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Should You Buy IGAS Energy PLC After It Surges 19%?

It has been a hugely eventful recent period for investors in IGAS Energy (LSE: IGAS), with the company seeing its share price swing wildly as news flow surrounding the future of fracking has had a major impact in both directions.

For example, shares in IGAS Energy slumped at the start of the week as UK policymakers suggested that fracking for shale oil and gas should not be allowed at the present time, and that a decision on its long term future should be made at a later date. Clearly, this was bad news for companies that are aiming to tap into the potentially lucrative industry in the UK and, as a result, shares in IGAS Energy fell by as much as 33% on Monday.

However, they have more than made up this fall in the last two days and are up a further 19% today due to the rejection of the proposed moratorium on fracking by Parliament. According to IGAS Energy, the new Infrastructure Bill now provides clarity that enables new and existing operators to invest in shale, although there remain stringent restrictions surrounding noise pollution and exactly where fracking will be allowed. As a result, the future seems to be a lot brighter for IGAS and for the wider shale industry in the UK.

Finances

Of course, a major concern for investors in any smaller resources company is cash flow and, although the news flow regarding the passing of the new Infrastructure Bill by Parliament is positive, it will still take time for IGAS to generate cash flow from the extraction of shale gas in the UK.

Furthermore, the company will need to make significant initial investment and, while its balance sheet contains £28m of cash, it also contains £108m of debt. This will need to be serviced and, while IGAS does have income from other operations, it would not be a major surprise if additional capital is needed over the medium term.

Looking Ahead

While recent news flow has been rather mixed for IGAS, this is likely to be a feature of its longer term future. In other words, fracking appears to polarise opinion and the anti-fracking voice is a rather loud one, which means that IGAS’s journey to becoming a key player in the shale industry is unlikely to be a smooth one. And, with the company trading on a forward price to earnings (P/E) ratio of 31.3 (using forecast earnings for the year to March 2017), much of its future earnings potential appears to already be priced in.

As a result, and while shale could become a key part of the UK’s energy mix through which IGAS directly benefits, now may not be the right time to buy a slice of the company, although it is certainly a stock to watch in the months ahead.

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Peter Stephens 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.