Existing shareholders suffered dilution of their interests, but now own stock in an enterprise that has cleared much of its debt and, in the process, secured financial backing from some strong – and presumably knowledgeable – players in the sector.

Steady cash flow

Today’s full-year results underline the firm’s improved position now. Revenue rose 17% during 2017 compared to the year before and net cash from operations came in at £6.7m down from £12.4m the year before. The big financial feature of the report is that net debt plummeted almost 94% to just over £6m, which puts the firm on a much more stable footing.

Production during 2017 was steady at 2,335 barrels of oil equivalent per day (boepd), which is the same figure as that achieved in 2016. Looking forward, the directors expect a similar outcome in 2018 with production coming in between 2,300 and 2,400 boepd. Such steady production should keep the cash flowing into the IGas coffers. Chief executive Stephen Bowler said: “The expectation of ongoing free operating cash flow provides us with a solid platform and financial flexibility to execute our growth plans.”

The plunge in commodity prices led to a difficult two-year period for the firm along with the rest of the industry, but the directors say that a more stable outlook for commodity prices now leaves it well positioned for its next phase of growth. The company is starting to drill and flow-test appraisal wells to assess the commercial viability of its shale resources, which could go on to deliver upside for shareholders from here. I think ‘right now’ is a good time to dig deeper into the opportunity with IGas.

Combining income and growth

If you do decide to take the plunge and buy some IGas Energy shares, why not pair them in your portfolio with some BP stock? The main attraction is the oil major’s fat dividend. At the recent share price of 462p, the forward dividend yield for 2019 runs just above 6%, which is handy income to collect as you wait for the upside potential from IGas to materialise.

In its full-year results report back in February, BP declared underlying profit up 139% compared to the year before, organic cash flows back in balance, downstream underlying profit up 24%, upstream production up 12%, a reserves replacement ratio of 143% and a restarting of the share buyback programme. It’s amazing what a difference the recovering oil price makes, and with forecast earnings now set once again to cover forward dividend payments, the dividend no longer looks threatened.

The firm expects underlying production during 2018 to be higher than 2017 due to “the ramp-up of major projects.,” which reinforces my view that BP could serve investors well in the coming years.

The post One growth candidate I’d buy alongside BP plc appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended BP. 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.

It’s a strong comeback for a company that was forced into a painful refinancing in 2017. IGas now has backing from both chemicals giant INEOS and from oil and gas investor Kerogen Capital, which owns 28% of the group’s shares after pumping £29m into last year’s refinancing.

Although this AIM-listed firm is a relatively small investment for both INEOS and Kerogen, both are credible investors with industry knowledge. Their support suggests to me that they see considerable upside potential in the firm’s assets.

An action-packed year

INEOS support means that IGas now has a carried work programme worth up to £183m. The company is hoping to drill two new shale wells this year, and further data is expected from a number of rivals also hoping to drill or frack UK shale wells.

Rising oil prices have also helped the group’s portfolio of conventional oil and gas wells. These are now producing around 2,500 barrels of oil equivalent per day, at a cost of about $25 per barrel. Group revenue is expected to rise by about 10% to £36m this year, and broker forecasts suggest a net profit of about £3m.

The speculative opportunity for shareholders lies in the shale exploration programme. In my opinion, success could easily result in rapid gains. But if early results from shale wells are disappointing, then I’d suspect the shares may decline.

In my opinion this situation remains highly speculative. I’d only be prepared to consider this stock for a small part of my portfolio.

One share I’d buy today

A stock I’d be happy to own in much larger amounts is Porvair (LSE: PRV), a specialist maker of industrial filters. This £243m firm has risen by more than 850% since the financial crisis, and has gained 85% over the last two years.

Today’s full-year results suggest to me that the group’s growth potential remains strong. Pre-tax profit rose by 16% to £11.7m last year, while sales were 6% higher at £116.4m. Earnings per share climbed 14% to 19.5p.

Although Porvair spent £11.4m on acquisitions and capital expenditure last year, the group still ended the year with net cash of £9.8m. That’s just £3.8m less than the £13.6m reported at the end of 2016, highlighting the group’s strong cash generation.

Quality at a reasonable price?

Porvair shares are up 3% at the time of writing, reflecting chief executive Ben Stocks’ view that the group has started 2018 with “a healthy order position and is trading well”.

The firm’s growth strategy is based on the principle that it will only sell products which require specialist skills to make, and which must be replaced regularly.

This approach appears to provide a high level of repeat business and attractive pricing power, due to limited competition. The Kings Lynn-based firm’s operating margins have now been stable at about 10% for the last five years.

