IGAS Energy: Farm-out Deal; CEO Follows Up With Share Purchase!

20th Dec '12 by johnrosier

31 comments 39224 reads

Igas Energy (LON:IGAS) - I have just bought a holding in Igas Energy. Igas, which this morning announced its half year results for the 6 months to 30th September, produces oil from a number of onshore fields in the UK as well as having considerable undeveloped shale and coal bed methane (CBM)resources, mainly in the North West of England.

The highlights from today's results were average oil production of 2513 barrels of oil equivalent per day (boepd) and an increase in proven reserves of 30% to 7.9m barrels. The Company expects to enhance production and recovery through a number of initiatives planned to commence in the New Year. Underlying operating profits were £12.7m compared to a loss of £1.3m in the first half of 2011, net cash generated was £15.5m and net debt dropped to £65.3m from £74.6m at 31st March 2012.

My reason for buying the stock however is all about the potential from unconventional gas production. Igas already has a pilot CBM production plant at Doe Green, near Warrington producing gas and generating electricity. It owns licenses to extract hydrocarbons over an area of North Wales and North West England covering some 1,455 km2. The Company says that the results of independent analysis estimates that they have a Contingent Recoverable Resource of 1,811 Bcf of gas.

The company also has the potential to explore for shale gas and it believes that within its acreage it has up to 4.5 trillion cubic feet of gas (on an un-risked basis). In its results today it updates on these prospects and mentions that its Ince Marshes -1 well drilled as a CBM well encountered a thick shale interval highlighting the potential for shale gas in the North West.

Why now?

The Company has made huge progress in the last year building up its conventional oil production, thus generating cash for the business. In the meantime the regulatory environment has improved. Only last week the Government published a Gas Strategy paper and has set up a new Office of Unconventional Gas and Oil. The Government quite rightly acknowledges the importance of gas as a "clean" hydrocarbon that will play a larger part in providing the energy needs of the UK at a time when UK production of conventional gas is declining. (The UK is forecast to…

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Cuthbert C

14th Jan '14

And have just doubled up at 137p - which considering I started watching IGAS at 30p is a little irritating - but can't allow all my future decisions to be influenced by historic slowness off the mark

It looks to me that there is clearly building momentum which will provide considerable uplift for the next 3-6 months at least.

T

"...Igas had its price target trimmed by Canaccord Genuity from 180p to 170p on Monday..."

"...Jefferies Group reiterated a buy rating on shares of Igas on Monday. They now have a 195p price target

source: http://zolmax.com/investing/igas-energy-pt-lowered-to-gbx-170-igas/188753

johnrosier

17th Jan '14

Igas Energy (153p and 3.5% of JIC Portfolio) A nice move today following the disclosure yesterday that Andrew Austin, Chief Executive, had followed up Monday's news by buying 300,000 shares at 135.38p each. The interesting fact is that he has borrowed the money to fund it! He has “entered into a loan facility, and has transferred up to 7.5 million shares as security. Andrew Austin is required to redeem the shares at maturity when the loan is repaid at the end of the three year term and it is his full intention to do so”. Given that he already had an interest in 10,667,075 shares you might ask why he felt he needed another 300,000? He must be very confident! Happy Holder!

extrader

Hi all,

I can't help feeling there's something missing in the detail of this transaction : If I gave my bank security of 'up to GBP:10M) (7.5M shares x say 120p), I'd expect to generate more than £400K (330K x 135p) in 'firepower' in exchange.

On the face of it , this pledge is for roughly 25 x the funds generated. I wonder whether the security taken covers other things as well that we haven't been told about. Either that, or the CEO isn't a very good negotiator - which doesn't seem likely !

ATB

18th Jan '14

In effect the borrower has arranged a mortgage like loan secured against his IGAS share holding.

Just like many mortgages, the loan represents only a fraction of the value of the asset against which it is secured.

A tranche of the loan has been used to buy 300,000 IGAS shares. That might be the only tranche that has been drawn down or ever will be drawn down. However, there could already be draw downs against the loan agreement or such drawdowns could materialise in future. Perhaps the borrower will buy a house or a Bentley or a yacht using the same loan aggrement.

Who cares? I mean if the guy is smart enough to run IGas, then presumably he is smart enough that he can organise his own financial affairs. Surely the only thing that matters to us is that despite already owning 3 million shares (from memory, so not a reliable figure) he has decided that he wants to buy another 300,000. He did not have the £400k lying around, so he borrowed the money.

What more do we need to know? And why?

slartybartfast

I think the point is that if the security is needed to be called on due to the share price falling, the security itself also drops in value.

"I think the point is that if the security is needed to be called on due to the share price falling, the security itself also drops in value"

Why is that of any interest to us?

