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UK shale deals make Egdon Resources a takeover target, says VSA Capital

Published: 11:27 28 May 2014 BST

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Egdon Resources (LON:EDR) is a potential takeover target following the consolidation of its position in Britain’s nascent shale gas industry, according to VSA Capital.

The City broker today began its coverage of the AIM-quoted oil and gas junior with a ‘buy’ recommendation.

A punchy 60p target is more than double the current price of 24.7p per share.

Hot on the heels of IGas’s (LON:IGAS) deal to buy Dart Energy (ASX:DTE), which creates the UK’s largest shale gas player, Egdon acquired Alkane Energy’s onshore shale assets in mid-May.

With a deal value of about £8.5mln the Egdon transaction didn’t register in the same league as IGas’s £117mln takeover of Dart, but by taking the oil minnow’s shale portfolio to 140,176 acres it put Egdon in a position of strength.

Indeed, VSA analyst Marc Anis-Hanna points out that Egdon will now be the second-largest acreage holder in the UK shale play, and it is estimated to have 27.6 trillion cubic feet of gas-initially-in-place.

“UK shale gas is a nascent industry, but is strongly supported by the UK government, which has implemented strong taxation incentives,” Anis-Hanna said in a note.

“New players are entering this highly promising area, and small E&Ps have started consolidating to reach critical mass - e.g. EDR/ALK and IGas/Dart - thus enhancing asset values. We therefore view EDR as a potential takeover target.”

As guessing games begin and speculative investors reach for a figurative crystal ball, a glance at the shareholder register suggests two other listed companies may prove significant should any offer emerge.

Alkane, as a result of this month’s acquisition, now has 22% of the company’s shares whilst FTSE 350 constituent Premier Oil retains a 21% stake.

Setting aside Egdon’s shale interests and M&A potential, the VSA analyst sees an upcoming eight well drill programme as a near term catalyst for the AIM share.

“EDR is an explorer looking to monetise its resources ahead of development.

“Eight wells are planned by the first quarter of 2015 in the current drilling campaign, targeting 26.5mboe net to EDR, which should support the share price in a news flow driven industry.

Success with the drill-bit could add as much as 46p per upside to the broker’s valuation, he said.

“The near-term drilling programme will act as an important value driver for EDR, giving significant upside potential.”

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