Egdon Resources — Deferred Ceres output offset by higher gas prices

Egdon Resources (AIM: EDR)

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Research: Energy & Resources

Egdon Resources — Deferred Ceres output offset by higher gas prices

Egdon’s operational update highlights lower production for FY18 at 84boed versus guidance of 100boed as a result of unplanned downtime at Ceres. Management remains confident in future production expectations and potential for increased gas recovery at Ceres based on pressure build-up analysis during shutdown. Our conventional asset RENAV moves to 12.5p/share from 12.8p/share (-2%) as a result of lower FY18 production and a higher risking applied to Wressle, offset by an increase in our short-term EIA-based oil price forecasts and higher NBP gas price assumptions. The valuation of Egdon’s net shale resource (205,000 net acres) remains uncertain but in our view has the potential to be worth over risked 100p/share based on current expectations of well cost, type curves and forward gas prices.

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Energy & Resources

Egdon Resources

Deferred Ceres output offset by higher gas prices

Operations update

Oil & gas

3 September 2018

Price

8.65p

Market cap

£23m

US$/£0.73

Net cash (£m) at 31 January 2018

4.1

Shares in issue

260.0m

Free float

51%

Code

EDR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(14.4)

(24.8)

0.3

Rel (local)

(11.3)

(22.7)

(0.5)

52-week high/low

12.50p

5.70p

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 205,000 net shale acres.

Next events

FY18 results

November 2018

Analysts

Sanjeev Bahl

+44 (0)20 3077 5742

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

Egdon’s operational update highlights lower production for FY18 at 84boed versus guidance of 100boed as a result of unplanned downtime at Ceres. Management remains confident in future production expectations and potential for increased gas recovery at Ceres based on pressure build-up analysis during shutdown. Our conventional asset RENAV moves to 12.5p/share from 12.8p/share (-2%) as a result of lower FY18 production and a higher risking applied to Wressle, offset by an increase in our short-term EIA-based oil price forecasts and higher NBP gas price assumptions. The valuation of Egdon’s net shale resource (205,000 net acres) remains uncertain but in our view has the potential to be worth over risked 100p/share based on current expectations of well cost, type curves and forward gas prices.

Year end

Revenue
(£m)

PBT*
(£m)

Net cash/
(debt) (£m)

EBITDA
(£m)

Capex
(£m)

07/16

1.6

(2.7)

2.7

(0.7)

(2.4)

07/17

1.0

(1.7)

6.1

(1.2)

(1.1)

07/18e

1.1

(1.5)

2.8

(1.1)

(1.6)

07/19e

2.4

0.3

0.8

0.1

(2.1)

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

Conventional value moving parts

Our valuation of Egdon’s conventional asset portfolio has been negatively affected by a short-term production deferment at Ceres and higher commercial risking applied to Wressle (from 90% chance of success to 60%), which remains contingent on planning approval. This is partly offset by an increase in expected recoverable gas at Ceres and higher oil and gas price expectations (we move our CY18 UK gas price assumption from 41p/therm to 56p/therm, in line with a year to date NBP gas price of 56p/therm). Initial production guidance for H119 stands at 160–180kboed (Edison 160kboed for FY19).

Upcoming activity

Drilling operations are expected to commence at Biscathorpe (Egdon 35.8% part carried) in October/November 2018, with the aim of evaluating 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 Q418. Drilling at North Kelsey and Resolution/Endeavour remains contingent on farm-down/external investment.

Valuation: An option of UK shale

At end January 2018 Egdon had cash of £4.1m, which we expect to cover anticipated costs (post farm-down) to end FY19. Our conventional valuation stands at 12.5p/share (from 12.8p/share). We believe the key value proposition for shareholders is Egdon’s net UK shale exposure and conventional E&A.

Updated valuation

We make several changes to our conventional valuation with the net impact of reducing our RENAV from 12.8p/share to 12.5p/share (-2%). Key changes include:

Lower production for FY18 from Edison 95boed to 84boed driven by lower short-term output from Ceres offset by higher long-term gas recovery.

Higher risking for Wressle with chance of commercial success reduced from 90% to 60% after planning delays and uncertainty.

Higher short-term oil price expectations based on EIA projections at $71.7/bbl in CY18 and $70.6/bbl in CY19.

A material increase in UK NBP gas price assumptions from 41p/therm to 56p/therm CY18 (inflated by 2.5% thereafter) based on current spot prices and forward curve.

A modest move in exchange rate from $/£1.40 to $/£1.37 (based on six-month historical average).

