PennPetro Shares Leap 44% On Farm-in Agreement – What Next For PPP?

PennPetro (LON: PPP) shares have jumped 40% and more in London this morning on the back of a farm-in agreement in Tunisia. Essentially, by undertaking the work to explore the area then PennPetro Energy gains ownership of a portion of what is found at that prospect.

This is an entirely normal sort of deal at this end of the minerals exploration market. Different companies, different organisations, specialise in different aspects or stages of the work to be done. Some focus on the very initial stages, the acquisition of exploration licences and initial surveying. Then another organisation or company comes in to do the next stage, the detailed surveys, and identification of proper prospects. And so on down the chain of the various jobs that need to be done leading up to actual exploitation.

Here it is Upland Resources which has done that initial work on Tunisia, teaming up with the state oil company, gaining access to the exploration permits and the very initial stages of the exploration itself. PennPetro, through its subsidiary Nobel Petroleum, then comes in and “farm-in”s its interest. By financing and doing the next stage of the work, the more detailed surveys, then PennPetro takes ownership of a significant portion of what is found in that exploration area.

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This is one of those valuation moments for both companies. As with any mineral exploration there are stages that have to be gone through. Gain the rights to explore, find something, then “prove” that something is economic and only then go on to actually finance and start extraction. Each of these stages – and several interim ones too – are valuation events. In that uncertainty about the prospect is reduced at each level of proof. Therefore the project itself, having been derisked, is worth more.

Note though that no project is ever fully “derisked”. It is possible to remove one risk – creating that valuation event – but not to solve all risks. Which is, of course, why the next valuation event exists, when that next risk is itself derisked and the uncertainty comes out of the valuation equation.

This particular earn-in, or farm-in, looks to be a good bet – but do note that it is a bet, there are still those risks to come. There are prospective fields that have been identified. The infrastructure – in terms of pipelines and so on – to transport what might be found already exist in the area. That those pipelines exist is proof that similar geologies in the area have contained producing assets.

This announcement is not proof that PennPetro will be able to produce in Tunisia. It’s not even proof that there is something worth producing in Tunisia. But it is evidence that PennPetro has taken another step forward in gaining access to something that might be worth producing. Thus the jump in PennPetro shares.

As to what happens next, that depends upon two things. Objectively, what is actually found during the farm-in process. And more subjectively, what other investors think might be found during it. The better folk think the prospect is then the higher PennPetro shares will go.