UK Shale Gas Industry Set To Boom - How To Profit From It

May 07, 2012 4:13 AM ET1 Comment
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Long/Short Equity, Value, Software, Contrarian

Contributor Since 2012

ifs Young Business Writer of the Year 2012. Author of "How The Financial Industry is Dealing With The Pensions Timebomb". Featured in The Times in the UK. My day job is a freelance marketing consultant, and by night I research stocks.

The UK's energy future?

As I wrote a couple of weeks ago, the US is benefiting from a booming shale gas industry. So much has been invested in the drilling of shale that the US now faces a glut of natural gas and depressed prices. But if we were to look the other side of the Atlantic, the UK has barely touched its shale resources. There are two main visible players in Britain, and those are Cuadrilla Resources and IGas - but IGas is the only one publicly traded.

Recently IGas upped its estimates of recoverable shale gas at their Ince Marshes site to 10TCF (Trillion Cubic Feet). To put that in perspective, the UK uses 3.3TCF every year (Source: NoHotAir). That means that IGas owns fields which have the potential to power the UK's gas needs for 3 years. No North Sea resources, no tankers coming from dodgy Middle-East states, no pipelines from Norway... for 3 years!

My question then was: why is this company only trading at roughly £100M?

My first thoughts were the controversy surrounding shale drilling and the misunderstandings about it. Will nimbyism and local politics get in the way? Concerns were raised about earthquakes caused by fracking operations near Blackpool and the government had suspended Cuadrilla's drilling, pending an investigation. That DECC investigation last week concluded that Cuadrilla should continue, so this bodes well for IGas' holdings.

Secondly I wondered if that because it is a small company and barely discussed in the newspapers... it has garnered little attention. Its low market capitalisation could be due to this.

Thirdly, I wondered whether the fact that they are not planning to develop their shale gas resources was weighing on its valuation. Instead of drilling themselves, IGas announced that they would be looking for partners to exploit the gas for them.

After attempting to contact the CEO this morning, I was sent towards their PR department who told me very little beyond what I already knew. Except that the woman who I spoke to implied that they would be looking to sell their shale gas acreage, as opposed to other options.

According to their recent investor report IGas own 384,249 acres. In the US, where commercial production has taken off, transactions in 2010/11 valued each acre at $7,468 (according to the same report). Now correct me on my back of the envelope maths, but that makes an estimate of their shale assets worth $2.9 billion or £1.76 billion at today's exchange rates. Even if only a fraction of those assets are retrievable, exploitable and sellable - IGas' share price should be a multiple of where it is today.

What also gave me faith in the company is the fact that its management own a significant portion of it. Francis Gugen, the chairman, owns 17.03% of the company, whilst Andrew Austin, the CEO, owns 6.57%. Those two will know more about the company than any freelance researcher like myself can find out - so that should be a strong signal to buy in.

All in all, the company owns shale gas fields which may be worth several times its current market value. The company appears to have had minimal attention paid to it, so it is trading at low prices. Furthermore the management have put several million pounds of their own money into the business. What's not to like?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I own some IGAS shares which I bought today. IGAS is traded on the London Stock Exchange's AIM (Alternative Investment Market)

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