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VSA Capital Market Movers - Independent Oil & Gas

VSA Capital Market Movers - Independent Oil & Gas

Independent Oil & Gas (LON:IOG)#

Independent Oil & Gas (LON:IOG) has announced that following the successful reprocessing of seismic data at Harvey the company has increased its estimates of Prospective Resources and closed the previously announced £15m loan facility from London Oil & Gas, the proceeds of which will be used to drill the appraisal well. The terms of the funding are as previously announced.

The Pre-Stack Depth Migration reinterpretation work has resulted in an optimised resource estimate with a 93%, 13% and 44% increase in the respective low, mid and high resource estimates to 85/129/199 BCF. Most significant, in our view, is the strong increase in the low case to 85BCF from the CPR estimate of 44BCF. This strengthens the case for Harvey being an important part of the Southern North Sea gas project and ultimately being tied into the Thames Pipeline. The data has increased IOG’s confidence in the prospect and increased its internal geological chance of success to 63% from 50%.

The funding closure confirms IOG’s ability to carry out the appraisal well which is targeted for January 2019 providing a key potential catalyst for a further rerating of the stock. Fraser Well Management has been contracted to manage and operate the appraisal well, and the rig and offshore service providers are expected to be confirmed shortly.

UK natural gas prices rallied 33% during august peaking at over 75p/therm. Our analysis of IOG was conducted based on a UK natural gas price of 45p/therm yet indicates significant further upside potential. The severe winter last year resulted in destocking of UK gas reserves which owing to the closure of major infrastructure and high Asian gas prices are unlikely to rapidly replenished. With FID and further value catalysts, such as the Harvey appraisal well upcoming we believe that IOG is well placed to benefit and is an important asset for the UK energy market.
We maintain our Chance of Success estimate ahead of the appraisal well although adjust our reserve base to the updated figure of 129BCF. This has a 1p impact on our target price which increases to 92p/sh.

We reiterate our Buy recommendation although increase our target price to 92p/sh. 

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