Is Infrastrata a buy as Islandmagee construction looms?
Infrastrata fell 9pc to 0.96p last Thursday as investors overlooked several positive developments in an update to focus on the firm’s claim that due diligence with potential equity partners was taking ‘longer than expected’. It then fell another 8.8pc to 0.88p on Friday following the news that chairman Graham Lyon would be stepping down to concentrate on other projects. Here, we take a look at the company and its recent newsflow before asking whether this week’s drop presents a decent buying opportunity.
Infrastrata’s sole asset is the Islandmagee gas storage project, located in Country Antrim, Northern Ireland. Islandmagee is a proposed salt cavern gas storage facility that could hold 500,000,000 cubic metres of natural gas. The board of Infrastrata believes the project will provide more than a quarter of the UK’s total natural gas storage once it has been constructed.
To date, around £14.5m has been invested into Islandmagee, supported in part by EU funding. Work began in 2007 with the acquisition of 3D seismic data to image Permian salt in the Larne Lough area. Several years on, in 2012, the project received planning permission and the utility regulator issued a gas licence. Next, in 2015, a well was drilled to core the salt and confirm the technical feasibility of the project.
Now, Infrastrata hopes to make a final investment decision on the site in H1 2019. Depending on what way this goes, construction is then slated to take place from 2019 to 2022.
FEED for thought
Infrastrata took a significant step forward in November last year with the completion of the Front End Engineering and Design (FEED) element of Islandmagee’s development. As part of the work, which was 50pc funded by the EU’s Connecting Europe facility, the company calculated a P90 cost estimate for delivering the project. In layman’s terms, there is a 90pc chance that the project outrun cost will come in below this figure, and a 10pc chance it will be higher. Luckily, the estimate was consistent with economic modelling undertaken on the project so far.
‘On this basis, the company will proceed into the next phase of development with a high level of confidence from a technical, cost, and economic viewpoint,’ it added at the time.
In the weeks following, the company’s shares shot up in value to as high as 1.8p in January as it continued efforts to secure funding for the project. However, they have since declined to pretty consistently sit around the 1-1.3p market. Although this fall may look considerable, the firm remains well above the price it sat at before the release of the FEED, and the upward progress of its share price has been pretty consistent over the last year. So, what has it been up to in 2019?
Infrastrata’s shares took a pretty considerable hit towards the end of January when it announced a placing to raise £1.5m at 1.2p a share. The business said the money was needed to maintain the project’s schedule and momentum as potential equity providers continued due diligence and term sheet discussions.
The proceeds have been put towards land purchases, design works to facilitate the £65m savings identified in the FEED work, pre-construction documentation, land surveys, and onsite enabling works. The business added that investing further in Islandmagee at that stage would help it further de-risk the project and, in turn, negotiate stronger equity retention with any potential partners.
‘The Board is looking to conclude equity negotiations to fund Project construction as soon possible once the latest potential equity provider has completed its due diligence,’ it added. ‘This proposed deal and eventual partner will most likely be for the life of the Project and therefore it’s essential that all relevant issues are considered in detail at this stage.
‘The Project remains on track to undertake final investment decision by the end of the first half of this year and whilst the company is striving to meet this target, there is no guarantee on the timing to conclude discussions with the potential equity and debt providers or that acceptable terms will ultimately be forthcoming or agreed.
Despite this optimism, the firm announced on Thursday that the due diligence being undertaken by its potential funding partners has ‘unfortunately’ taken longer than expected since Christmas. It added that the due diligence has now been ongoing at full speed for several weeks and is expected to complete towards the end of this month.
‘We have, thus far, received no adverse comments to give us any cause for concern,’ the business added. ‘Whilst we are going through this process we also continue to work with our other potential equity partners, some of whom have already undertaken a full due diligence process, and therefore, as previously reported, various options remain active in relation to equity funding.’
Elsewhere in the update, Infrastrata issued numerous positive developments. For example, it said it had made ‘good progress’ on the debt front, receiving indicative terms from two interested banks. It also said it had extended the deadline for its invitation to tender for an engineering, procurement, and construction contractor after a request from two interested parties.
Meanwhile, it announced that another organisation had joined offtake negotiations, further potential capex reductions, and positive developments in the granting of its draft marine licence. It also issued a brief update on its plans for the coming weeks, highlighting that it will be undertaking the next phase of land acquisition, engineering-related works, and documentation preparation for enabling works.
Finally, the business provided an update on its EU funding progress. It is in the final stages of preparing the final funding drawdown submission for the FEED studies that were funded on a matched basis by the EU. Its draft submission is due to be audited in the next ten days before its presentation, which will enable the final balance to be repaid by the EU.
The organisation said it is also working on a submission for the next round of EU funding, although it highlighted the potential disruption that Brexit negotiations could have on this process. Regardless, Infrastrata said it had not included any grant money in its financial models. Essentially, this means that, while any grants will improve the economics of its project, they are not essential.
Chief executive John Wood added: ‘It has been a busy start to the year with numerous work streams being progressed. It is encouraging that we have been able to locate further savings in the CAPEX which we believe will lead to an improvement in Project economics. We are very excited to now be in the commercialisation process and in the final furlong prior to our planned final investment decision at the end of H1 2019. We are encouraged by the strong support the Project has and the growing realisation that our Project is required to help ensure the security of energy supply. We remain on track for the Project to become operational during 2023.’
One day on from this update, Infrastrata announced that Graham Lyon, its chairman since November 2017, would be stepping down to concentrate on other projects. Wood will undertake the additional role of chairman for a short period as the firm searches for Lyon’s replacement. This is expected to take between three and six months.
Although there was a range of positive developments on offer in Infrastrata’s update on Thursday, shares dropped 9pc to 0.96p, their lowest price this year. Shares fell even further following the news of Lyon’s exit, despite this development – one would assume – not having a massive amount of impact on Infrastrata’s fundamentals. There is an argument to be made that this could represent a good entry point for new investors or an opportunity for existing investors who still buy into the firm’s story to top up ahead of the next round of news.
With updates on EU funding, offtake agreements, and project financing all on the near-term horizon and a final investment decision and project construction looming it will be interesting to see how Infrastrata performs. The substantial positive reaction to news towards the end of 2018 and early 2019 suggests the company and its engaging Brit-centric story have won over a large number of investors. If things go its way, and Islandmagee ends up the UK gas powerhouse the business expects it to become, then its current £14.1m market cap could end up looking cheap.