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IGas Energy Plc: THE INVESTMENT CASE

IGas Energy Plc: Steady producer today, growth by shale gas tomorrow

A 25% drop in production costs and oil sales above $60 are the obvious, somewhat cherry-picked highlights of 2015's financial results.
Prime Minister David Cameron supports fracking in the UK, he is pictured at a IGas Energy shale well site.
INVESTMENT OVERVIEW: IGAS The Big Picture
Growth is targeted via a 5 year plan for shale gas (if fracking projects can get going).

IGas Energy Plc’s (LON:IGAS) financial results for 2015 show a steady conventional oil business whilst putting a spotlight on the longer term potential of the UK shale division.

A 25% drop in production costs and the fact that its oil will be sold above $60 per barrel in 2016 are the obvious, somewhat cherry-picked highlights of the British onshore producer’s results statement.

OK … there’s also the not-so-small matter of write-offs totalling nearly £60mln, continued uncertainty over the market price for crude and the limbo-like state of the UK shale gas sector.

But, in a small cap oil and gas market that has got used to shock and awful news recently, IGas looks to be in resilient shape.


Today's conventional oil and gas


Continues to be functional - it is there to tick over, to generate cash-flows and sustain the corporate cost base.

Cost cutting during 2015 means the UK operations breakeven at around $25 per barrel.

On that basis, today's results are positive. The business has shown it has adapted to the low oil price environment, and has to some extent shown it can 'survive'.

Earnings for the year amounted to £18.3mln, down from £21,6mln. Naturally, total revenues are down sharply in light of continued oil price weakness. Turnover was down to just over £25mln, from £58mln in the preceding year.

It generated about £1mln of net cash from operating activities, compared with £26.5mln the year before (though the drop includes £9mln of investments during 2015).

On paper, write offs and impairments put a sizeable dent in the financials.  A total of £58mln was written off, and it was the main factor in the group's £44.8mln loss for the year.

IGas ended the year with £28.6mln of cash. Its assets were valued at £98.8mln and it had £73.3mln of net debt.


Tomorrow's shale business and UK fracking hullabaloo


IGas is one of very few investible plays on UK shale, and of those that are investible it is the most significant.

It has, pending confirmation of new licences, about one million acres in the UK that deemed to be prospective for shale.  

Whilst it has only done work on small portions of that it beleives it has already identified huge gas resources. Estimates put that resource at 80 trillion cubic feet of gas-initially-in-place (GIIP).

The problem - for all UK shale firms, not just IGas - is the UK shale industry is seemingly stalling.

If IGas was able easily plan, permit, drill and frack shale wells in the UK the group's valuation would be unrecognisable.

Currently, the market gives very little credit to IGas and its shale business.

Such is the uncertainty over timelines, for local planing and permitting particularly, IGas is now working through what it is describing as a five year strategy for shale.

At present, this mostly involves planning applications, appeals, and a lot of waiting.

The governement in Westminster has repeatedly given support to UK shale, but, this has yet to translate to meaningful or measurable progress at local level.

Through its work so far IGas has already indentified plenty of resource potential, the next phase should be about proving the concept. It needs to show that UK shales wells can be delivered safely, effectively and that sufficient volumes of gas can actually be extracted at rates that can be economically viable.

These are the aims for the UK shale sector as a whole. But, currently the sector's efforts are stifled and, notably, opposition to shale gas and fracking remains.


What’s does IGas expect for the rest of 2016?


First and foremost, for the production business IGas chief executive Stephen Bowler says 2016 is going to be another challenging year for the oil industry - though, plainly, this commentary could feasibly have been lifted from ANY oil executive’s outlook statement.

“With commodity prices still remaining at low levels, our focus remains on retaining balance sheet strength and preserving cash,” he said in the 2015 financial results statement.

“Whilst the steps we have taken to manage costs and improve the strength of the balance sheet have helped the business in this environment, we must remain focused on cost effective, value adding activity both on the production and appraisal assets.”

Specifically, Bowler highlights that production is expected in the range of 2,500 and 2,700 boepd for 2016.

And, the company has cut back capital spending budget to less than £10mln.

IGas expect confirmation of the new shale acreage awards, announced initially last year, in April and that trigger a phase of desk-top based work to analyse and refine planned work programmes.

It continues to pursue a five-year development plan for its shale business.

As part of this campaign it completed a new 3D seismic programme in the North West of England in November, and data interpretation is expected to be ready by the third quarter of this year.

Meanwhile, the timeline for company’s projects are largely influenced by the UK planning and permitting processes.

More information was recently requested for the group’s proposed Springs Road project, further consultation will follow and determination is expected in the third quarter.

At the Spring Road site, in Nottinghamshire, IGas wants to drill two wells - one vertical and one horizontal - and depending upon planning timelines drilling could happen either late in 2016 or early 2017.

Meanwhile, a new planning application is expected to be submitted for the Tinker Lane Site in the second quarter.

“We continue to make progress in line with our five year development plan for our shale assets, including the submission of planning applications in North Nottinghamshire and the interpretation and processing of the 3D seismic data in the North West,” Bowler said.


City brokers describe a ‘creditable’ performance for 2016


Broker SP Angel, in a note, said: “Today's earnings are a creditable performance in what has been a torrid time for the company.

“That they only made ~$2mm for all the effort seems to be a significant let down, for investors and the company's officers alike.

“Still, the debt is being serviced, and the Company is in a solid position for the future. Our only concern, currently, is what the company will look like once the hedges expire and the cash flow is not buoyed by these instruments.

“Once that has become clearer, we believe that IGAS will be one for the medium to longer term.”

Richard Griffith, analyst at Canaccord Genuity, meanwhile, said: “Bond covenants look likely to be manageable at least until mid-2016 (they are tested end March and end June) but they may be challenged in the possible absence of higher oil prices and/or other activities at the end of 2016.”

 

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