Developments at Wressle and Resolution

Egdon Resources 27 January 2020 Update
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Egdon Resources

Developments at Wressle and Resolution

Licences Update

Oil & gas

27 January 2020

Price

4.55p

Market cap

£14m

US$1.26/£

Net cash (£m) at end July 2019

1.6

Shares in issue

303.3m

Free float

55%

Code

EDR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

40.0

(13.3)

(41.9)

Rel (local)

40.9

(17.0)

(48.2)

52-week high/low

8.22p

2.55p

Business description

Egdon Resources is an AIM-listed onshore oil and gas exploration company. The group has conventional and unconventional assets in the UK.

Analysts

Carlos Gomes

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Egdon Resources is a research client of Edison Investment Research Limited

Egdon Resources started the year with two important developments. The first was the announcement of the positive result of Egdon’s appeal against the refusal of planning consent at the Wressle oil field, which will allow the company to proceed with project development. The second was the farm-in agreement for the P1929 and P2304 licences with Shell. In November 2019, Egdon announced it had signed an exclusivity agreement for the licences, which contain the Resolution and Endeavour gas discoveries. The farm-down to Shell will allow Egdon to retain a 30% working interest in the licences and proceed with a 3D seismic survey planned for 2020. Our updated RENAV increases from 10.8p/share to 13.2p/share as we had previously assumed that Egdon would only retain a 15% working interest in the project.

Year-end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

EBITDA
(£m)

Net cash
(£m)

Operating
cash flow (%)

07/18

1.2

(2.0)

(0.8)

(2.2)

2.7

(1.6)

07/19

2.2

(1.7)

(0.2)

(0.6)

1.6

(0.9)

07/20e

1.9

(0.9)

(0.8)

(0.6)

0.2

(0.1)

07/21e

4.1

(1.5)

(0.8)

1.5

1.0

2.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Joining forces with a major E&P player

Under the terms of the farm-in agreement, Shell will become the operator and will acquire 70% in both P1929 and P2304, with Egdon retaining a 30% interest. Shell will also pay 85% of the costs (70% after the $5m threshold) of a 3D seismic survey covering the Resolution and Endeavour gas discoveries, estimated to contain mean contingent resources of 231bcf and 18bcf, respectively. Shell will also pay 100% of all studies and manpower costs up to a well investment decision. The farm-in is conditional upon approval from the Oil & Gas Authority.

Green light for development planning at Wressle

Egdon announced that its appeal against the refusal of planning consent at the Wressle oil field has been upheld and it has now been granted planning permission. The project has incurred numerous delays due to rejected planning applications but Egdon now has the green light to start working on development planning. Wressle has the potential to add c 150bopd of oil production to Egdon’s portfolio.

Valuation: RENAV at 13.2p/share

Our risked NAV valuation remains at 0.7p/share for producing assets and cash net of SG&A, rising to 13.2p/share (from 10.8p) if we include risked exploration potential. Our RENAV now accounts for a 30% working interest at Resolution versus the previously assumed 15% participating interest. A more detailed description of Egdon’s assets can be found in our recently published outlook note. Egdon’s FY19 cash position of £1.6m should cover its share of 3D seismic, however in case of a drilling decision at Resolution, additional funding would have to be secured.

Valuation

We value Egdon’s asset base using a conventional risked net asset value (NAV) approach, with a risked valuation for proven undeveloped reserves, contingent and prospective resources. We use publicly available sources for our key assumptions, including company guidance, analysis of analogous field developments and government data.

We employ a 12.5% cost of capital to reflect the through-cycle cost of funding. We incorporate the end-FY19 net cash position and G&A for the next three years, and include Egdon’s conventional asset base in our valuation. We see greater value in the company’s exploration and appraisal portfolio compared to the producing assets, in particular its interest in the appraisal of the Resolution gas discovery, which makes up the bulk of our RENAV. We have updated our valuation to incorporate a retained working interest of 30% in Resolution versus our previous estimate of 15%. A full valuation breakdown is provided in Exhibit 1 below, including producing assets and risked exploration and appraisal.

