Egdon Resources — UK shale appraisal in focus

Egdon Resources (AIM: EDR)

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Research: Energy & Resources

Egdon Resources — UK shale appraisal in focus

We have slightly increased our valuation of Egdon’s conventional asset base from 12.5p/share to 12.7p/share (+2%). Moving parts include higher forecast Ceres production in FY19 and a stronger dollar offset by the removal of Holmwood. Our valuation of Egdon’s net shale resource (188,000 net acres) remains uncertain but, in our view, has the potential to be worth a risked c 100p/share based on current expectations of well cost, type curves and forward gas prices. Appraisal activity at Cuadrilla operated Preston New Road is set to provide information on horizontal well flow rates in the Bowland Basin with results due at the end of CY18 or early 2019. Initial flow-back gas at Preston New Road announced on 2 November is encouraging.

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Energy & Resources

Egdon Resources

UK shale appraisal in focus

FY18 results

Oil & gas

12 November 2018

Price

7.50p

Market cap

£20m

US$/£ 1.33

Net cash (£m) at 31 July 2018

2.8

Shares in issue

260.0m

Free float

47%

Code

EDR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.7

(14.5)

(3.0)

Rel (local)

2.7

(6.9)

2.2

52-week high/low

12.5p

5.7p

Business description

Egdon Resources is an AIM-listed onshore oil and gas exploration company. The group has conventional and unconventional assets in the UK and access to over 188,000 net shale acres.

Next events

Biscathorpe drilling

Late 2018

Springs Road-1 drilling

Early 2019

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

Elaine Reynolds

+44 (0)20 3077 5713

Carlos Gomes

+44 (0)20 3077 5700

Egdon Resources is a research client of Edison Investment Research Limited

We have slightly increased our valuation of Egdon’s conventional asset base from 12.5p/share to 12.7p/share (+2%). Moving parts include higher forecast Ceres production in FY19 and a stronger dollar offset by the removal of Holmwood. Our valuation of Egdon’s net shale resource (188,000 net acres) remains uncertain but, in our view, has the potential to be worth a risked c 100p/share based on current expectations of well cost, type curves and forward gas prices. Appraisal activity at Cuadrilla operated Preston New Road is set to provide information on horizontal well flow rates in the Bowland Basin with results due at the end of CY18 or early 2019. Initial flow-back gas at Preston New Road announced on 2 November is encouraging.

Year end

Revenue
(£m)

PBT*
(£m)

Net cash/
(debt) (£m)

EBITDA
(£m)

Capex
(£m)

07/17

1.0

(2.2)

6.1

(1.2)

(1.1)

07/18

0.8

(1.7)

2.8

(2.2)

(1.8)

07/19e

3.2

(0.6)

0.9

0.1

(2.4)

07/20e

4.2

(2.0)

(0.2)

(0.1)

(1.5)

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

Small upgrade to conventional value

Our valuation of Egdon’s conventional asset portfolio increases by 2%, driven by higher than expected gas production from Ceres in FY19 and a stronger dollar, but offset by the removal of Holmwood where the site lease was not renewed. The operator is looking at new site locations for the drilling of Holmwood, and we expect to revisit this asset once new plans emerge. Production guidance for H119 stands at 150–180boed with Ceres gas production expected to increase over the year and H219 (Edison estimates 211boed for FY19).

Upcoming activity

Drilling operations are expected to commence at Biscathorpe (Egdon 35.8% part carried) in late 2018, aiming to evaluate the 1987 BP oil discovery with net mean prospective resource of 5mmbo. Spud of the play opening unconventional exploration well at Springs Road-1 in the Gainsborough Trough (Egdon 14.5% carried) is expected in early 2019. Drilling at North Kelsey and Resolution/Endeavour remains contingent on farm-down/external investment.

Valuation: An option on UK shale

At end-July 2018 Egdon had cash of £2.8m, which we expect to cover anticipated costs (post farm-down) through most of FY19. This is contingent on oil and gas price realisations. We have slightly increased our conventional valuation from 12.5p/share to 12.7p/share. We believe the key value proposition for shareholders is Egdon’s net UK shale exposure and conventional E&A.

Key valuation changes

We make several changes to our conventional valuation, with the net impact slightly increasing our RENAV from 12.5p/share to 12.7p/share. Key changes include:

Increased FY19 production expectations for Ceres after re-start of production in November 2018 following the installation of a new flowmeter. Egdon expects to update Ceres production expectations once production has stabilised.

Removal of Holmwood from asset value until a new drilling site location has been confirmed.

A small increase in UK NBP gas price assumptions from 56p/therm to 59p/therm CY18 (inflated by 2.5% thereafter) based on current spot prices and the forward curve.

Movement in exchange rate from US$/£1.37 to US$/£1.33 (based on six-month historical average).