It was in response to the discussion point :
"On the face of it , this pledge is for roughly 25 x the funds generated. I wonder whether the security taken covers other things as well that we haven't been told about. Either that, or the CEO isn't a very good negotiator - which doesn't seem likely !"

cig

He might have got a bigger loan (e.g. for future purchases), the RNS wording doesn't state the amount or that it's to be used exclusively for that one 300K buy announced at the same time.

19th Jan '14

Looking at the announcement that the CEO has bought 300k shares to add to the millions that he already owns and I'd guess the millions he is in line for through option schemes and bonuses, the most salient, most interesting, most relevant fact is that he has decided to fill his boots more- even though boots are already full to the brim - and has accordingly borrowed some bigger boots.

Frankly the contract under which the bigger boots have been obtained is a matter of very secondary interest.

The simplest and most pertinent deductions that we can make are:

1) he is uber confident about the likely trajectory of the share price

2) he is sufficiently pro-active that he will take direct action to convey to the market his own feelings/convictions

Frankly the speculation about the terms of the loan is completely irrelevant compared to the above.

Hi rg,

Playing devil's advocate for the moment :
- if you go to equitiesfirst.com (loan provider's) website, you see that they typically offer an LTV of 70%, occasionally 80%. There's a basic arithmetic error in their worked example of advantages of loan structure vs margin-based facility, but that's incidental;
- in Andrews' case, that suggests potentially a loan of around GBP 7M agst security assessed at GBP 10M;
- of this (assumed) available facility, just over 6 % has been applied to 'top up' slightly his existing ,significant, holding. Why bother ? A sceptic might say that this relatively immaterial top-up dresses up the underlying transaction.in a market-pleasing manner.
- if you look at the loan provider's website, in addition to stating ' no margin calls, no assertion of voting rights' (good from the CEO's - and hence shareholders' ?- POV), there is - if I've read it correctly - the interesting suggestion that margin calls won't apply even if security falls below loan outstandings. I'm not sure how the lender protects itself here, possibly by writing put options ?
- if so, then it might be argued that the CEO has effectively monetised a substantial part of his exposure to IGAS at current levels and (indirectly, via his loan provider) protected himself against any subsequent falls.

The relevant section of the lender's undertaking is set out below (my bold)
One of the most important features of a stock loan is the security that it brings. If Company X's stock appreciates during the loan term, the individual retains 100% of the market value at maturity. If the stock significantly declines, the individual can walk away from the loan and keep the original loan proceeds with no further obligation.

A stock loan is also non-purpose, allowing the borrower to invest in what he or she might need. Since the loan is also non-recourse, if the value of the security has a steep decline, the borrower has the option of terminating the loan, or keeping the loan proceeds with no further obligation. If the security appreciates, the borrower retains 100% of the upside market value after paying back the original loan.

I think that the above give legitimate grounds for pause for thought.

As the CIA are supposed to say ' we listen to intentions but plan according to capabilities'. I'm not imputing anything sinister to the CEO's actions, just pointing out some of the possibilities thereby opened up.

Hope this clarifies where I'm coming from.

ATB

extrader (not an IGAS shareholder, but a former banker, for my sins)

Great find, @extrader! So basically he's halved his capital commitment (70% of 7M out of 10M shares exposure) while making it look like he's increasing it.

Re lender business model. It's curious indeed.

They could hedge with derivatives like a swap or buying a put (not writing, they're already short a synthetic put with the non recourse thing) but then doesn't that break all the rules in the book? If the claim they won't short sell covers only direct short selling, it's meaningless. Well, it probably is. One could ask investors relations I guess, and see if they dodge the question.

They could also just portfolio hedge, with enough deals at the right price, it's okay, but here the problem is 70% LTV and "3 to 4.5%" (annual?) interest for a non-recourse on crazy resource stocks sounds too good to be true (just looked at RIO options briefly to estimate a lower bound, indeed is). I want some at this price!

If they don't hedge they may be doing a hit-and-run: take all the interest spread out of the company as it flows in, and if the portfolio is under water at some point so that they can't pay their creditors, just liquidate and default on the borrowers with upside (give the shares to your creditors). You need to find mugs who don't price the counterparty risk, but they may be fishing in the right pond here.

extrader

excellent post - and good research - thanks

T

20th Jan '14

Thought it worth flagging up the continuing strength of the share price for the benefit of anyone who has a mild interest but is not actively monitoring IGAS.

Price > 161p this morning. Looks like it is will easily reach and surpass the 170p target stated by Cannacord and keep going to the 195p target set by Jeffries. I suppose it might pause for breath at that point or it might just keep going.

It seems to me that the primary support is emotion/sentiment at present rather than any detailed analytical insight. The shale gas story is easy to tell and to buy into. Long term the outcome might be much less positive than many of us hope but that denouement, even if it eventuates, has to be years away. Meantime, the optimists will have time to do what they do and drive the price ever higher.

