UK Shale gas
A quick blog on the shale announcement this morning, a little later than planned but I have managed to get in depth interviews with the company’s involved except Total and eCorp. I will write a bit more later but as the share prices of the quoted stocks have risen it is appropriate to acknowledge at least why.
Regular readers will know that I have been positive on UK shale, not least as a reasonably low cost way of ensuring that the country does not miss the boat on a possible energy revolution, if the jeremiahs on fraccing had been around in the 60’s the North Sea would never had been drilled. I think I am circumspect enough to realise that this will not cut energy bills at a stroke, revitalise British industry or even save the country from the traumas of the cost of long term gas imports with its associated balance of payments advantages and independence but could with only a modest success rate, be transformational for the country.
Total has farmed-in to UK onshore licences PEDL’s 139 and 140 and joins Dart, IGas, Egdon and eCorp in the Gainsborough Trough, part of the Bowland Shale. There has been a restructuring of licence interests and I am not going to try and explain what the old interests were as they were split low and high, suffice it to say that the new interests are as follows. Total 40%, Dart 17.5%, IGas 14.5%, Egdon Resources 14.5% and eCorp 13.5%. Total will pay costs of up to $46.5m plus $1m to Dart on completion. When the deal completes Dart will cede the operatorship to IGas and after the initial work, expected to be 3D seismic, a vertical exploration well and if successful a horizontal appraisal well, Total will take over as operator.
For Dart this represents another excellent piece of farm-out business following the recent deal with GDF SUEZ and mean that they have raised money, opened up their UK acreage whilst being carried and remain with a substantial portfolio of assets in the exciting onshore basins giving them substantial flexibility. It is not an exaggeration to say that these two deals for Dart have had a meaningful effect on the company and its restructuring in recent months has been transformational. This deal is not only more valuable than any that came before it but as with the other participants, has franked a value on its acreage giving substantial upside to the shares. As the key asset for Dart is now firmly in the UK it would be surprising if the company did not press on with a dual listing, giving UK shareholders a chance to participate in this company which is now in a far better position than it was even 12 months ago.
For IGas and Egdon the deal also shows a good deal of upside, for IGas it proves that its expertise means that it will operate the exploration process and will be in charge of spending total’s money, for both of them it too franks and improves previous deal valuations. The Centrica and GDF valuations were probably half as valuable as this and therefore with extensive acreage nearby, increases the value of their portfolios substantially. I am working on $5.7m per TCF of shale gas in place so all these stocks could be significantly undervalued.
For the Government there are a number of positives to take from the deal and confirms their support for the shale gas industry. The fact that a major, albeit a French major, has decided that it is worth the risks of the process to invest in the UK is good and validates their early confidence in the process. Dave has also decided to try and make life easier for local authorities by saying that they will be able to keep 100% of business rate income from shale gas activity rather than the existing 50%, this is a meaningful number as rates on a big site might be £20m each, start to multiply that out and local authorities will be better off to a significant degree. In addition to this, local communities are set to gain from the drilling in their vicinity with cash payments and revenues dependent on success, currently proposed to be 1% so a tangible framework for them can be stablished.
This is probably not the end of the farm-out activity, these three companies have plenty more acreage and will encourage other companies in, for all of them momentum in the process is good news. My spies tell me that there are other international players waiting on the side-lines, this deal can only speed up the process and frank the values already paid. With so few potential investment targets my mantra is not going to change, investors should consider investing in IGas (target 250p), Dart (25c+), Egdon (20p+) and also to consider other companies with as yet unrecognised shale assets such as my old favourite Alkane Energy (70p) which could put its unconventional assets together at some stage.
Much more later, another blog as well as its been a mad, mad morning!