Looking for a way to play the ongoing fuel crisis? Maybe consider IGas Energy PLC
“…As the Gas crisis began to bite the #IGAS share price spiked up to nearly 30p, before plunging back to 15p. It has since started to make its way back towards 20p…”
The ongoing fuel crisis has left investors puzzling how they can take advantage of Europe’s pressing need for gas. Is this an opportunity for a short or a long term investment? Or both? The prospects for one of the UK’s biggest independent gas producers may provide a useful index to those of the wider industry.
IGas Energy (AIM:IGAS) is the UK’s largest independent onshore oil and gas operator, with interests in more than 50 licences across England and Scotland. More than half of the company’s production is focused on the Weald Basin in southern England, which has produced more than 21 million barrels of oil to date.
iGas continues to seek to maximise its oil and gas production, citing the UK Committee on Climate Change (CCC) forecast that the UK will still require 70pc of its current demand for gas in the year 2050. But the company wants to play a role in the energy transition, drawing on its operational expertise to explore the potential its infrastructure might offer for tapping sources of geothermal energy, and possibilities for channeling its gas production towards the production of hydrogen. An upbeat assessment in the company’s most recent set of interim results argued that ‘a number of our UK sites could become integrated hybrid energy hubs, encompassing combinations of solar, modular hydrogen, Carbon Capture, Utilisation and Storage and battery storage.’
This shift of focus is charged with some urgency given the ‘natural decline’ in the company’s oil and gas assets acknowledged in its communications. But iGas insists their course of life has some years to run yet. The company’s interims stated an average net production for the six months to 30 June 2021 of 2,005 boepd. And a revised CPR published earlier this year estimated Reserves and Resources as at 31 December 2020 of 1P 11.74 MMboe, 2P 17.12 MMboe and 2C 20.35 MMboe, with a replacement rate for 2P reserves of approximately 250pc. Some 85pc of the 2P is already developed, requiring no further significant capital investment. The report valued the company’s assets at around $204m on a 2P NPV10 basis, and $150m on a 1P NPV10 basis.
iGas had hoped to significantly extend its resource by exploring its fields’ capacity for shale gas, an aspiration that seems to have been closed by the moratorium placed on fracking by the Government just over two years ago. The company hasn’t given up hope, applying – so far unsuccessfully – to extend the operational period for its Springs Road site in Nottinghamshire, which targets the ‘world-class’ Gainsborough Trough, for a further three years. iGas has also appealed the forced mothballing of a second site at Ellesmere Port on the Wirral peninsula. Right now, the prospects for both look bleak. The Government withdrew support for the UK’s nascent shale industry after a report by the Oil and Gas Authority concluded that it was not possible with current technology to ‘accurately predict the probability of tremors associated with fracking’, with the moratorium due to stand until ‘compelling new evidence is provided’.
The company’s prospects for developing its evolving geothermal and hydrogen programmes seem much rosier. iGas brought in geothermal expertise last year with the acquisition of specialists GT Energy. Geothermal is one of the lesser publicised low carbon energy technologies, but one of the most exciting. It seeks to tap energy stored in the form of heat emanating from the Earth’s core, which at 5,500 degrees centigrade is almost as hot as the sun. Sub-surface temperatures get progressively hotter, quickly, rising by 30 centigrade at each kilometre of depth. Geothermal energy is emerges when wells intersect with hydrothermal reservoirs, bringing superheated water to the surface which has the capacity to power turbines that generate heat and electricity. The cooled water is then recycled back down into the aquifer through a re-injection well.
Like solar, geothermal offers an elegant means of channeling natural sources of heat to meet our energy needs. The Earth’s heat, like that of the Sun, is a virtually infinite resource. Indeed, unlike sunlight, it is permanently available independent of the weather. The technology used to access it is well understood, employing drilling and well completion techniques mastered long ago by the oil and gas industry. The costs are similar to those of oil and gas extraction, requiring significant investment to bore holes through rock at sufficient depth. But, like an oil well, once drilled a geothermal well should deliver consistent low-carbon heat for decades.
