fmp230 Aug 2014 09:00
Exploration funded; big targets for 2014-16
With seven exploration prospects targeted for drilling within 18 months, Egdon’s exploration programme could provide a material catalyst for the shares. Success at prospects Wressle and Burton on the Wolds, due to spud in June, could be worth 20p to shareholders. Success at the more material Biscathorpe and prospect ‘A’, targeted for drilling in 2015, could add a further 85p on an unrisked basis.
Valuation: 26p RENAV, shale gas all upside
In terms of core NAV for Egdon’s existing assets we assign a value of 8.5p, comprising producing assets and cash. We value the seven exploration prospects at 17.5p, suggesting a risked valuation (RENAV) of 26p. In addition, we tentatively suggest a value for Egdon’s unconventional shale-gas acreage portfolio of 41p, suggesting a value for the company of 67p.
Alkane deal represents good value
On 13 May Egdon agreed to acquire the onshore UK shale gas exploration licences of Alkane Energy. 10 licences are to be acquired totalling 66,867 net acres, increasing Egdon’s shale-gas portfolio by 91% to 140,176 acres. Egdon will pay for the licences with the issue of 40m 20p shares, equating to a purchase price of £8m ($12.8m) or $191/acre. In terms of recent deals in UK shale this looks cheap. If we strip out the parcel of 29,700 acres highlighted as less critical to this deal, the group paid only $350/acre for these assets. This is against a backdrop of both asset and corporate deals in the UK ranging from $500-3,000/acre. The deal and simultaneously announced placing will be put to a general shareholder meeting for approval on 5 June.
From Alkane’s perspective the deal makes good sense; given the dispersed nature of Alkane’s licences and the group’s lack of capital, a standalone exploration programme was unlikely. We do not think the Egdon shares held by Alkane represent an overhang as Alkane has clearly stated its desire to retain leverage to a potential windfall from UK shale-gas development.
Of the 10 Alkane licences acquired, three are viewed as having the greatest shale gas potential: PEDL043 and PEDL169 in the Gainsborough Trough and PEDL191 to the East in the Craven basin, Lancashire. The absolute size and position of these licences relative to Egdon’s existing portfolio are illustrated in Exhibit 1.