Guest Pitch: Falcon Oil & Gas (FO:V)

Merger Arbitrage: 30% Upside (at C$0.20)

This idea was shared by Povilas.

This is a relatively high-risk, high-reward merger arb, likely to wrap up in 4-6 months.

Falcon Oil & Gas is a junior oil & gas exploration company. Its key asset is a 22.5% minority stake in a joint venture that holds exploration rights in the Beetaloo Basin in Australia. The remaining 77.5% interest of the JV is held equally by Tamboran Resources and Daly Waters Energy.

Falcon has recently agreed to sell all of its assets and operating subsidiaries to its JV partner TBN. The consideration is primarily in TBN stock, with a small cash component. Upon completion, Falcon will distribute TBN shares to its shareholders at a ratio of 0.00687 and delist from the stock exchange. TBN is dual-listed in the US and Australia, but the merger consideration will be paid in US-listed shares.

Since the announcement ten days ago, the spread has fluctuated between 30% and 50%. Currently, it’s at 30%. All closing conditions are likely to be met, and the risk of TBN backing out is minimal. The transaction should close as expected in Q1’26. The spread likely stems from hedging concerns: even though IB currently shows relatively high borrow availability (US$3m at 4.5%), this might change as we get closer to the finish line.

The JV between Falcon, TBN, and Daly Waters Energy holds exploration permits covering 4.6m acres in the Beetaloo Basin. Their key test project for the whole area is Shenandoah, which has just reached a Final Investment Decision – a key milestone that marks the shift from exploration to pilot-scale commercial operations. The first gas sales are expected around mid-2026. If the pilot goes well, it could open the door to full-field development across the whole Beetaloo basin. It is against this backdrop that TBN is buying out Falcon’s share of the JV and securing a controlling majority stake.

Regulatory issues are unlikely, as this is a small transaction in which a larger JV partner is simply buying out a minority stake. TBN is incorporated in the U.S. and Falcon in Canada – both friendly jurisdictions to Australia.

The acquisition is contingent on three approvals: from two-thirds of Falcon shareholders, from a majority of TBN shareholders and also an approval form the minority holders of Falcon’s Australian subsidiary. I expect all of these to pass easily.

From Falcon’s shareholder perspective, the consideration looks reasonably fair. The JV stake is the core asset for both Falcon and TBN, and the deal values Falcon’s interest at about US$202 per acre, which is roughly in line with TBN’s own valuation of US$233 per acre. A modest premium in TBN’s favor seems fair, given its larger scale, stronger balance sheet, and NYSE listing (whereas Falcon trades on the TSX Venture exchange and is running low on cash). Earlier this year, TBN sold 100k acres of land to the other JV partner, Daly Waters Energy, at an implied valuation of US$150/acre. Falcon’s buyout comes at a decent premium to that. Overall, it’s very likely that both Falcon’s and TBN’s shareholders will support the merger.

An approval by the minority shareholders of Falcon’s Australian subsidiary, in which Falcon holds a 98.1% stake, seems equally likely. While it hasn’t been disclosed who the minority holder is, this historical filing suggests it could be Sweetpea Petroleum, a private Australian company run by Robert Macaulay. There’s little reason to think the minority shareholder would oppose the deal, as its stake would simply roll over into a larger, better-capitalized partner.

Hedging concerns and the risk of of TBN stock declining to pre-announcement levels are the main drivers of the spread.

• Borrow availability. At the moment Interactive Brokers shows quite a decent borrow availability of TBN stock (no clue how it looks at the other brokers, but please share if you have access to that info). IB has 50k-100k, or US$1.5-US$3m in dollar terms, of shortable TBN stock available for borrow at 4.5% annual fee. This is quite a decent borrow availability for a microcap (and again, this is only from one broker), but it is tiny compared to 6.5m of TBN shares, which will get distributed as merger consideration. So there’s a risk the borrow could dry up or get much more expensive before the transaction closes.
• Sharp spike in TBN stock price over the last couple of weeks. TBN’s stock is up about 25% since the deal was announced, which at first glance looks like a hype-driven spike on the acquisition news. That doesn’t exactly ease the borrow concerns, and it also makes an unhedged trade look pretty dicey. But that’s not really what’s going on. The Final Investment Decision on the Shenandoah South Pilot Project was announced the very same day as Falcon’s acquisition. So both companies had a positive development for their core asset, and pre-announcement prices might not be the right reference point anymore.

Given these dynamics, an unhedged position is also a viable option. For the unhedged trade to break even, TBN would have to fall all the way back to pre-announcement levels upon closing. TBN has very rarely traded below that range on both the US and Australian exchanges, and after the FID decision it is even less likely.

That said, this is more of a high-level take than a valuation call, as I’m not pretending to have a strong view on what these junior miners should be worth. I have half of my Falcon position hedged and the rest I intend to hold unhedged. That might change depending on borrow price and availability.

 

Additional points of discussion

• There could be some confusion regarding the stock exchange ratio. The sale announcement stated that Falcon will receive 6.5m TBN shares and distribute them to shareholders at a 0.00687 ratio. However, with 1.1bn Falcon shares outstanding, the distribution math implies a lower 0.0059 ratio. The press release, and even the merger agreement document did a poor job at clarifying the discrepancy. What’s actually happening is that Falcon’s largest shareholder, Lamesa Holdings (14% stake) is a sanctioned entity controlled by Russian oligarch Viktor Vekselberg. Falcon’s management confirmed that the 157m shares held by Lamesa won’t be eligible for the stock distribution. Once those shares are excluded, the math adds up, and the remaining shareholders will receive TBN stock at  0.00687 ratio as per the press release.
• The market may also worry that the TBN distribution could be taxable, which would eat into the upside. I’m not a Canadian tax expert, but my understanding is that any potential tax would apply only to the portion exceeding Falcon’s paid-up capital, i.e., that part of the distribution would be treated as a dividend. Since Falcon’s paid-up capital of C$0.53/share is well above the distribution value (C$0.26/share), the whole merger consideration should qualify as a return of capital. Several precedents seem to support this – First Mining/Treasury Metals, Wallbridge Mining/Archer Exploration, and Stellar Pacific Ventures/TomaGold. These Canada-incorporated companies also sold all or most of their assets for stock and then distributed that stock to shareholders. The distribution was treated as a return of capital, as paid-up capital exceeded the distribution value.
• Falcon’s only other major shareholder, Sheffield Holdings, sold 4m shares at C$0.1925/share shortly after the merger announcement – well below the current implied distribution value of C$0.26/share. Sheffield said the sale was part of a routine portfolio rebalancing, so it likely doesn’t reflect its view on the acquisition.