently boosted its stake in Falcon to 90,443,607 common shares or 8.66% of the common shares outstanding, 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% working interest in the Beetaloo project. Falcon will use the US$6 million to exercise call option so as to reduce the existing ORRI with the TOG Group from 3% to 1%.
Sheffield's investment in Falcon is a powerful endorsement for the Beetaloo shale gas play, and his purchase of the ORRI reveals his belief that Falcon's Beetaloo acreage will become producing assets in the not-too-distant future, as he said,

"The Beetaloo is emerging as a world class shale gas basin with stacked pay potential from several shale intervals. Flow tests from the B Shale of the Amungee Member have confirmed a productive dry gas system in place. Geologic and engineering data from test wells across the Sub-basin have similar properties to some of the highly successful shale gas plays in the United States. The Beetaloo Sub-Basin is still in the exploration and appraisal phase, but with continued good well results, Falcon is well positioned to become a key supplier of low carbon energy to Australia and to the world within a few short years. I am delighted to have this opportunity to acquire a significant interest in Falcon and gain exposure to their net 1 million acres in what may become one of the biggest shale plays in the world."

The next two years are expected to be catalyst-rich for Falcon. Origin and Falcon are currently in the stage 3 work program according to the restated farm-out agreement, which includes acquiring 40 km2 of 3D seismic survey on the Amungee NW-1H well lease area; and drilling two >2,000m horizontal wells on the Amungee NW-1H pad, targeting the Middle Velkerri B shale (aka, the Amungee Member B shale), fracking, and extended-production testing of these wells. Positive results therefrom will lead to a pilot development program in 2023.

Investor Takeaways
With recent successful drilling results, the Beetaloo Basin is emerging as a world-class shale gas basin with a validated shale gas system characterized by multi-stacked pay zones.

Shareholders may reap enormous gains by investing in the opening of such an exciting new shale gas play.

According to my analysis of the competitive landscape in the basin, I believe first mover Falcon Oil & Gas provides the most advantageous exposure to Beetaloo for those who favor small-cap, pure-play ideas for the outsized upside potential; for those averse to small-cap volatility, Origin Energy can be chosen for a decent exposure to the emerging shale gas play.

I have established a position in Falcon and plan to add to it opportunistically based on operational progresses (Fig. 9).

Stock chart of Falcon Oil & Gas and Origin Energy.
Fig. 9. Stock chart of Falcon Oil & Gas and Origin Energy. (Seeking Alpha, modified by Laurentian Research)

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