Exhibit 1: Egdon valuation breakdown

Assets

Country

WI

CCoS

Net

NPV/boe

NPV12.5

Risked

%

%

mmboe

$/boe

$m

p/share

Net cash at 31 July 2019

2.0

0.5

G&A (3 years)

(3.4)

(0.9)

Production

Ceres

UK

10%

100%

0.39

4.0

1.6

0.4

Fiskerton

UK

80%

100%

0.07

1.0

0.1

0.0

Keddington

UK

45%

100%

0.07

(8.6)

(0.6)

0.0

Wressle (Ashover Grit)

UK

25%

60%

0.14

25.3

2.2

0.6

Core Nav

1.9

0.7

Exploration

Broughton

UK

25%

23%

0.11

19.0

0.4

0.1

Louth

UK

65%

20%

0.85

12.4

2.1

0.6

North Kelsey

UK

80%

12%

4.94

13.1

7.8

2.0

Resolution

UK

30%

50%

11.11

6.4

35.7

9.3

Wressle (upside)

UK

25%

25%

0.38

19.0

1.8

0.5

RENAV

 

 

 

 

 

49.8

13.2

Source: Edison Investment Research. Note: Number of shares in issue: 303.3m.

Exhibit 2: Financial summary

£000s

2017

2018

2019

2020e

2021e

Year-end 31 July

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,039

1,215

2,197

1,915

4,108

Cost of Sales (inc DD&A)

(1,576)

(2,190)

(2,876)

(1,634)

(4,448)

Gross Profit

(537)

(975)

(680)

281

(339)

EBITDA

 

 

(1,193)

(2,219)

(628)

(589)

1,529

Operating Profit (before amort. and except.)

 

 

(1,657)

(1,938)

(1,668)

(812)

(1,459)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(1,657)

(1,938)

(1,668)

(812)

(1,459)

Net Interest

(42)

(41)

(49)

(52)

(52)

Profit Before Tax (norm)

 

 

(1,699)

(1,978)

(1,717)

(864)

(1,511)

Profit Before Tax (FRS 3)

 

 

(1,699)

(1,978)

(1,717)

(864)

(1,511)

Tax

0

0

0

0

0

Profit After Tax (norm)

(1,699)

(1,978)

(1,717)

(864)

(1,511)

Profit After Tax (FRS 3)

(1,699)

(1,978)

(1,717)

(864)

(1,511)

Average Number of Shares Outstanding (m)

249

260

303

303

303

EPS - normalised (p)

 

 

(0.7)

(0.8)

(0.2)

(0.8)

(0.8)

EPS - normalised fully diluted (p)

 

 

(0.7)

(0.8)

(0.2)

(0.8)

(0.8)

EPS - (IFRS) (p)

 

 

(0.7)

(0.8)

(0.6)

(0.3)

(0.5)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

28,495

30,105

31,477

32,530

30,735

Intangible Assets

19,231

19,572

21,781

22,503

23,249

Tangible Assets

9,264

10,534

9,696

10,027

7,485

Investments

0

0

0

0

0

Current Assets

 

 

7,613

4,020

3,293

1,877

2,660

Stocks

0

8

0

0

0

Debtors

1,507

1,240

1,675

1,675

1,675

Cash

6,057

2,772

1,618

202

985

Other

50

0

0

0

0

Current Liabilities

 

 

(1,216)

(1,150)

(1,379)

(1,379)

(1,379)

Creditors

(1,216)

(1,150)

(1,379)

(1,379)

(1,379)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(2,187)

(2,249)

(2,397)

(2,397)

(2,397)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(2,187)

(2,249)

(2,397)

(2,397)

(2,397)

Net Assets

 

 

32,705

30,727

30,994

30,631

29,619

CASH FLOW

Operating Cash Flow

 

 

(422)

(1,629)

(907)

(89)

2,029

Net Interest

0

0

(0)

(52)

(52)

Tax

0

0

0

0

0

Capex

(1,054)

(1,825)

(2,220)

(1,275)

(1,193)

Acquisitions/disposals

0

137

0

0

0

Equity Financing

4,865

0

1,974

0

0

Other cash flow

5

8

4

0

0

Net Cash Flow

3,394

(3,308)

(1,150)

(1,417)

784

Opening net debt/(cash)

 

 

(2,678)

(6,056)

(2,748)

(1,599)

(182)

HP finance leases initiated

0

0

0

0

0

Other

16

0

0

(0)

0

Closing net debt/(cash)

 

 

(6,056)

(2,748)

(1,599)

(182)

(966)

Source: Company data, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Egdon Resources and prepared and issued by Edison, in consideration of a fee payable by Egdon Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Egdon Resources and prepared and issued by Edison, in consideration of a fee payable by Egdon Resources. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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