IGas Energy (LON:IGAS), a small London listed company with a large exposure to onshore UK shale reserves, has had a busy time of it recently.
Earlier this month (August 13) its shares rose 7.5% amid government plans that could fast-track planning decisions for shale gas and fracking projects.
New government measures, effective from August 14, give local councils up to 16 weeks either to grant or deny fracking permissions before Westminster steps in.
Chief executive Stephen Bowler gave many interviews saying IGas warmly welcomed the initiative and that the company would continue to ensure that any risks or environmental impacts are minimised.
More recently IGas was among the first oil and gas groups to be offered new acreage in Britain as part of the government 28th onshore licensing round.
The Oil & Gas Authority, the UK’s newly created regulator, revealed that 27 new licence blocks had been offered to companies in the initial tranche of the round. Seven of those blocks have been offered to IGas.
Precise details of the licence blocks have yet to be disclosed or analysed and it is not known how much of the acreage will involve shale gas.
But Bowler said: “We are delighted with these new licence offers which further increase our oil and gas operations onshore and extends our acreage position in the strategically important Gainsborough Trough”.
The Gainsborough Trough is a known as a shale hotspot in the North of England.
IGas has been champing at the bit to get on with the exploitation of its shale assets in the North and East Midlands, particularly since May, when it announced it had completed its farm-out to chemicals giant INEOS, a deal that puts real financial fire-power behind its existing shale gas acreage.
The AIM-quoted oil producer agreed the deal in March, which will see INEOS assume operatorship of production exploration and development licences PEDLs 133, 145 and 193 and EXL 273.
Under the terms of the transaction, IGas received £30mln in cash and a funded work programme of up to £138mln gross, with IGas’s share of these costs, reckoned to be about £65mln, to be funded fully by INEOS.
In the North West, INEOS will acquire a 50% per cent interest in IGas’s PEDL, 147, 184, 189, and 190 licences and a 60% interest in PEDL 145, 193 and EXL 273 (collectively known as the Bowland Licences).
Once commercial production starts from the Bowland Basin licences, IGas would pay back its net share of the carry out of 50% of its net free cash-flow.
In the East Midlands, INEOS has the option to acquire 20% in PEDL 012 and 200 and in Scotland INEOS will acquire IGas’s entire working interest in the acreage held under PEDL133 in the Midland Basin and assume operatorship.
INEOS is keen to advance the UK’s shale gas industry, believing an indigenous shale gas industry could transform UK manufacturing and lower feedstock costs for its Grangemouth petrochemical plant.
Partnering with IGas makes sense because IGas is one of the few publicly quoted groups at the forefront of the UK’s fledgling shale industry, and for IGas the tie-up adds further financial firepower to its shale portfolio.
The transaction means the shale gas wanna-be is now in partnership with industry heavyweights Total, GDF Suez and INEOS in the UK with a gross carried work programme of US$285mln.
It will give IGas a significant, funded schedule going forward, including 15 wells, flow tests and gas handling stations from its acreage covering 300 sq km and estimated by the company to hold 185 trillion cubic feet of gas.
In the meantime, in its most recently published guidance, in May, IGas said in the year to March 2015 the company produced 2,737 barrels of oil equivalent a day (boepd) - virtually all conventional oil - from its fields in the UK.
It expects to maintain output at 2,750 boepd for the next 12 months.
House broker Jefferies believes that IGas produced at US$48 a barrel including general and administration costs (G&A) and that capital expenditure was £13mln.
However, in the current poor oil price climate IGas has been cutting costs.
These involve head-count reductions of more than 25% including the closure of the former Dart office in Stirling, Scotland.(Dart was a company taken over by IGas).
At the end of March the company had cash of £19mln and net debt of £90.9mln. This has since been bolstered by the £30mln in cash from the INEOS farm-out.
The company expects to reduce costs per barrel to under US$40, and according to Jefferies, IGas has hedged 1mln barrels of its expected financial year 2016 output at an average of US$67 a barrel.
In attempting a valuation, which it last did after the May company update, Jefferies arrives at a core value of 18p a share. This includes revenues of £19.3mln from production and a sum for its12.6 mln barrels of proven and probable (2P) conventional oil reserves.
As for the shale gas question Jefferies bases its upside to a target price of 41p above the core valuation, on a 50% risking of the US$1079 per acre INEOS farm-in valuation.
The share price was 25.25p recently, but the valuation was made in May and the company has an annual general meeting (AGM) on Wednesday and we should glean some new information particularly about production, which should in turn lead to a Jefferies update on value.