Wealth Effects of Farmout Arrangements in the Oil and Gas Industry

Abstract

We examine market reactions to farmout agreements, a popular form of strategic alliance, undertaken by oil and gas firms worldwide. This study is motivated by a gap in the literature regarding empirical studies of farmout arrangements. Using a sample of 589 farmor and 389 farminee announcements over 722 farmout agreements during the period 1990−2016, we document significant market reactions in order of 3.6% over a three-day event window to the farmors. Cross-sectional regressions of event returns provide results consistent with the resource pooling and expertise hypotheses. Furthermore, we also find evidence consistent with farmout agreements as real options by showing that farmors’ stock prices are sensitive to the underlying oil price uncertainty.