Exhibit 1: Egdon asset valuation (NPV12.5)

Assets

Country/

WI

CCoS

Net

NPV/boe

NPV12.5

Risked

$1.37/£, shares 259m

licence

%

%

mmboe

$/boe

$m

/share (p)

Net (debt) cash January 2018

5.6

1.6

G&A (three years)

-4.0

-1.1

Production

Keddington

UK

45

100

0.07

(3.8)

-0.3

0.00

Ceres

UK

10

100

0.42

9.8

4.1

1.1

Fiskerton

UK

80

100

0.08

8.0

0.7

0.2

Wressle (Ashover Grit)

UK

30

60

0.15

19.1

1.7

0.5

Core NAV

7.7

2.2

Exploration

North Kelsey

UK

80

12

4.94

10.7

6.4

1.8

Louth

UK

65

20

0.85

9.9

1.7

0.5

Wressle (upside)

UK

30

25

0.46

14.3

1.6

0.5

Broughton

UK

25

23

0.11

14.3

0.3

0.1

Biscathorpe

UK

36

20

4.91

12.4

12.2

3.4

Holmwood

UK

18

17

1.03

7.9

1.3

0.4

Resolution

UK

50*

18

12.65

5.9

13.0

3.7

Appraisal & Exploration NAV

 

 

 

 

 

36.6

10.3

RENAV

 

 

 

 

 

44.3

12.5

Indicative shale valuation P50

UK

50

67

381.3

107.1

Source: Edison Investment Research. Note: *Assumed 50% post farm-down (Egdon holds 100% equity).


Exhibit 2: Financial summary

£000's

2015

2016

2017

2018e

2019e

July

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

2,068

1,586

1,039

1,055

2,401

Cost of Sales

(5,131)

(1,287)

(1,112)

(1,070)

(1,116)

Gross Profit

(3,063)

299

(73)

(15)

1,285

EBITDA

 

(4,015)

(733)

(1,193)

(1,108)

85

Operating Profit (before amort. and except.)

 

(4,539)

(2,652)

(1,657)

(1,435)

(305)

Intangible Amortisation

0

0

0

0

0

Exceptionals

0

0

0

0

0

Other

0

0

0

0

0

Operating Profit

(4,539)

(2,652)

(1,657)

(1,435)

(305)

Net Interest

(2)

(34)

(42)

(20)

0

Profit Before Tax (norm)

 

(4,540)

(2,686)

(1,699)

(1,455)

(305)

Profit Before Tax (FRS 3)

 

(4,540)

(2,686)

(1,699)

(1,455)

(305)

Tax

0

0

0

0

0

Profit After Tax (norm)

(4,540)

(2,686)

(1,699)

(1,455)

(305)

Profit After Tax (FRS 3)

(4,540)

(2,686)

(1,699)

(1,455)

(305)

Average Number of Shares Outstanding (m)

221

221

249

259

259

EPS - normalised (p)

 

(2.1)

(1.2)

(0.7)

(0.6)

(0.1)

EPS - normalised and fully diluted (p)

 

(2.0)

(1.2)

(0.7)

(0.6)

(0.1)

EPS - (IFRS) (p)

 

(2.1)

(1.2)

(0.7)

(0.6)

(0.1)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

18.8

N/A

N/A

53.5

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

 

26,703

27,053

28,495

29,704

31,406

Intangible Assets

17,864

18,370

19,231

20,699

22,742

Tangible Assets

8,838

8,683

9,264

9,005

8,664

Investments

0

0

0

0

0

Current Assets

 

8,120

5,270

7,613

4,625

2,617

Stocks

0

0

0

0

0

Debtors

2,889

2,541

1,507

1,808

1,808

Cash

5,180

2,679

6,057

2,767

759

Other

50

50

50

50

50

Current Liabilities

 

(941)

(1,085)

(1,216)

(878)

(878)

Creditors

(941)

(1,085)

(1,216)

(878)

(878)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

(1,827)

(1,803)

(2,187)

(2,201)

(2,201)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(1,827)

(1,803)

(2,187)

(2,201)

(2,201)

Net Assets

 

32,054

29,435

32,705

31,250

30,944

CASH FLOW

Operating Cash Flow

 

(1,437)

(159)

(422)

(1,808)

85

Net Interest

(0)

0

0

0

0

Tax

0

0

0

0

0

Capex

(3,255)

(2,379)

(1,054)

(1,620)

(2,093)

Acquisitions/disposals

78

0

0

137

0

Equity Financing

0

0

4,865

0

0

Other cash flow

35

8

5

4

0

Net Cash Flow

(4,580)

(2,529)

3,394

(3,287)

(2,008)

Opening net debt/(cash)

 

(9,667)

(5,180)

(2,679)

(6,057)

(2,767)

HP finance leases initiated

0

0

0

0

0

Other

(93)

(28)

16

3

0

Closing net debt/(cash)

 

(5,180)

(2,679)

(6,057)

(2,767)

(759)

Source: Company data, Edison Investment Research

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 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 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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