Exhibit 1: Egdon detailed valuation

Country

WI

CCoS

Net

NPV/boe

NPV12.5

Risked

Assets

%

%

mmboe

$/boe

$m

/share (p)

Net cash at January 2018

5.4

1.6

G&A (3yrs)

(3.8)

(1.1)

Production

Keddington

UK

45%

100%

0.06

(10.7)

(0.7)

0.0

Ceres

UK

10%

100%

0.44

11.5

5.0

1.4

Fiskerton

UK

80%

100%

0.08

9.3

0.8

0.2

Wressle (Ashover Grit)

UK

30%

60%

0.15

23.6

2.1

0.6

Core NAV

8.8

2.7

Exploration

North Kelsey

UK

80%

12%

4.94

11.1

6.6

1.9

Louth

UK

65%

20%

0.85

10.3

1.8

0.5

Wressle (upside)

UK

30%

25%

0.46

17.7

2.0

0.6

Broughton

UK

25%

23%

0.11

17.7

0.4

0.1

Biscathorpe

UK

36%

20%

4.91

12.8

12.6

3.6

Resolution

UK

50%

18%

12.52

5.1

11.1

3.2

Appraisal & Exploration NAV

 

 

 

 

 

34.5

10.0

RENAV

 

 

 

 

 

43.3

12.7

Indicative shale valuation P50

UK

50%

67%

344.3

99.5

Source: Edison Investment Research. Note: US$/£1.33, shares 260m.

Exhibit 2: Financial summary

£000's

2016

2017

2018

2019e

2020e

July

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

1,586

1,039

779

3,214

4,243

Cost of Sales

(3,206)

(1,576)

(1,754)

(1,579)

(2,831)

Gross Profit

(1,620)

(537)

(975)

1,635

1,412

EBITDA

 

(733)

(1,193)

(2,219)

135

(88)

Operating Profit (before amort. and except.)

 

(4,571)

(2,121)

(1,656)

(528)

(1,934)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(4,571)

(2,121)

(1,656)

(528)

(1,934)

Net Interest

(34)

(42)

(41)

(48)

(48)

Profit Before Tax (norm)

 

(4,604)

(2,163)

(1,697)

(576)

(1,982)

Profit Before Tax (FRS 3)

 

(4,604)

(2,163)

(1,697)

(576)

(1,982)

Tax

0

0

0

0

0

Profit After Tax (norm)

(4,604)

(2,163)

(1,697)

(576)

(1,982)

Profit After Tax (FRS 3)

(4,604)

(2,163)

(1,697)

(576)

(1,982)

Average Number of Shares Outstanding (m)

221

249

260

260

260

EPS - normalised (p)

 

(2.1)

(0.9)

(0.7)

(0.2)

(0.8)

EPS - normalised fully diluted (p)

 

(1.2)

(0.7)

(0.8)

(0.2)

(0.8)

EPS - (IFRS) (p)

 

(2.1)

(0.9)

(0.7)

(0.2)

(0.8)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

-102.1

-51.7

-125.2

50.9

33.3

EBITDA Margin (%)

-46.2

-114.8

-284.9

4.2

-2.1

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

-288.2

-204.1

-212.7

-16.4

-45.6

BALANCE SHEET

Fixed Assets

 

27,053

28,495

30,105

31,872

31,530

Intangible Assets

18,370

19,231

19,572

21,363

22,063

Tangible Assets

8,683

9,264

10,534

10,509

9,467

Investments

0

0

0

0

0

Current Assets

 

5,270

7,613

4,020

2,178

1,038

Stocks

0

0

8

8

8

Debtors

2,541

1,507

1,240

1,240

1,240

Cash

2,679

6,057

2,772

930

(210)*

Other

50

50

0

0

0

Current Liabilities

 

(1,085)

(1,216)

(1,150)

(1,150)

(1,150)

Creditors

(1,085)

(1,216)

(1,150)

(1,150)

(1,150)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

(1,803)

(2,187)

(2,249)

(2,249)

(2,249)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(1,803)

(2,187)

(2,249)

(2,249)

(2,249)

Net Assets

 

29,435

32,705

30,727

30,651

29,169

CASH FLOW

Operating Cash Flow

 

(159)

(422)

(1,629)

635

412

Net Interest

0

0

0

(48)

(48)

Tax

0

0

0

0

0

Capex

(2,379)

(1,054)

(1,825)

(2,429)

(1,504)

Acquisitions/disposals

0

0

137

0

0

Equity Financing

0

4,865

0

0

0

Other cash flow

8

5

8

0

0

Net Cash Flow

(2,529)

3,394

(3,308)

(1,842)

(1,140)

Opening net debt/(cash)

 

(5,180)

(2,678)

(6,056)

(2,771)

(929)

HP finance leases initiated

0

0

0

0

0

Other

(28)

16

(23)

(0)

0

Closing net debt/(cash)

 

(2,678)

(6,056)

(2,771)

(929)

211

Source: Company accounts, Edison Investment Research. Note: *A small amount (£0.210m) of equity or debt funding required based on current projections.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Egdon Resources and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Egdon Resources and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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