Shares in IGAS Energy (LSE: IGAS) are trading down this morning after the company announced that it’s still in discussions with all stakeholders as it tries to work out a capital structure “appropriate for the business in the current operating environment.”
Put simply, IGas is talking to bondholders and strategic investors about restructuring its business, and according to news reports, this may result in the group’s conventional assets being sold.
Indeed, according to reports IGas has held talks with private equity-backed oil group Trans European Oil & Gas, one of its bondholders, which has proposed a sale of IGas’s conventional gas assets.
Two separate divisions
The IGas business has two separate divisions; UK shale gas assets and a group of conventional oil and gas production assets. These conventional assets are already producing income for the business. Production is expected to average between 2,400 and 2,600 barrels of oil equivalent per day for 2016. But the size of the conventional assets is insignificant compared to IGas’s shale interests.
It’s estimated that conventional 2P + 2C reserves are 35m barrels of oil equivalent while the net prospective resource of the shale gas prospects is estimated at 440m barrels of oil equivalent.
Considering these reserve figures, selling the conventional assets to fund the development of the shale gas fields seems to be the most attractive option for IGas. At the end of September, the company reported a cash balance of $27.6m with net debt of $117.4m.
To fund the development of its shale assets, IGas will need a massive cash infusion or more debt. One of these options is significantly more attractive from a long-term perspective than the other. A cash infusion would offset any near-term worries about the firm’s balance sheet and keep financing costs down.
A cash dilemma
The dilemma management faces is that by selling the company’s conventional production assets, the company will lose its existing revenue stream. For the six months ended 30 June, IGas reported revenues of £12.1m, adjusted earnings before interest tax, amortisation, and depreciation of £5.1m and a cash inflow from operating activities of £9.1m. Without conventional production, IGas will have to cope with much-reduced cash flows.
Any other options?
Does the group have any other options? Maybe not. Barring a cash call on shareholders. IGas is up against it when it comes to the group’s financial position. Last week management warned that the company would breach its daily bond liquidity covenants this week. After the expected breach, a 10 business day grace period will be applied to allow management to “pursue options, including the sale of bonds or other assets, and expects to remedy any such breach before an Event of Default.” So, IGas has to find a solution to its liquidity issues by mid-November or bondholders will take control of the company.
All in all, a sale of its conventional oil properties could be the best solution for IGas to avoid default. If the firm goes down this route, investors would be wise to hold on to their shares ahead of further progess with the IGas shale assets. If not, it could be time for investors to consider selling their holdings in the company ahead of a potential default.
