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Common Stock Returns around Farmout Announcements in the Oil and Gas Industry

We examine market reactions to farmout agreements, a common form of strategic alliance undertaken by oil and gas explorers internationally. Using an Australian sample of 722 farmout agreements announced during the 1990–2016 period, we find that farmout announcements generate a positive cumulative average abnormal return of 3.60% for farmors and 1.90% for farminees over a 3-day event window. Cross-sectional analysis of farmors' event returns provides results consistent with the resource pooling hypotheses. We also find that farmors' announcement returns are sensitive to the underlying oil price volatility, consistent with the real options view of farmout arrangements.

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Keywords: Strategic alliance, farmout, oil and gas, resource pooling, real options

DOI: 10.5547/01956574.44.4.ldis

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Published in Volume 44, Number 4 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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