This AIM stock has millionaire-maker potential

This UK onshore oil explorer is now drilling on firmer ground, says Harvey Jones.

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These have been torrid times for UK-focused onshore UK hydrocarbon producer and shale explorer IGas Energy (LSE: IGAS), which came close to collapsing earlier this year. The plunging oil price and soaring debts almost put it out of business until a restructuring and refinancing programme saved the day.

Life’s a gas

IGas now looks a more solid proposition. However, the AIM-listed group has a market cap of just £60m and like any small-scale oil producer and explorer, is still risky/speculative. It published its audited results for the six months ended 30 June this morning and the initial market response was positive, with the share price up more than 4% at one point, although it has since trailed back.

IGas group generated £16.8m of revenue in the first six months of 2017, up 39% from £12.1m in 2016. It sold 444,023 barrels of oil and 4,100 mwh of electricity, against 438,665 barrels and 4,200 mwh last year, and benefitted from higher Brent crude prices, which averaged $51.8 a barrel against $39.7 last year. The weaker pound also boosted the value of its dollar-priced oil revenues.

Oil flows

Adjusted EBITDA fell from £5.1m in 2016 to £2.5m but IGas posted a profit after tax of £8m from continuing activities, reversing last year’s loss of £23.9m. The rebound was largely down to higher oil prices and a cost reduction programme, which offset increased operating costs.

In April, IGas successfully completed its capital restructuring and fundraising plan, introducing experienced industry investor, Kerogen Capital as a 28% shareholder following a £29m equity investment. It has also reduced net debt from £100m at 31 December to just £7m on 30 June 2017, against a cash balance of £16m.

Shale and hearty

CEO Stephen Bowler said the group is now well funded and should be cashflow generative at current oil prices. It can now invest in growth projects across its conventional assets and shale acreage, and has identified incremental projects that should produce around 2,500 barrels oil equivalent per day, at a cost of $25 a barrel, well below today’s Brent crude price of $56.

Shale progress has been frustratingly slow in the UK, thanks to weak government support and noisy environmental campaigns, but IGas will shortly commence site construction at two sites in North Nottinghamshire, has submitted an application to conduct further tests at Ellesmere Port, and is developing applications across the North West and the East Midlands. It says momentum in the UK shale sector is increasing with significant activity onshore.

Crude facts

The UK desperately needs energy diversification and this is a fascinating sector to invest in, but also a frustrating one. IGas saw its stock peak at 146p in June 2014 when crude traded at $115 a barrel, before slumping to below 4p. This year’s capital restructuring and share consolidation artificially elevated the share price from 3.9p to 73p, at great cost to existing investors, but the price has since trailed back to today’s 52.75p.

Investors are understandably wary even if the company is now on much more solid ground, especially as the oil price continues to rise. IGas is still risky/speculative, but definitely one to watch.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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