This morning IGas Energy (LON:IGAS) unveiled plans for a major step-up in drilling in the coming months, now that it has full control of its UK coal bed methane (CBM) assets.
CBM is an unconventional hydrocarbon that has been widely developed in Australia, North America and China but has yet to catch on in a meaningful way in Europe.
IGas had been developing a portfolio of CBM projects across the UK through a joint venture with Canadian oil and gas firm Nexen. However in January it executed a transformational deal to buy-out its major partner and it simultaneously raised £20.6 million.
Crucially the deal gave IGas full ownership of the 1.7 trillion cubic feet of CBM gas (C2 resource).
The deal made many of the City’s market watchers sit up and take notice. Several big name institutions have took an interest in the AIM-listed group – with Goldman Sachs, RBS and Numis issuing ‘buy’ recommendations in the early part of the year.
Now IGas has decided to press ahead with an expanded drill programme that will see it drill four to six wells in the first half of 2012.These wells will be spread across five separate development sites.
This morning RBS analyst Phil Corbett said that the enhanced drill programme will help IGas convert resources into reserves – and in turn into production – but more importantly it could give investors more confidence in the viability of the CBM resource play.
The analyst upgraded his price target, from 100 to 125 pence a share, in response to the group’s more aggressive drill plans.
“We continue to believe there is significant upside potential in the share price if IGas can unlock the potential of its CBM resource,” Corbett said in a note to clients.
“Crucial to this, in our view, will be delivering positive results from the drilling programme.”
Corbett emphasised that his target 125 pence target fairly balances the risks and rewards, and he expect the share price to appreciate in coming months as the group nears the active drilling campaign.
Meanwhile Numis Securities – who currently see the stock as a ‘buy’ with a 139 pence target – highlighted that its target is conservative and in a ‘high case’ scenario the stock could be worth 260 pence a share.
This ‘high case’ foresees better gas prices, faster development and cheaper capital expenditure.
“The 2010 results released today represent a company in transition, from a minority owner of UK CBM assets to a business that now has full control (and is sufficiently funded) to begin rolling out its portfolio of full CBM production sites,” Numis analyst Matthew Lambourne said in a note to clients.
“We think it is positive that IGas is diversifying its drilling campaign across several sites – several concurrent developments allows dewatering (which is an important stage in developing CBM wells) to occur simultaneously and de-risks several assets at the same time.”
This morning’s full year financial results showed an expected loss – IGas is a resource development company and its revenues largely came from management fees paid by Nexen – of £1.5 million (FY09: £504,000 loss).
By the end of April 2011 IGas had £30.6 million in cash and it expects to spend (capex) between £14 million and £19 million during 2011.
Chairman Francis Gugen said: “As I said in the last annual report, 2010 and 2011 were going to be critical years for IGas to grow.
He added: “We are now totally focused on a step change in activity. During the next nine months we will be operational at five sites and will have more wells being drilled than in the previous four years. I look forward to the next year with optimism.”
He went on: “Looking at the wider energy market in the UK we have been seeing rising prices for gas and electricity and an increasing focus on security of supply.
He said IGas’ portfolio of domestic assets, close to customers and distribution networks, was uniquely positioned.
“Security of supply is a growing political issue in the UK and it is my view that gas fired power generation will be an increasingly material part of the mix. With a growing demand for gas and the UK increasingly relying on importing gas, the benefits of supplying local gas to local consumers, via existing infrastructure, are considerable.”
IGas also confirmed that its executive technical director Brent Cheshire will retire from the board in June.
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