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IGas is currently 17p a market cap of £51m, off the recent lows of circa 10p and I’m curious as to why this stock has bounced of late.
The driver I believe was based on some comments made from the government around giving more direct benefit to those in the community affected by fracking. Theoretically a supportive government should make things a lot easier for iGas once it is able to start sweating its assets.
IGas problem though is that it is years away from monetizing its shale assets, indeed its first exploration shale wells are not expected before 2017. Whilst it does have $255m of carries on its development pipeline it is operating very close to its financial covenants on its bonds. Cash was around £22.5m as at the end of April, but note 2016 CAPEX guidance of £10m and a further £10m of Interest payments due. With limited cashflow generated from operations then IGas could be out of cash by the end of the year or perhaps Q1 2017, based on my calculations.
IGas does have options which don’t involve the secured bondholders, 1) M&A, i.e. the whole company or individual assets and/or 2) an equity raise. Taking option 1 – IGas has £255m of Assets on the balance sheet, however buyers for UK oil and gas assets are limited and unconventional exploration I view as being unattractive at present. An equity raise I think is the more likely of the two options, this equity raise should partly be used to pay down a good chunk of the debt. Given the current market cap is £51m then a huge equity raise would be required, this would have to be at a discount to current market price to get it away.
With all of the above in mind it is no surprise to see the bonds trading (albeit illiquidly) at 78c in the $. There is also the mystery bond buyer, someone has been building a stake in the bonds which means we shouldn’t be surprised to see some sort of hostile move if and when the financial covenants are breached. The likely outcome is a debt for equity swap and in this scenario, equity is worth little or nothing, a token gesture could be offered to shareholders to ensure orderly proceedings. Look at Petroceltic or Gulf Keystone for an example of what is likely to happen.
Disclaimer – I have no positions in this stock and to my knowledge nor do any close family, friends nor associates. This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.