VSA Morning Flow Test, 27/06/19
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Egdon Resources (LON:EDR)
Egdon Resources (EDR LN) has announced the much anticipated results of its Springs Road exploration well which was completed 20% under budget earlier this year. EDR holds a 14.5% interest while IGas (LON:IGAS) is the operator and we have previously highlighted the exploration well as a potential play opener given its central position within the Gainsborough Trough where EDR has a net 82,000 acres of shale exploration acreage. Today’s strong results confirm a major step towards realising that potential.
The vertical exploration well was drilled to a depth of 3,500m intercepting 429m of hydrocarbon bearing shales from the Bowland Shale, Millstone Grit and Arundian Shale. IGAS recovered 147m of core from the Bowland shale starting at c2,100m depth. This was the primary target for drilling and was analysed by Stratum Reservoir. The highlights of those results include:
- Total Organic Carbon (TOC): 2-7% averaging 3%. Which compares to 2-8% in the Marcellus and a minimum of 2% in the Permian.
- Average thermal maturity of 464°C.
- Total porosity of 2-9% averaging 4% compared to 3-13% in the Marcellus and 2-10% in the Permian.
- Gas content of 24-131scf/ton averaging 71scf/ton versus typical values of 40-150scf/t in the Marcellus. We also highlight that Cuadrilla’s Preston New Road yielded an average of 40scf/ton.
- Average clay content of c.30 wt.%.
The low clay content means that hydraulic fracturing would likely be effective although this is likely to vary significantly across the reservoir. Higher clay content areas are more ductile and less likely to fracture when stimulated while lower clay content rocks which are more brittle enable to gas to flow more easily when fractured. Although the figure is an average it is lower than we had anticipated which we believe is a further positive.
We attach a high level of significance to the higher gas content compared to the Preston New Road development where Cuadrilla recently completed flow testing. Whilst with gas contents and porosity closely aligned to those of the major commercial shale basins of the US these results imply a major step forward in technically derisking the Gainsborough Trough and demonstrating that it the geological characteristics suitable for economic extraction.
The announcement indicates that IGAS and EDR will provide further detail in the coming quarter as well as providing more detailed comparative data on analogues. At this stage we have provided very high-level generalised statistics from the US which do not reflect the nuances within the basins mentioned, however, we believe that given the results the quality of the host rock within the Gainsborough Trough is clear, in our view.
We maintain that the UK will likely remain dependent on natural gas for a significant portion of its needs over the coming decades. This outlook is supported by the fact that natural gas is the cleanest hydrocarbon based fuel and represents a practical step towards lowering greenhouse gas emissions. Furthermore, the UK is currently reliant on imports for c50% of its gas needs and there is a clear benefit to exploiting domestic energy supplies. These strong results from Springs Road provide significant weight to the argument that the UK Government should re-evaluate its position and actively work to develop this industry.
Having recently completed an open offer which raised £1.9m on a net basis the company is in a strong position underpinned by a significant production uplift in 2019 driving a stronger revenue and earnings outlook YoY. With a strengthened balance sheet EDR is well placed to capitalise on the results from Springs Road as well as to continue to progress other key areas of its portfolio such as Resolution.
Our current target price of 39p is dominated by our shale acreage valuation which accounts for 27p of the total. The market has to date given little credit to this part of EDR’s portfolio, however, we believe that these latest results should drive a significant rerating of the stock particularly as our valuation of US$787/acre was based primarily on transactions for shale acreage which had only been modestly derisked. More advanced acreage typically trades closer to and in excess of US$2,000/acre. We note that EDR acquired much of its acreage for US$200/acre or less.
We reiterate our Buy recommendation and 39p target price.