Independent Oil & Gas (LON:IOG)
Independent Oil & Gas (LON:IOG) has provided an update on the integrity of the Thames Pipeline which demonstrates that further testwork and analysis of the existing data has demonstrated that the condition of the pipeline is “excellent”. Testwork on the cut section by Oilfield Testing Services demonstrated less than expected internal corrosion which shows the pipeline can be considered virtually new.
As a result, of these encouraging results IOG has updated its integrity confirmation plan. It will run a 24 hour hydrotest required under the Pipeline Code in July and August on the section of the pipeline most likely to have suffered from degradation since decommissioning in 2015 i.e. between the Bacton terminal to 1km offshore. However, further intelligent pigging is not now expected to be required until shortly ahead of first gas when the entire export route will be tested, including extensions.
The Thames Pipeline is a critical part of IOG’s project providing a 100% owned export route for its Southern North Sea gas project. These results confirm our view that the pipeline will save the company hundreds of millions in development capital overall, significantly enhancing the economics of the project. Furthermore, at peak production we anticipate c180mmcfd indicating a minimum 120mmcfd spare capacity on which IOG could benefit from exporting third party gas for additional tariff revenue which would further strengthen returns.
There will consequently be some expected cost savings in relation to the updated plan although Field Development Plan approval has now been pushed back to the end of September. With the project approaching FDP and following significant positive announcements regarding the pipeline and resource expansion the shares have rallied 87% since our initiation in March 2018. Although historically sharp rallies in the shares have eased back, with FDP now approaching we believe that further positive progress towards first gas is likely to result in stronger support for the stock.
We reiterate our Buy recommendation and target price of 96p.