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IGas PLC (LON:IGAS) is a company where valuations change markedly depending on how you look at it.
On one side is a steady, onshore UK-based oil and gas production business generating steady revenues and cash flows from about 2,300 barrels daily.
On the other is a shale arm with assets so large that on their own they can potentially provide enough gas to meet the UK’s requirements for decades.
Analysts calculate that IGas is being valued at a hefty discount not only to the shale but also the production arm. 


Of course, numbers on a spreadsheet give little insight into what is happening on the ground and that’s especially true for IGas’s shale assets.
To get the gas out of the ground, the source rocks will likely need to be stimulated or fracked and that is a very emotive issue in Britain at present.

A National Audit Office report just published cast doubt on whether fracking in the UK would result in lower prices or even if production would be viable in meaningful quantities.
Rules on development are tight and planning permission hard to obtain, though IGas has made better progress than most.
Having a big partner in Ineos, the private firm run by Jim Ratcliffe (reportedly Britain’s richest man) has helped.
Ineos is carrying IGas on a series of wells, including two drilled earlier in the year at Tinker Lane and Springs Road in Nottinghamshire. 
Springs Road was a key well for the company and targeted three types of formation: the Bowland Shale; the Millstone Grit and the Arundian Shale.

Lots of gas
Results were even better than hoped said Stephen Bowler, IGas’s chief executive, with a 429m thick section in the Bowland layers with significant gas indications. 
“That ticked every single box from a world-class shale play perspective,” he says, pointing to US equivalents where the thickness typically is between 50-80m.
Other issues such as clay content also provided plenty of encouragement says Bowler, who added the direct read-across is 630bn cubic feet of gas per square mile.
“And we’ve 400sq miles in the East Midlands alone.”
“Add in a recovery factor of 10% and that could mean trillions of cubic feet of gas and many years’ worth of supply for the UK.”
Work is ongoing to process the data from the two wells to assess the next steps and how to go forward with development.
IGas has permission to drill but not to frack, though the well logs from Springs Road indicated it was naturally fractured.

Fracking or not
Even so, the political scenario will be a major influence on how fast things move.
Labour leader Jeremy Corbyn has repeatedly said he will ban fracking if he comes to power, while a review by the OGA into seismic tremors at rival Cuadrilla’s site at Preston New Road is underway.
This will be assessed on completion by Energy Minister Andrea Leadsom.
Whatever the outcome, Bowler is unreservedly in favour of fracking.
“Fracking makes a lot of sense. Climate change is a problem and the UK will need 70% of the gas that we use today in 2050 even in a net-zero [emissions] situation.
“If we have to have gas in the UK, we should have indigenous gas.” 

Conventional arm has potential 
But there’s more to IGas than just the shale assets, says Bowler.
The existing onshore UK business produces about 850,000 barrels equivalent per year, which generated revenue of £43mln in 2018.
“That’s very good revenue for us,” says Bowler.

It meant, too, there was an underlying profit of £10.8mln for the year.
IGas also has the opportunity to boost its conventional production considerably.
At Godley Bridge in the Weald Basin in Surrey, the company is in close proximity to the Horse Hill prospect near Gatwick being explored by UKOG.
A second well is currently being drilled by UKOG, which includes a horizontal play for the first time.
IGas’s plans for Godley Bridge include two conventional wells to target the Portland Sandstones and deeper Kimmeridge formations, which are also UKOG’s targets.
As much as 300mln barrels might be present at Godley Bridge and Bowler is watching closely what happens at Horse Hill.

incremental additions
There also other areas where Bowler believes he can add substantial value.
The company recently announced an extension to the waterflood project at its Welton site in Lincolnshire. 
This involves injecting water into the reservoir to boost production and while the numbers might not look huge at 120 extra barrels per day, Bowler says it is very profitable as capex requirements are low and the payback rapid.
IGas has the capability for similar incremental improvements at many of its 100 sites, says Bowler.
Broker BMO added: “Whilst this Welton waterflood is small, it demonstrates the type of high-return, fast-payback projects that IGas has in the portfolio. 

“We expect this to become a growing theme for IGas as it has the balance sheet and technical competency to unlock a conventional resource base that could more than double current reserves.”

Big discount
Bowler estimates that the value of its conventional assets alone is around US$160mln (£123mln) based on the mean (2P) average at a 10% discount, which compares to a current market of  £56mln at 46p.
A reserve-based lending facility agreed recently will also give earnings a boost from lower interest rates.
“I think people are giving a zero value for the shale and the upside on the conventional assets,” says Bowler, a sentiment that is reflected in house broker Cannaccord’s target price of 175p and BMO’s 65p.
A big mark-down on the shale is perhaps understandable given the current backdrop, but the discount on the conventional arm looks like an anomaly.