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UPDATE - IGAS Energy strikes deal with INEOS for £138mln investment in UK shale gas

Last updated: 15:05 10 Mar 2015 GMT, First published: 16:05 10 Mar 2015 GMT

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IGas Energy (LON:IGAS) shares advanced on Tuesday as it agreed a new partnership with INEOS which will see the petrochemical group invest up to £138mln into UK shale gas projects.

INEOS is paying IGas £30mln in cash up-front as well as funding work programmes.

IGas expects INEOS will ‘carry’ the company for around £65mln of its share of project spending as a result of the farm-out transaction - though this will be repaid from future shale gas revenues.

Gary Haywood, chief executive of INEOS Upstream, described the new partnership as ‘a great opportunity’ and said INEOS’s scale and US shale experience was a perfect match for IGas’s portfolio of assets.

“INEOS believes that an indigenous shale gas industry will transform UK manufacturing, and that we can extract the gas safely and responsibly,” Haywood said in a statement.

INEOS will in return acquire a majority interests in IGas’s licences in the Bowland basin, in North West of England; it will have 50% interest in four licences (PEDL, 147, 184, 189, and 190) and 60% of three others (PEDL 145, 193 and EXL 273).

The new partner is also taking all of IGas’s PEDL 133 licence in Scotland, and will have the option to acquire 20% of two licences in the East Midlands.

This comprehensive new partnership adds to previous farm-out agreements with Total and GDF Suez, and together these arrangements mean some US$285mln will be spent on IGas shale projects by major partners.

"We are delighted to announce this farm out with INEOS which underpins the quality, scale and significant potential of our licences, whilst retaining material upside in these key assets,” said IGas chief executive Andrew Austin.

“Alongside the commitment from our existing partners, INEOS's commitment of upfront cash and considerable capital investment will help fund us through the next steps of our shale appraisal and production programme.”

Austin says IGas’s partnerships with ‘world class counterparties’ reinforces the potential and materiality of the company’s portfolio.

The injection of cash strongly positions IGas as it seeks to unlock the potential of untapped natural gas resources in Britain, he added.

Zac Philips, analyst at SP Angel, said the INEOS deal highlights the prospectivity of the UK onshore segment as well as the quality of IGAS' portfolio.

“Given that the exploration programme on these assets has now largely been paid for, or the risky portion has anyway, we believe that investors should be pleased with this deal, especially as it also adds £30mm to its balance sheet too,” he said.

Elsewhere, Westhouse Securities analyst Mark Henderson said the deal would be well received by the market though he highlights that news of the timing of shale gas drilling was also needed.

“The deal is helpful for sentiment, provides a boost to the balance sheet but, in our view, needs to be followed by improved visibility on when we are likely to see first gas flowing from shale wells in the UK,” the analyst said.

On AIM, IGas shares were up 4.25p, 17.7%, to trade at 28.25p.

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