Resolution Farm-In Agreement with Shell
In what is a major positive endorsement of the asset, Egdon Resources (EDR LN) has announced the signing of a Farm-In Agreement with Shell (RDSA LN) in relation to offshore licences P1929 and P2304 which contain the Resolution and Endeavour gas discoveries. Shell will now take a 70% working interest in Licences P1929 and P2304 and act as operator with EDR retaining a 30% non-operated interest. Shell will pay 85% of the costs of the acquisition and processing of the 3D seismic survey over both the Resolution and Endeavour gas discoveries. The carry on the acquisition costs will be capped at US$5 million gross, beyond which Shell would pay 70% of the cost. In addition, Shell will pay 100% of all costs relating to studies and manpower up to a well investment decision on the Licences.
We value the combined discoveries at 13.8p/sh. of which little is reflected in the current share price, despite the 49% rally YTD. However, we believe that the farm in agreement provides a clear path to derisking the assets and realising value for EDR shareholders. Furthermore, the fact that a supermajor has farmed into the asset highlights its potential quality
EDR also recently announced that planning consent for the development of the Wressle oil field had been granted by the Planning Inspectorate on appeal. This is a significant and long-awaited step for EDR who will now begin detailed planning for the development works. EDR has also been permitted to make an application for an award of costs against North Lincolnshire Council. Producing 150bopd net to EDR the field has significant positive implications for the company’s near-term earnings outlook commencing FY 2021. YoY revenues are expected to increase by £1.5m YoY to £3.5m in FY 2021.
Recommendation and Target Price
The recent announcements validate our investment thesis for EDR highlighting the attractive balance between developing and operating assets as well as conventional and unconventional.
We reiterate our Buy recommendation with a target price of 38.4p/sh.