The technology is finally getting significant public support as governments cast around for new sources of low carbon energy. A report published earlier this year by the ARUP Group and the Association for Renewable Energy and Clean Technology estimates that, with immediate government support, the UK could deliver 360 geothermal projects by 2050, generating up to 15,000 GW hours per year. The UK Department for Business, Energy and Industrial Strategy is developing a financial model for the long-term geothermal funding. Energy consultants Wood Mackenzie calculate that global geothermal capacity has the potential to exceed 1,000 GW by 2050, bigger than either global nuclear or hydro capacity today.
iGas signed two agreements earlier this month to speed its progress towards a viable geothermal project. A Memorandum of Understanding with electricity major SSE commits the partners to a pathfinder geothermal district heating project in Stoke. Local regulators have already granted approval, and the partners are currently in dialogue with the Government regarding grant funding to support the project. Heads of Terms have been signed with CeraPhi Energy, a specialist in repurposing oil and gas assets for geothermal energy, to expedite the project. iGas intends that the Stoke project will demonstrate the commercial potential for geothermal energy production from repurposing existing oil and gas assets for ‘direct heat for agriculture, residential heating and cooling, and the development of hybrid energy systems generating both heat and power’. The company says that while ‘we await the necessary Government support for the Stoke-on-Trent project, we are receiving an increasing number of enquiries from local councils and other large-scale users of heat.’
iGas has also taken practical steps to explore the capacity of its assets to generate hydrogen, identifying two candidate sites in Surrey. Like geothermal, hydrogen has enormous potential. It is easy to make, generated through the process of hydrolysis – the division of water into hydrogen and oxygen by means of an electrical current. Hydrogen produces power when passed through a fuel cell, generating harmless water vapour as its sole by-product. Like geothermal hydrogen, which can be stored and used as appropriate, is free from the intermittency issues that complicate reliance on wind and solar power.
But only some forms of hydrogen energy can be said to be truly green. It all depends on how the electrolysis process is powered. ‘Grey’ hydrogen uses methane gas as a feedstock in a process called steam methane reformation, or SMR. The product is zero carbon but the process itself relies on gas. ‘Blue hydrogen’ also uses gas to produce hydrogen, but adds carbon capture and storage to gather emissions. Properly ‘green hydrogen’ uses electrolysis powered wholly by renewables, ensuring both process and product are entirely carbon free. Blue and green hydrogen have the potential to be critical to a future green energy mix, offering potential sources of clean power for notoriously carbon-intensive industries like steel and cement, and a solution to the vexatious problem of powering big vehicles and ships, for which the lithium batteries used in electric vehicles are currently inadequate.
Governments around the world have made commitments to invest heavily in hydrogen. The Johnson administration is sinking £500m into hydrogen initiatives with the hope of attracting £4b worth of private sector investment, aiming for five gigawatts (GW) of low carbon hydrogen production by 2030. Hydrogen pioneer ITM Power has hit the headlines with its construction of an electrolyser factory in Sheffield, where it is working to ramp up production to 1 GW per year.
But like geothermal hydrogen is at a very early phase in its development. The technology has already given rise to several false dawns, notably electric truck start-up Nikola which raced to a $40bn valuation before it became clear that the gleaming prototypes pictured in its promotional materials didn’t actually exist – the company had little more than an idea for a prototype. In addition to the difficulties in developing working models for hydrogen powered vehicles, green hydrogen is much more expensive than its grey and blue variants. Even blue is premised on the use of largely non-existent carbon capture technology.
Nevertheless, iGas is aspiring to develop the UK’s first blue hydrogen project. Its Albury site would generate 1000kg/day of hydrogen, and Bletchingley 2000kg/day, offering a potential of up to 6000kg/day depending on reserves. Discussions with potential offtakers are taking place for both projects. It should be noted that both will run on SMR techniques: the projects will only count as blue hydrogen if iGas can demonstrate that gas used in the electrolysis process will not enter the atmosphere.
