Is IGAS Energy PLC A Buy At Present Levels?

It’s been a rough start to the year for IGAS Energy (LSE: IGAS). In only four weeks the company’s shares have declined by 11%, as shareholders have become concerned about the viability of fracking in the UK.

Nevertheless, IGAS has started to recover over the past few days. Luckily, several pieces of good news have helped pull the company’s shares higher but there’s a certain amount of uncertainty regarding IGAS’s future. 

And it all comes down to the state of the UK’s fracking industry. For example, IGAS’s shares took a dive last week when a panel of lawmakers recommended that fracking for shale for oil and gas in the UK should be put on hold. What’s more, planners in Lancashire recommended that the county council’s Development Control Committee should reject an application for shale drilling in the region. 

But only a few days ago, both of these issues were resolved. The proposed moratorium on fracking by Parliament has been rejected and the new infrastructure bill provides clarity on the rules for new and existing operators seeking to invest in shale.

Deals taking place 

There has also been some M&A going on in the UK fracking sector over the past week. In the latest corporate shale deal, Newton Energy UK Ltd — which holds four onshore production, exploration and development licenses in the East Midlands — was sold to Hutton Energy.

For IGAS, this deal and others like it are great news as it indicates a growing interest in the UK’s shale prospects. The more interest the sector generates, the easier it’ll become to push projects forward and cost of drilling should be pushed lower.

Bid speculation 

IGAS itself has also been the subject of bid speculation recently. Indeed, it has been rumoured that Swiss chemicals group Ineos has been in talks to buy a share of IGAS’s acreage.

However, these talks are only the beginnings of Ineos’s ambitions. Analysts have begun to speculate that the Swiss group could be weighing up a £30m equity stake in IGAS to help fund drilling and development costs. 

Difficult to value

Overall, IGAS is set to benefit from an increasing amount of activity and investment in the UK’s fledging fracking industry. However, it’s difficult to try and place a value on IGAS’s shares at present. It will take time for IGAS to generate cash flow from the extraction of shale gas in the UK and the company has a weak balance sheet — IGAS has £28m of cash and £108m of debt.

Moreover, based on earnings forecasts for 2017, IGAS looks expensive as the company is currently trading at a 2017 P/E of 18.4.

So based on the company's rich valuation, it might not be time to buy IGAS at present levels. But if you are thinking of taking a position, the best strategy is the use a basket approach. 

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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.