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IGAS Energy PLC Slumps After Calls To Postpone Fracking In The UK

Shares in IGAS Energy (LSE: IGAS) have crashed today after a panel of lawmakers recommended that fracking for shale for oil and gas in the UK should be put on hold. Risks to public health, the environment and the rights of citizens were all reasons put forward as to why fracking should be restricted in the country.

Plenty of opposition

At time of writing, IGAS’s shares have fallen by around a third following this news and it is undoubtedly a huge blow for the company and its outlook. The report, published by parliament’s Environmental Audit Committee, was released only hours before parliament was due to debate an infrastructure bill that would allow fracking companies to drill deep under land without the owner’s permission — a move that’s been called “profoundly undemocratic”.

What’s more, this news comes only a few days after an amendment to the bill was proposed, which recommended imposing a moratorium on fracking, in which water, sand and chemicals are used to free oil and natural gas from shale formations, because it could risk the UK efforts to tackle climate change.

And while politicians have been debating the issue in London, the UK’s fledgling fracking industry has come under additional pressure within Lancashire. Where planners last week recommended the county council’s Development Control Committee should reject an application for shale drilling.

Planners are concerned about noise pollution resulting from fracking developments. Cuadrilla, the operator trying to get permission to drill in the region, has submitted new noise-reduction proposals and asked the council to delay a decision to allow for “proper consultation.”

All in all, the future of the UK’s fracking industry looks to be in jeopardy. There’s certainly plenty of uncertainty surround the industry’s future. 

IGAS impact

The question is, how will these developments affect IGAS? Well, the biggest issue will be the company’s liquidity. Further delays to planning applications and a general move against fracking in the UK, will cost the company precious time and money. That being said, unlike many small-cap oilies, IGAS is already producing hydrocarbons so the company has some cash flowing into its coffers.

Nevertheless, IGAS is still subject to international energy prices. Even though the majority of the company’s production is hedged until September 2015, high production costs mean that the company will struggle to finance operations after this date. In particular, IGAS reported operating costs per barrel of oil equivalent were of £22.8 per barrel for the six months ended 30 September 2014, that’s around $34 per boe. Add interest and admin costs onto this, and with Brent oil trading at $48/bbl, there’s not much room for manoeuvre. 

Still, the company’s balance sheet is in relatively good shape with a cash balance of £29.1m and net debt of £80.8m reported at the end of September. During the reported six-month period, cash generated from operations covered all capital spending and interest costs. So IGAS is not struggling just yet. However, with opposition against fracking in the UK building, the company’s future is uncertain.

And if you are thinking about buying IGAS, you need to be prepared for volatility -- this is a high risk/high reward company, not suitable for widows and orphans. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.