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Research: Energy & Resources
Egdon Resources
Written by
Egdon Resources |
Unlevered UK shale play |
Company update |
Oil & gas |
5 December 2016 |
Share price performance
Business description
Next events
Analysts
Egdon Resources is a research client of Edison Investment Research Limited |
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Post the fund-raise, Egdon has zero debt and cash of c £7.0m, making it the largest unlevered UK-listed shale play. Licences span over 200,000 net acres with an ERCE estimated undiscovered gas initially in place (GIIP Pmean) of 48tcf. Our valuation is adjusted for placing proceeds and associated NAV/share dilution; this is offset by inclusion of 14th round licence awards. Our valuation is broken down in to 3.7p/share for core 2P value (including cash and net of G&A) and 18.5p/share for contingent resource and risked exploration. We also include an indicative dollars per acre shale valuation of 25.7p/share.
Year end |
Revenue (£m) |
EBITDA |
PBT* |
Debt |
Net cash |
Capex |
07/15 |
2.1 |
(4.0) |
(4.5) |
0.0 |
5.2 |
(3.3) |
07/16 |
1.6 |
(0.7) |
(2.7) |
0.0 |
2.7 |
(2.4) |
07/17e |
2.5 |
0.2 |
(1.0) |
0.0 |
6.4 |
(1.3) |
07/18e |
4.5 |
2.2 |
0.7 |
0.0 |
5.5 |
(3.1) |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Fundraise and use of proceeds
Egdon has raised £5.06m (gross) through a £3m placing with shareholder HEYCO International and just over £2m via an open offer, both priced at 13.5p/share. The proceeds are to be used to progress the Wressle oil field through to management expected first oil in H117. They will also be used to progress 14th round licence awards and the ‘A’ prospect to drillable status.
Wressle first oil in 2017
The development of Wressle will provide Egdon with a step change in production, albeit from relatively low levels. We currently forecast FY17 production of 165boepd, in-line with management guidance and predicated on Wressle first oil in Q217. We forecast an increase to 233kboed in FY18 with potential for Egdon to generate £2.2m of cash from operations (based on our FY18 63$/bbl Brent forecast). Upcoming exploration and appraisal includes the ‘A’ prospect (contingent on farm-out); Holmwood-1, which is expected to be drilled in 2017 (fully carried); and North Kelsey and Biscathorpe, which are expected in H117 (both contingent on farm-out).
Valuation: Shale momentum
Our updated valuation for Egdon incorporates fund-raise proceeds and the notional value for the 14th round UK shale licence awards on a dollars per acre basis. The net result is broadly neutral, with our conventional RENAV standing at 22.3p/share. However, we see a material increase in the unconventional valuation, which now includes a dollars per acre value for 14th round licence awards. This moves from 22p/share to 25.7p/share (+16.8%).
Balance sheet strength
Through a combination of 22.2m shares placed with HEYCO International (an existing shareholder and subsidiary of HEYCO Energy Group), and an open offer issue of 15.2m shares at 13.5p/share, Egdon has raised £5.06m (gross).
The net proceeds are to be used to:
■
Progress the development of the Wressle oil field
■
Progress the company’s 14th round licence evaluations
■
Progress the ‘A’ prospect to drillable status
■
Make targeted investments with the view of increasing production and cash flow
■
Review and target other value-creating opportunities
It is our understanding that HEYCO is a strategic investor with expertise in conventional and unconventional oil and gas. Subsidiaries of HEYCO hold five permits in Spain, one permit in France and many hundreds of leases in the United States. HEYCO also has domestic oil and gas experience, with subsidiaries of the group having owned interests in operated and non-operated assets in the UK including participation in the discovery of the Avington field. We believe HEYCO’s appetite for equity at Egdon’s current market valuation helps validate the equity investment case.
Post the newly completed funding round, Egdon will have c £7.0m of cash on its balance sheet and no debt, making it the largest unlevered UK listed shale gas play.
Conventional portfolio: Immediate focus on Wressle
The 2014 Wressle oil discovery was tested in 2015 at combined gross flow rate of 700b/d. The discovery has since been ascribed gross 2P oil reserves of 0.62mmbbl and gross 2P gas reserves of 0.2bcf by independent reserve auditor, ERC Equipoise. Incremental to reserves, a substantial contingent resource has been confirmed in the Penistone Flags reservoir with 2C 1.53mmbbls and 2.0bcf of gas – this is expected to be monetised following the start of production from the Ashover Grit reservoir (which is included in 2P). Egdon expects first oil in early 2017, and we assume production ramp-up over Q217 in our forecasts. Management estimates initial production at 500b/d gross and 125b/d net to Egdon’s 25% interest.
