Wealth Effects of Farmout Arrangements in the Oil and Gas Industry

55 Pages Posted: 29 Aug 2019 Last revised: 21 Sep 2020

See all articles by Luiz Fernando Distadio

Luiz Fernando Distadio

Griffith University - Griffith Business School

Andrew Ferguson

Department of Accounting, UTS

Peter Lam

University of Technology, Sydney - Discipline of Accounting; Financial Research Network (FIRN)

Date Written: September 20, 2020

Abstract

We examine market reactions to farmout agreements undertaken by Australian oil and gas firms. Despite their prevalence in the oil and gas sector, there is a gap in the literature regarding empirical studies of farmout arrangements. Using a sample of 589 farmor and 389 farminee announcements over 722 unique farmout agreements during the period 1990−2016, we document significant market reactions in the order of 3.6% (1.9%) over a three-day event window to the farmors (farminees). Cross-sectional regressions of event returns provide results consistent with the resource pooling and expertise hypotheses as the sources of value creation. Furthermore, we also find evidence consistent with farmout agreements as real options by showing that farmors’ stock price reaction is sensitive to the underlying oil price uncertainty.

Keywords: alliances, farmout, oil and gas, resource pooling, real options

JEL Classification: G30, G34, D22, D23, D24, L24

Suggested Citation

Distadio, Luiz Fernando and Ferguson, Andrew and Lam, Peter, Wealth Effects of Farmout Arrangements in the Oil and Gas Industry (September 20, 2020). Available at SSRN: https://ssrn.com/abstract=3444028 or http://dx.doi.org/10.2139/ssrn.3444028

Luiz Fernando Distadio

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61756780675 (Phone)

Andrew Ferguson (Contact Author)

Department of Accounting, UTS ( email )

PO Box 123 Broadway
Sydney, NSW 2007
Australia
61 2 9514 3565 (Phone)

Peter Lam

University of Technology, Sydney - Discipline of Accounting ( email )

P.O. Box 123 Broadway
Sydney, NSW 2007
Australia
02 9514 3926 (Phone)
02 9514 3669 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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