Small cap oil and gas stocks including IGas Energy PLC (AIM:IGAS, OTC:IGESF), Egdon Resources PLC (AIM:EDR), Union Jack Oil PLC (AIM:UJO) and Deltic Energy PLC (AIM:DELT) could among the beneficiaries as incoming PM Liz Truss zeros in on energy security.
It is certainly not the first time that investors have bought into the possibility that the United Kingdom could bulk up its domestic hydrocarbons industry, especially onshore.
For about a decade now there’s been appetite to go after vast but seemingly unextractable volumes of gas in shale beneath swathes of British land.
The anti-fracking lobby, the spectre of man-made earth tremors, nimby protestations and a political system that’s passed the buck back and forth between council committees and Westminster have over the years added up to widely held expectations that decades worth of gas supply would remain untapped.
While the environment seems to have become more favourable in the last few months, it remains to be seen whether this time will be any different to the past where reform has stalled at the on-ramp.
Whether or not talk of energy security is merely opportunistic fodder for the incoming PM, plans to greenlight fracking will certainly be divisive and likely problematic for at least one side of Britain’s politics.
Nevertheless, evidently out-of-control soaring fuel prices perhaps provide a new, more urgent context for what cynical market watchers may otherwise dismiss as pie-in-the-sky.
One suggestion eking out of broadsheet editorials and online think pieces is that through a combination localised incentives - basically, “you can have discounted gas bills if you let us frack next door” - and the desperate need for the new government to score a big win, may provide the difference maker this time around.
It certainly is the case that there’s renewed interest and giddiness among investors, in the small-cap space at least.
Igas Energy has apparently developed a very strong fan club with the stock up more than 100% in the last month amid hedge fund interest in the stock.
Notably, Brexit-supporting hedge fund manager Crispin Odey has built a career and a personal fortune estimated in excess of £800mln through his ability to spot a market opportunity.
It was revealed in early August that the old Harrovian’s Odey Asset Management had taken a stake of 3.17 per cent in the natural resources minnow – not directly but via unnamed financial instruments, quickly triggering wild speculation on online forums and social media.
It is a risky bet, nonetheless, as the outcome will most probably be binary. Either the light will turn green or stay red, the latter leaving the gas projects buried at least until the next speculative cycle.
Presently, there is a moratorium on the controversial fracking extraction technique, which is alleged to have sparked a mini earthquake near Blackpool three years ago.
The British Geological Society was asked to compile a ‘drill-or-drop’ report on the UK’s vast shale resources. The BGS handed in its homework early last month.
The hope among the shale evangelists is that the BGS report will provide just enough scientific justification (or, alternatively be absent of major red flags) so that the moratorium can be lifted.
If it does the plan for IGas is quite simple, get to work.
An April 2022 corporate presentation revealed that with the right financial support, IGas plans to deliver five well pads.
Each pad is envisaged with up to 16 wells, drilled over 18 months, and could supply 3mln homes with cheaper domestic gas.
At the same time, Egdon Resources, which is also a UK onshore play that has designs on a shale gas future, was also up strongly through August.
Elsewhere in the sector, Union Jack Oil & Gas is another onshore UK small cap that’s been in the spotlight in recent months.
Alongside partners Europa and Egdon, UJO has the single-well Wressle field in Lincolnshire beat production targets whilst crude prices have hit the recent highs.
For Union Jack and friends a lot of hay has been made whilst the sun’s been out.
Now, with more cash in the bank than investors originally bargained for, it will be one to watch as next steps are decided.
If the UK shale sector does indeed take off it will be well placed to play a part, if that’s the direction management choose to go.
North Sea opportunities
Whilst shale resources are believed to be vast, a possibly easier route to improving UK energy security would be through new projects in the North Sea.
Controversial windfall taxation introduced earlier this year, although unpopular amongst producers, brought in supportive measures for a select group of small caps.
So, those with deal-ready or in-development projects will benefit from Rishi Sunak’s sweetener which upped the tax relief on new investments to 91p in the pound.
It means big producers in the region can swerve the majority of the windfall tax, so long as they pour money into developing new projects instead.
Potentially, it’s a massive boon for small-cap firms that would otherwise have to fight for funding in less than favourable conditions capital market conditions.
Instead, team-up deals with producers potentially see small-cap explorers and developers hitched into opportunities to fast-track.
Deltic Energy is an ambitious smaller explorer that’s very much in the limelight thanks to its partnership with Shell, which is preparing to set to start work on the Pensacola exploration well.
Pensacola happens to be one of the most hotly anticipated North Sea well for years. It has a chance of unlocking a large gas resource that’s close enough to existing infrastructure that production could feasibly be deliver more quickly than usual.
All that relies on the well finding the gas that the partners are targeting, and in exploration there’s no such thing as a dead cert.
Progress towards the September spud date has so far caught the imagination of small-cap investors, as well as Deltic’s management.
'We are really excited about Pensacola,' Deltic chief executive Graham Swindells told Proactive in August.
'It's a very significant prospect that can be brought on-stream relatively quickly [if the exploration well is a success] and it would be a real play-opener for the Southern North Sea.'
Swindells says Deltic, which has yet to test a prospect in its portfolio, is positioned for 'transformational growth' if Pensacola, or one of its other UK North Sea prospects, comes good.
'We're a relatively small company, with our market cap (just over £40million today) and our low overhead, we're really geared for exploration success. So I don't think I'd be overstating it to say that a success in this well would be absolutely transformational for us and our shareholders.'
Deltic is of course one of a several London-listed North Sea firms with big ambitions, though the market’s attention is very on this well in the coming weeks.
But that’s not to overlook other players such as I3 Energy and Europa which are advancing the Serenity well this month also, and, will similarly tee-up a new high profile development should the appraisal project deliver.
Across the sector, plainly, the appetite and excitement is there. Investor’s will now look hopefully towards the new government. Time will tell whether it results in valuable gas, or if all drifts away like hot ephemeral air.