In September 2016, Union Jack acquired a 3.34% interest in Wressle from Europa for £0.6m, implying a gross 100% licence value of £17.9m. This is broadly in line with our gross DCF value of $21.4m (£17.4m at current exchange rate). This was followed by a farm-in to Wressle by Upland Resources, announced on 24 November 2016. The implied valuation of this transaction was £18.5m gross, including contingent consideration.
Growing shale position
Our updated UK onshore shale valuation includes acreage awarded in the 14th onshore oil and gas licensing round. The new licences total a gross area of 281,979 acres located in the East Midlands and Cleveland Basins. Over the last 24 months net shale acreage has increased 3.5 times to over 200,000 acres and mean net undiscovered GIIP 2.6 times to 47.5tcf.
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Exhibit 1: Net shale acreage increase |
Exhibit 2: Increase in mean undiscovered GIIP |
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Source: Egdon |
Source: Egdon |
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Exhibit 1: Net shale acreage increase |
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Source: Egdon |
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Exhibit 2: Increase in mean undiscovered GIIP |
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Source: Egdon |
We flag that our valuation of this acreage is highly uncertain at this time as there are no UK domestic shale commercial analogues. We expect risk and uncertainty to reduce over 2017 as Third Energy drills and fracks the KM-8 well in North Yorkshire (approval currently subject to judicial review). As it stands, we use a dollars per acre valuation based on historic UK shale transactions and adjust downwards given the recent precedent of planning approval delays. We currently use a unit valuation of $400/acre (transaction values range from $200/acre to $2,000/acre) – a full breakdown of our UK shale valuation is provided below.
Valuation
The key updates since our last published valuation are:
■
Inclusion of placing and open offer net proceeds, and associated increase in share count.
■
Inclusion of 14th round net acreage awards in valuation.
■
Downwards adjustment of UK shale dollars per acre valuation to reflect recent planning-related delays; this moves from $500/acre to $400/acre but we flag that there is a significant degree of uncertainty to this figure.
■
No material changes to Wressle first oil, which remains in early 2017 (we assume Q217 in our forecasts).
As can be seen in our RENAV below, conventional producing assets constitute a small part of RENAV at 3.7p/share (including cash and net of G&A) and the bulk value of our conventional valuation lies in appraisal and development (18.5p/share).
As mentioned above, we believe the company’s most valuable conventional assets are the ‘A’ exploration prospect (risked 7.0p/share) and Biscathorpe prospect (risked 7.2p/share). In addition to this, we provide an indicative valuation for Egdon’s shale acreage at (25.7p/share).
Exhibit 3: Egdon updated RENAV
Assets |
Country/ |
WI |
GCoS |
CCoS |
Net |
NPV/boe |
NPV |
Risked |
$1.3/£, shares 258m |
licence |
% |
% |
% |
mboe |
$/boe |
$m |
/share (p) |
Net (debt) cash post fund raise |
8.8 |
2.62 |
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G&A |
-1.6 |
-0.47 |
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Production |
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Avington |
UK |
27% |
100% |
100% |
0.10 |
6.8 |
0.7 |
0.21 |
Keddington |
UK |
45% |
100% |
100% |
0.09 |
6.1 |
0.5 |
0.16 |
Ceres |
UK |
10% |
100% |
100% |
0.23 |
2.7 |
0.6 |
0.19 |
Wressle (Ashover Grit) |
UK |
25% |
100% |
90% |
0.15 |
26.3 |
3.5 |
1.0 |
Core NAV |
12.6 |
3.7 |
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Exploration |
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North Kelsey |
UK |
80% |
24% |
50% |
3.88 |
17.0 |
7.9 |
2.4 |
Louth |
UK |
65% |
40% |
50% |
0.85 |
12.7 |
2.2 |
0.6 |
Wressle (upside) |
UK |
25% |
50% |
50% |
0.38 |
19.8 |
1.9 |
0.6 |
Broughton |
UK |
25% |
45% |
50% |
0.11 |
19.8 |
0.5 |
0.1 |
Biscathorpe |
UK |
53% |
40% |
50% |
7.36 |
16.5 |
24.3 |
7.2 |
Holmwood |
UK |
18% |
30% |
50% |
1.03 |
12.7 |
2.0 |
0.6 |
A prospect* |
UK |
50% |
52% |
50% |
12.65 |
7.2 |
23.6 |
7.0 |
Appraisal & exploration NAV |
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|
|
|
|
|
62.3 |
18.5 |
RENAV |
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|
|
|
|
|
74.8 |
22.3 |
Source: Edison Investment Research. Note: *Working interest after assumed farm-in (current working interest 100%)
In addition to our conventional valuation above, we include a dollars per acre valuation from unconventional resources. This is broken down by licence below.
