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

The article investigates the stock market reactions to farmout agreements—strategic alliances where an oil and gas permit owner ("farmor") assigns partial exploration rights to another party ("farminee") in exchange for exploration commitments—in the Australian oil and gas industry from 1990 to 2016. Using a sample of 722 unique farmout deals, the study finds that farmout announcements generate significant positive cumulative abnormal returns (CARs) of 3.60% for farmors and 1.90% for farminees over a three-day event window. Cross-sectional analysis supports the financial resource pooling hypothesis, showing that farmors announcing deals with disclosed farminee financial commitments experience higher abnormal returns; it also finds that farmouts targeting unconventional resources yield higher returns, consistent with technical resource pooling. The study finds no significant certification effect from participation by major oil and gas companies, but a positive effect emerges when using relative firm size as a proxy. Additionally, higher crude oil price volatility correlates with greater farmor abnormal returns, consistent with real options theory reflecting the sequential and uncertain nature of exploration investments. These findings highlight farmouts as important economic events that facilitate risk-sharing and capital access for smaller exploration firms, thereby promoting competition and investment in the oil and gas sector.