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Independent Oil & Gas – North Sea licence awards would be better than an exploration well

Published: 12:01 10 Jul 2014 BST

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Independent Oil & Gas plc (LON:IOG) wants to continue building its North Sea portfolio through the UK’s pending 28th Licensing Round.

This would represent a significant catalyst for the AIM-quoted firm.

Totting up existing interests, including the Blythe and Skipper projects, as well as the pending addition of Cronx, IOG has just shy of 20million net oil and oil equivalent discovered barrels.

The company is currently working towards the submission of a field development plan for Blythe before the end of this year, which would make first gas production possible by around mid-2016.

Blythe is the starting point of what IOG sees as a ‘hub’ development and as such the company intends to appraise and later develop the nearby Harvey discovery and Truman prospect, as well as Cronx.

Preparations are ongoing for the appraisal of the Skipper and Cronx discoveries by mid-2015 and the securing of the appropriate drill rigs for these projects will be additional catalysts.

IOG also retains access to US$50mln of debt financing, for which it has had credit approval and could also be used to fund the acquisition of a producing asset, which is a strategic priority for IOG.

In the 28th Licensing Round, IOG has applied for three North Sea licences containing significant known discoveries, discarded for various reasons by prior operators.

Having done their homework, IOG believes these dormant discoveries are commercial and can be bought into production in due course.

While management doesn’t want to show its hand and as such naturally remains tight-lipped on details until the outcome of the bidding is known, it is estimated that IOG could potentially increase its discovered oil inventory as much as threefold to more than 60 million barrels of oil equivalent.

It is therefore fair to say a successful outcome would be a major share price catalyst for IOG, which since joining AIM in September has swung between highs of 49p and lows of 20p.

Licence awards are usually made based upon the technical merits of the respective applications and as such IOG believes it is well-placed despite the anticipated high level of competition for the best blocks.

“Last time we applied for four licences and got two. This time we’d be disappointed not to get at least two out of three.

“A great deal of technical work has gone into making these applications. The three licences IOG has applied for each contain two or more wells which have previously encountered hydrocarbons.

“They fit into the classic definition of dormant discoveries.

“We therefore believe that applying for these licences is a lot less risky than an exploration well, yet the results could be equally transformational for IOG,” chief executive Mark Routh told Proactive Investors.

Some sector experts have suggested that the Department of Energy and Climate Change (DECC) will aim to announce the new licence awards ahead of September’s Scottish referendum on independence.

The new licence applications are part of a broader portfolio building effort and it is not the only avenue IOG is pursuing.

A deal to acquire the Cronx field, to expand the Blythe hub, is currently progressing and is subject to IOG being recognised as an operator by DECC – an application was made in this regard in March and it is anticipated that the approval to operate will come by the end of the year.

At the same time, IOG is open to potential corporate M&A.

For any transaction, a paper deal would be deemed most likely and given management’s view that the share price is too cheap, the possibilities may presently be limited – unless of course the target was subject to a similar discount.

Management would not be drawn on potential names but confirmed they have an open mind as long as the combination is good value for IOG shareholders.

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