Exhibit 4: Egdon net prospective shale acreage
Location |
Location/Basin |
Licence |
Interest |
Net acres |
$/acre |
Value ($m) |
p/share |
Gainsborough Trough |
East Midlands |
PL161-2 |
100% |
4,448 |
400 |
1.78 |
0.5 |
Gainsborough Trough |
East Midlands |
PEDL043 |
100% |
14,085 |
400 |
5.63 |
1.7 |
Gainsborough Trough |
East Midlands |
PEDL169 |
20% |
3,064 |
400 |
1.23 |
0.4 |
Gainsborough Trough |
East Midlands |
PEDL037 |
100% |
2,471 |
400 |
0.99 |
0.3 |
Gainsborough Trough |
East Midlands |
PEDL011 |
100% |
1,483 |
400 |
0.59 |
0.2 |
Edale Shelf |
East Midlands |
PEDL202 |
100% |
20,806 |
400 |
8.32 |
2.5 |
Edale Shelf |
East Midlands |
PEDL001 |
100% |
2,718 |
400 |
1.09 |
0.3 |
Croxteth |
Bowland Basin |
PEDL191 |
100% |
16,309 |
400 |
6.52 |
1.9 |
Manchester |
Bowland Basin |
PEDL039 |
100% |
741 |
400 |
0.30 |
0.1 |
Manchester |
Bowland Basin |
EXL253 |
100% |
741 |
400 |
0.30 |
0.1 |
Gainsborough Trough |
East Midlands |
PEDL139/PEDL140 |
14.5% |
8,621 |
1,000 |
8.62 |
2.6 |
Gainsborough Trough |
East Midlands |
PEDL209 |
30% |
4,744 |
400 |
1.90 |
0.6 |
Widmerpool Gulf |
East Midlands |
PEDL201 |
45.0% |
8,896 |
400 |
3.56 |
1.1 |
Cleveland Basin |
Cleveland Basin |
PEDL068 |
68% |
6,016 |
400 |
2.41 |
0.7 |
Gainsborough Trough |
East Midlands |
PL161/162 Option |
50% |
15,116 |
400 |
6.05 |
1.8 |
Edale Shelf |
East Midlands |
PEDL130 |
100% |
5,436 |
400 |
2.17 |
0.6 |
Humber |
East Midlands |
PEDL130 |
25% |
9,884 |
400 |
3.95 |
1.2 |
Gainsborough North West JV |
East Midlands |
PEDL273 |
15.00% |
7,265 |
400 |
2.91 |
0.9 |
Gainsborough South JV |
East Midlands |
PEDL305 |
15.00% |
5,300 |
400 |
2.12 |
0.6 |
Gainsborough East JV 1 |
East Midlands |
PEDL316 |
15.00% |
4,114 |
400 |
1.65 |
0.5 |
Widmerpool 1 |
East Midlands |
PEDL306 |
30.00% |
14,159 |
400 |
5.66 |
1.7 |
Cloughton Area |
Cleveland Basin |
PEDL343 |
17.50% |
4,757 |
400 |
1.90 |
0.6 |
Stainmore Trough |
Cleveland Basin |
PEDL259 |
49.99% |
17,170 |
400 |
6.87 |
2.0 |
Humber Basin 1 |
East Midlands |
PEDL334 |
60.00% |
24,315 |
400 |
9.73 |
2.9 |
Total |
|
|
|
202,661 |
10,200 |
86 |
25.7 |
Source: Edison Investment Research, Egdon Resources
Financials
Our short-term financial forecasts assume Wressle first oil in H117, which drives a step up in production to a forecast 233boe/d in CY18 and a material increase in operational cash flow to £2.2m (Edison $63/bbl CY18 forecast). We expect cash generated from operations to be re-invested in appraisal or development of contingent resources as well as in progressing the company’s net shale acreage position. Egdon is actively pursuing farm-down and divestment of non-core assets to manage cash resource and risk exposure.
