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IGas Energy Plc: THE INVESTMENT CASE

IGas Energy goes for financial reboot

A US$35mln injection of fresh funds from strategic investor Kerogen Capital and a debt-for-equity swap with its lenders is underway
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).

Can IGas Energy Plc (LON:IGAS) provide the catalyst to get the UK shale industry moving with an overhaul of its finances and capital structure?

The problem - for all UK shale firms, not just IGas - is that Britain's fledgling shale industry is seemingly stalling, and that has taken a heavy toll on the AIM-listed junior.

A reboot is underway with a US$35mln injection of fresh funds from strategic investor Kerogen Capital and a debt-for-equity swap with its lenders.

According to IGas, the company’s new structure will be sustainable in the current oil price environment and to expand while maintaining its valuable carry agreements (some US$230mln of work to be paid by well-funded partners).

WATCH: IGas CEO hails new investment ...

The proposals will see a significant reduction in the group’s outstanding debt, but, it will also mean significant dilution for existing shareholders though precise details have not yet been determined, as the extent of the debt-for-equity swap is still to be finalised.

Debt-for-equity

It is, however, currently anticipated that there’ll be a partial equitisation of the group’s secured bonds (presently there’s US$125.6mln outstanding) and the group’s unsecured bonds (US$27.4mln) will be fully equitised.

The debt will be converted to equity with some discount to the par value of the bonds.

At the same time some US$13mln of bonds held by the company would be cancelled.

It is envisaged that the equity placing with Kerogen will be priced at around 4.5p per share and the company plans a further placing to offer other investors the opportunity to buy new shares at the same price.

Stephen Bowler, IGas chief executive, said in a statement: “This potential investment recognises the underlying value in the IGas group, both through its stable production assets, significant shale acreage and c.US$230m carry from its partners. 

Shale business and UK fracking hullabaloo

IGas is one of very few investible plays in 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 believes it has already identified huge gas resources. Estimates put that resource at 80 trillion cubic feet of gas-initially-in-place (GIIP).

If it was easy to plan, permit, drill and frack shale wells in the UK the group's valuation would be unrecognisable but 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 government 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 shale 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.


 

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