Commodity prices, Brexit and now the impact of coronavirus have made it tough for small-cap oil and gas groups in recent months.
George Lucan, chief executive of Angus Energy PLC (LON:ANGS) believes even in the face of these extreme external factors the fundamentals behind its acquisition of the Saltfleetby gas field in Lincolnshire have not changed.
Indeed, if anything, they have improved, he says.
Angus paid a nominal amount for a 51% stake in Saltfleetby in June last year, with its owner Wingas, a Gazprom subsidiary, also paying £2.5mln towards abandonment costs at the previously producing field.
Lord Lucan says that the value of that deal was materially enhanced by a competent person’s report published earlier this month.
The CPR estimated recoverable gas reserves at 32Bcf (billion cubic feet) or much better than originally expected.
Net to Angus’s 51% stake, that makes about 16Bcf of gas and at a value of £4mln for each Bcf values its stake at around £64mln plus some additional condensates
Knock off taxes, costs and other expenses and Lord Lucan reckons that over its ten-year life Saltfleetby will generate a net US$35mln in cash to shareholders.
A reconnection story
Of course, it is not that straightforward. Angus will have to build 600 metres of pipeline to connect it to the grid and plans to drill a sidetrack next year but Lucan says there will be no new drilling.
“It is all about reconnecting. It’s not about drilling or exploration but restarting the two existing producing wells, which have valves on top to tell you pressure.”
Costs of the reconnection will be about £1.25mln, with the company having to pay roughly the same again for decommissioning.
What flummoxes Lucan is that given the (independent) CPR suggested Saltfleetby can produce £3.5mln in net cashflow annually for ten years, why Angus is valued at less than £2.6mln currently.
At 0.5p, the current market cap is even less than its cash holdings he adds
In terms of NAV per share, Anguis estimates the low, mid and high NPV cases suggested in the CPR are worth respectively 2.9p, 4.4p and 6.1p per share.
Lucan concedes there might have been some scepticism about why any company would hand that amount of gas over for effectively nothing, but he says companies of the size and cost base of Gazprom are not geared to handle small fields such as Saltfleetby.
But having been the UK’s largest onshore gas field at one point, it was effectively stranded by the closure of refinery at Theddlethorpe.
"For them, it’s now marginal but for us it’s transformational," Lucan says, He even envisages working together possibly with Gazprom on other similar-sized projects.
Buyers' market for gas equipment
Angus is now in the process of buying compression, clean-up and pipeline equipment, but here as well Lucan believes things have moved in its favour recently.
One of the main casualties of the recent oil price slump has been the US shale industry and that has meant what were once very expensive pieces of kit effectively for sale at scrap prices.
”It’s a buyers’ market,” he adds.
Production is scheduled to start in the fourth quarter of 2020 though there are still environmental, local council and OGA approvals required.
For that reason, Lucan won’t put a hard timeline on the reconnection as it is ‘all down to the slowest part of the process’.
Angus, though, will want Saltfleetby to come on stream as quickly as possible having suffered another setback at its Balcombe site in the Weald Basin in Sussex.
Balcombe meeting delayed by coronavirus
Here, it is targeting the deep Kimmeridge formations that were drilled nearby at Horse Hill by UKOG, but Lucan admits local opposition is fierce.
Earlier this week, a planning meeting at West Sussex Council to discuss an extended well test at the site was postponed due to the coronavirus crisis.
The planning officer, though, had recommended the application be turned down due to the High Weald being an area of outstanding natural beauty.
Lucan added: "The delay and recommendation are both frustrating but by no means final and many options exist to reach a more satisfactory outcome.
“In terms of the impact on cashflow the Balcombe project was forecast to result in cash outflow during calendar 2020 due to capital expenditures at the site.
“To the extent that the delay continues we shall have additional funds to direct to bringing Saltfleetby to first gas.”