Exhibit 5: Financial summary
£000's |
2015 |
2016 |
2017 |
2018 |
|
July |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
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Revenue |
|
2,068 |
1,586 |
2,493 |
4,529 |
Cost of Sales |
(5,131) |
(1,287) |
(1,079) |
(1,132) |
|
Gross Profit |
(3,063) |
299 |
1,414 |
3,396 |
|
EBITDA |
|
(4,015) |
(733) |
214 |
2,196 |
Operating Profit (before amort. and except.) |
|
(4,539) |
(2,652) |
(990) |
712 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
|
Exceptionals |
0 |
0 |
0 |
0 |
|
Other |
0 |
0 |
0 |
0 |
|
Operating Profit |
(4,539) |
(2,652) |
(990) |
712 |
|
Net Interest |
(2) |
(34) |
0 |
0 |
|
Profit Before Tax (norm) |
|
(4,540) |
(2,686) |
(990) |
712 |
Profit Before Tax (FRS 3) |
|
(4,540) |
(2,686) |
(990) |
712 |
Tax |
0 |
0 |
0 |
0 |
|
Profit After Tax (norm) |
(4,540) |
(2,686) |
(990) |
712 |
|
Profit After Tax (FRS 3) |
(4,540) |
(2,686) |
(990) |
712 |
|
Average Number of Shares Outstanding (m) |
221 |
221 |
246 |
258 |
|
EPS - normalised (p) |
|
(2.1) |
(1.2) |
(0.4) |
0.3 |
EPS - normalised and fully diluted (p) |
|
(2.0) |
(1.2) |
(0.4) |
0.3 |
EPS - (IFRS) (p) |
|
(2.1) |
(1.2) |
(0.4) |
0.3 |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
|
Gross Margin (%) |
-148.2 |
18.8 |
56.7 |
75.0 |
|
EBITDA Margin (%) |
-194.2 |
-46.2 |
8.6 |
48.5 |
|
Operating Margin (before GW and except.) (%) |
-219.5 |
-167.2 |
-39.7 |
15.7 |
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BALANCE SHEET |
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Fixed Assets |
|
26,703 |
27,053 |
27,119 |
28,715 |
Intangible Assets |
17,864 |
18,370 |
18,370 |
21,450 |
|
Tangible Assets |
8,838 |
8,683 |
8,749 |
7,265 |
|
Investments |
0 |
0 |
0 |
0 |
|
Current Assets |
|
8,120 |
5,270 |
9,021 |
8,137 |
Stocks |
0 |
0 |
0 |
0 |
|
Debtors |
2,889 |
2,541 |
2,541 |
2,541 |
|
Cash |
5,180 |
2,679 |
6,430 |
5,546 |
|
Other |
50 |
50 |
50 |
50 |
|
Current Liabilities |
|
(941) |
(1,085) |
(1,085) |
(1,085) |
Creditors |
(941) |
(1,085) |
(1,085) |
(1,085) |
|
Short term borrowings |
0 |
0 |
0 |
0 |
|
Long Term Liabilities |
|
(1,827) |
(1,803) |
(1,803) |
(1,803) |
Long term borrowings |
0 |
0 |
0 |
0 |
|
Other long term liabilities |
(1,827) |
(1,803) |
(1,803) |
(1,803) |
|
Net Assets |
|
32,054 |
29,435 |
33,252 |
33,964 |
CASH FLOW |
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Operating Cash Flow |
|
(1,437) |
(159) |
214 |
2,196 |
Net Interest |
(0) |
0 |
0 |
0 |
|
Tax |
0 |
0 |
0 |
0 |
|
Capex |
(3,255) |
(2,379) |
(1,269) |
(3,080) |
|
Acquisitions/disposals |
78 |
0 |
0 |
0 |
|
Equity Financing |
0 |
0 |
4,807 |
0 |
|
Other cash flow |
35 |
8 |
0 |
0 |
|
Net Cash Flow |
(4,580) |
(2,529) |
3,752 |
(884) |
|
Opening net debt/(cash) |
|
(9,667) |
(5,180) |
(2,679) |
(6,430) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
|
Other |
(93) |
(28) |
0 |
0 |
|
Closing net debt/(cash) |
|
(5,180) |
(2,679) |
(6,430) |
(5,546) |
Source: Company data, Edison Investment Research
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