I'm neutral on the prospects for shale gas but I'm expecting to enjoy the ride for a long while yet.

:~)

rhomboid1

9th May '14

http://www.investegate.co.uk/igas-energy-plc--igas-/rns/acquisition/201405090931117037G/

Igas are acquiring Dart so a doubling up of exposure to UK shale...and then some!

" The Boards of IGas Energy Plc ("IGas") and Dart Energy Limited ("Dart") are pleased to announce that they have reached agreement on the terms of a recommended acquisition by IGas of Dart, which values the total share capital of Dart at approximately A$211.5 million on a fully diluted basis (being equivalent to £117.1 million).

· The acquisition will be via an Australian Scheme of Arrangement on a share exchange basis.

· Dart shareholders will receive 0.08117 IGas shares for each Dart share, equivalent to A$0.1898 per Dart share based on the A$:£ exchange rate and closing share price of IGas on 8 May 2014, and will hold approximately 30.5% of the enlarged company on a fully diluted basis.

· The combination of IGas and Dart will create a market leading onshore UK oil and gas company with the largest area in the UK under licence of over 1 million net acres including major UK shale basins.

· The Dart Board unanimously recommends Dart shareholders vote in favour of the Scheme (as defined below) in the absence of a superior proposal and subject to an independent expert concluding the Scheme is in the best interests of Dart shareholders.

· Significant shareholders of Dart, holding voting rights over a total of 337,662,293 Dart shares, representing 30.5% of the total voting rights of Dart, including 16.3% held by a subsidiary of New Hope Corporation Limited ("New Hope"), have indicated their intention to support the transaction in the absence of a superior proposal and subject to an independent expert concluding the Scheme is in the best interests of Dart shareholders.

· The IGas Board unanimously recommends IGas shareholders support the transaction and grant approval for the IGas Directors' authority to allot the consideration shares. The Directors of IGas, together with significant shareholders holding voting rights over a total of 89,838,479 IGas shares (representing 43.54% of the total voting rights of IGas) have indicated their support for the transaction.

· Dart has cancelled its planned listing on the AIM Market of the London Stock Exchange ("AIM"). However, upon implementation, the transaction will provide Dart shareholders with IGas consideration shares that will be admitted to trading on AIM."

13th May '14

My view for what it's worth on the Dart acquisition:

Igas Energy (Market capitalisation; £267m, 130p and 3.3% of JIC Portfolio) has announced an all share offer for Australian listed, Dart Energy this morning valuing the company at £117.1m. Dart shareholders will end up holding approximately 30.5% of the enlarged group with the combination of the two companies having the largest area in the UK under licence of over 1 million net acres. The combined group has an ongoing work programme for 13 shale gas licences funded by GDF Suez and 2 funded by Total E&P UK. The deal is expected to complete in September, is unanimously supported by the Board of Dart and has the agreement of major shareholders.

Conclusion: from an Igas shareholder’s point of view this looks to make sense. It will create a £400m company with greater exposure to potential shale gas fields and I suspect, superior operational and financial resources to successfully exploit them. In short I think it makes Igas Energy a more valuable company in this emerging market in the UK. There were a few sellers first thing on the announcement. I think that will be proved wrong. Happy Holder!

jjis

9th Oct '14

Announcement today about bidding for more licences and update on E.Midlands acreage and core analysis of its exploration well at Barton Moss at the end of this month could provide a catalyst for excitement or disappointment I guess.

People who know more about these types of stocks than I do were getting very excited earlier in the year when it was twice this price but now has market cap of £169m and cash of $47.2m with news flow to come could make it interesting down here? Discuss.

jonnyt

Not as exciting as others such as TRP will drilling in 3 months of a well with the potential of 15mmboe net plus and a £30m market cap.

Then you can look at FOGL which I consider a give me at the current price with at least 5 material wells being drilled in the new year.

I'm not saying this won't work I just think there maybe better opportunities elsewhere

10th Nov '14

I see igas is now caught up in the QPP affair as a result of Mr Austin's use of equity first to facilitate his buy/ sell or combination thereof

I'd like to see some full disclosure by RNS as to what exactly has transpired and who now holds Mr Austin's shares and the full detail .

I'm not impressed and will be making representations to the company.

My fun size punt is now not fun at all

19th Dec '15

Just updating this, I sold 2/3 of my holding at a heavy loss after a lengthy dialogue with the company and its advisers, I'm holding the remainder as a place holder/reminder for the potential of shale in the UK but mainly to remind me how stupid I can be. The category includes Aminex and Tower , I'm hoping to avoid having any further stupidity reminders any time soon.

IGAS Energy: Farm-out deal; CEO follows up with share purchase!

Why now?

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Johnrosier

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