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UK shale gas activity
The busy week continues and as I am out this morning I am writing today on the two big deals in the UK shale sector announced in the last few days. I will hopefully comment on Premier, Cape, Hurricane, GKP, Borders & Southern, Range Resources and Essar later, apologies.
On Friday it was announced that IGas had agreed to buy Dart Energy for £117m, (at 19 cents a 40% premium for holders) creating the biggest player in the UK shale gas space with over one million net acres in the UK’s major shale basins. The deal that the UK companies did with Total, and that Dart did with GDF Suez have financially strengthened them and this transaction enables IGas to continue operating their work programme whilst being carried in many areas.
The agreed deal gives Dart shareholders 30.5% of IGas although I expect most of the Australian retail to take advantage of the offers to smaller holders by the arbitraging situation and sell. The Chinese who hold a big stake in IGas from the Nexen deal will be diluted again to under 15% of the company. Dart has a number of attractions outside of the shale gas area with CBM licences and the Airth operation potentially ready to go once planning finally goes ahead, probably after the election in September. With no price on shale gas, valuation is tricky in this and the deal below, and as such I have seen a number of rather heroic numbers being bandied about, previous deals are the best guide to value and in both cases it makes previous acquisitions look very smart. In addition to this, the combined entity will be financially strong and with an exciting and funded work programme coming up, as well as the potential of the 14th round of onshore licenses at some stage there is much to look forward to.
I have many times recommended shares in the UK’s unconventional industry and this deal vindicates my view on how cheap Dart was, both deals leave vehicles which are funded and have strong work programmes and both, despite slightly differing exit routes are likely to prove wise investments. I continue to believe that over the next two years as an absolute minimum, investors will, if they want to participate in what might be the next ‘North Sea’ only be able to invest in IGas or Egdon/Alkane. At current levels and using the crudest valuation tools of previous deals then I think that the share price could double and not be considered expensive.
Egdon Resources has done a deal with Alkane Energy whereby it has bought certain of its UK onshore assets for the payment of 40 million Egdon shares, giving Alkane 21.5% of Egdon going down to between 18 and 19% post dilution. At the same time Egdon is raising around £7m by way of a placing and an open offer at 20p which is a 7% discount, less if you believe that the deal had leaked, either way it is a very creditable discount.
Following this deal Egdon will have two slightly sub 20% holders in Alkane and Premier Oil and Alkane will have board representation. The acreage is to be split on a horizontal axis with Egdon taking the deeper and Alkane the shallower interests. This leaves the shale and conventional plays to Egdon and the shallower to Alkane.
The money raised will be needed in a number of ways, Egdon is doubling its shale gas acreage so will need a bigger head count, there will be licence fees for another ten licences and they will be doing more technical work across the portfolio and there is the 14th round to think about. The much delayed onshore licensing round is due to finally get under way in July of this year (or later on past DECC form!) and this deal puts Egdon in a very strong position to take advantage of the opportunities that will offer. Don’t forget that the company is at the early stage of the exploration process and at the right time an exit route is envisaged to monetise what has been an exemplary creation of value. Should the 14th round and the attendant publicity bring in new, bigger international players I would expect Egdon to maybe take advantage of new players in the process and perhaps there might be a bigger, more tradeable market that would suit Egdon down to the ground. Egdon also has the conventional part of its portfolio to manage which brings balance and scope, a two well programme starting in June with Wressle and then Burton on the Wolds and the A prospect.
For Alkane this deal is most attractive, it provides a valuation of its unconventional assets not previously possible (although often speculated on) and it ensures that the company and its shareholders are able to participate in the upside should discoveries and production happen. I’m very surprised that the market has yet to push the Alkane price up as it now has a very strong traditional gas to power business growing rapidly which is now tied in to significant potential upside in a number of ways, after all, this is only the beginning of collaboration between the companies.
Overall I consider that investors should look at these two deals and realise that there are few listed opportunities to participate in what might be a significant onshore play in the UK and as and when the 14th Round comes up others may join in, this will have been the chance to get in early.