Refreshingly, though, for all the challenges that lay ahead iGas isn’t just talking about geothermal and hydrogen but taking practical steps to develop working projects. The company insists it has the know-how and financial firepower to commit to the necessary time and investment. In the six months to 30 June the company generated revenues of £16.6m from sales of 330,984 barrels of oil, 7,112 Mwh of electricity and 1,247,946 therms of gas, up from £10.5m for the previous year, during which of course demand was hit by the outbreak of the pandemic. Production is now recovering, up – as reported above – to 2,005 boepd, from 1,940 boepd for the equivalent period a year ago. The company stated a cash balance of £2.8m (H1 2020: £2.6m), an operating cash flow of £6.4m (H1 2020: £1.4m), and an adjusted EBITDA of £2.7m (H1 2020: £2.2m). It does however carry a net debt of £13.2m (H1 2020: £11.2m), but secured a Reserve Based Lending facility (RBL) redetermination in June, confirming £19.5m of debt capacity and headroom of £6.4m.
Higher gas prices – here to stay?
iGas, then needs to make the most of its gas resource to give it the capacity to engineer what will be a long and complex transition to alternative energy sources. The current gas crisis vividly illustrates there will strong demand for some time to come. Gas prices have hit new all-time highs in the UK and across continental Europe, forced up by a perfect storm of converging circumstances. A long cold winter last year across Asia and Europe drained storage levels, then infrastructure maintenance undertaken this summer, delayed by the pandemic, impeded efforts to replenish storage. UK natural gas production is down almost 28pc in the year to date. Wind power, on which the European grid has become increasingly dependent, produced less than expected over a warm and still summer. Left even more dependent than usual on imports Europe has struggled to secure them against competition from other regions. Asian countries have outbid Europe to buy liquefied natural (LNG) gas cargoes. Russia, a major supplier to both Europe and Asia, has restricted exports, perhaps because it wants to emphasise Europe’s dependence on the controversial Nord Stream 2 pipeline. And US shale producers, that once seemed to have access to seemingly limited resources, remain under shareholder pressure not to increase production in response to price rises after so many overextended themselves during the shale boom.
How long will higher prices last? Another cold winter certainly wouldn’t help, forcing suppliers to step up their bidding war with Asia to secure LNG cargoes. But some of the factors that have forced up prices will be transitory. The Russian government has said that a rapid regulatory approval for the now complete Nord Stream 2 pipeline would ‘significantly balance price parameters for natural gas in Europe, including on the spot market’. Russia is planning a significant increase in LNG production, and Qatar Petroleum is expanding capacity. The resolve of US producers if higher prices persist is likely to be severely tested.
Despite the thousands of words of commentary the present crisis has generated it’s only necessary to read a few for it to become clear that we don’t really know how long it will last. What can be said is that the crisis highlights the continuing dependence of the UK and Europe on gas for quite some years to come. As Europe phases out its coal-fired power, along with nuclear power in Germany, and its own production declines, its need for imported gas will grow. Natural gas import prices for the EU are up 440pc on a year ago, and renewables are still a long way from compensating. In Britain, which enjoys the most propitious geographical conditions for wind power anywhere in Europe, nearly 60pc of electricity at times this month has come from gas. Battery technology, geothermal, and green – and even blue – hydrogen geothermal, are not yet competitive. Europe cannot rely on US shale. And governments, under pressure to meet net zero commitments, are wary of the political sensitivities of being seen to promote gas too enthusiastically. But without gas consumers will have to pay significantly higher electricity prices, an even tougher political choice. Gas currently provides more than 80pc of the UK’s heating needs and around 40pc of our electricity generation.
Investing in iGas
iGas, then, looks like it has the time to execute its long term strategy – if it can maintain gas production across its ageing fields. The trend in the company’s share price – up nearly 70pc over the past 12 months – reflects investor recognition that demand for gas is here to stay. But there have been very sharp oscillations. Last December the price leapt from just over 12p to 24p, before drifting down to 15p at the beginning of September. As the crisis began to bite the price spiked up to nearly 30p, before plunging back to 15p. It has since started to make its way back towards 20p. In short, investors seeking to make a quick gain from iGas should tread with great caution. This is a tough market to time. But the case for a longer term investment is certainly there.