Although Porvair stock may look pricey on 28 times forecast earnings, I believe this is a quality growth business that’s worth owning. I’d be happy to buy at current levels, with a view to averaging down during any future periods of weakness.

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Roland Head no position in any of the shares mentioned. The Motley Fool UK owns shares of Porvair. 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.

Is it too late to buy these soaring stocks? Or are recent gains just the start of a bigger multi-year rise?

Responding to regulation

IG Group’s shares are little changed at 785p following today’s results, having enjoyed a strong run-up from 650p since a pre-close trading update on 5 December. In fact, this has been part of a longer rise since December 2016 when the threat of tighter regulatory controls initially caused a major share price crash for IG and its rivals.

Several announcements by regulators have caused some short-term volatility in the shares but the broad upward trajectory has continued. As the industry leader, FTSE 250 firm IG is well placed to pre-empt or adapt to new regulations. For example, it was able to respond to a recent fairly damning review of part of the contracts for difference market by the Financial Conduct Authority (FCA) with the statement: “IG believes that it complies with the applicable rules and FCA guidance and that this review has no new financial implications for IG’s business.”

Highly attractive valuation

Increased regulation could actually benefit the big players in the long run and IG’s half-year results today showed the business continuing to progress, with record revenue and profit for the period. City forecasts for the company’s financial year ending 31 May project earnings growth of over 13% to 52.4p a share, giving a price-to-earnings (P/E) ratio of 15. There’s also a very nice 4.6% yield from a forecast 36.3p dividend.

IG’s earnings multiple and yield strike me as highly attractive for an industry leader, which is also broadening its client base through the development of new products and services, and through the establishment of operations in new geographies. For these reasons, I rate the stock a ‘buy’.

Very buyable?

AIM-listed Igas Energy faced gale-force headwinds as a result of its high level of debt and the oil price crash of 2014. Indeed, so severe were these that, ultimately, the company’s very existence was threatened. A massive financial restructuring crushed existing shareholders but at least enabled the company to survive.

I turned bullish on Igas in June after its refinancing. I noted its transformed financial footing — net debt of $8m, compared with $122m pre-refinancing — and that the company was cash flow generative at the prevailing oil price. Also, that its shale development plan was well funded by its partners with a carried work programme of up to $230m.

Since then, it has released its half-year results and the price of oil has continued to recover (reaching over $70 a barrel recently). Management said that in addition to the carried work programme on its shale acreage, it now has capital to deploy in incremental growth projects across its conventional assets. It expects the latter to underpin increased production to 2,500 barrels of oil equivalent per day and operating costs of $25 a barrel in the medium term. As such, the shares of ‘New Igas’ continue to look very buyable to my eye.

The post Is it too late to buy IGAS Energy plc shares after doubling in 4 months? appeared first on The Motley Fool UK.

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G A Chester 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.

To add to the group’s woes, the oil price crash of 2014 cut its cash flow dramatically. With seemingly everything going wrong for the business, the shares have cratered by more than 96% over the past five years, although they have bounced back recently. 

However, 2018 looks to be somewhat of an inflection point for the fledgling hydrocarbon group. With oil prices rising and low operating costs, IGAS is well positioned to return to profit in the years ahead, and long-suffering shareholders look set to profit. 

Profits flowing 

IGAS’ interim results showed off what the group is capable of. For the six months to 30 June, the firm reported adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) of £2.5m. Cash generated from operations during the period was £0.4m. 

Management’s estimate of the overall operating cost per barrel of oil produced for full-year 2017 was $40.50, equivalent at the time of the interim results. Since then, the price of Brent crude has risen by nearly 40% indicating that today, the firm is profitable and generating plenty of cash. Anticipated average production for 2017 was 2,250 boepd with output increasing to 2,500 boepd by year-end. 

After a transformative restructuring last year, IGAS is now almost debt free. The group restructured around $130m of debt to just $30m at the end of June. Net debt at the end of the period was $9.3m, giving the firm plenty of headroom to fund capital spending. Following the rise in the oil price, increased cash generation should help reduce this deficit even faster than expected. 

Future growth 

So IGAS is generating cash and has plenty of resources to support its growth, but what’s next for the business? 

Management is progressing with several growth projects to help improve output. The Welton Waterflood expansion project and Stockbridge production recovery projects are both expected to complete this year, yielding an estimated 100 boepd for a capital outlay of less than £2.5m. During the year, the company is also planning to start the exploration and development of its Springs Road and Tinker Lane shale prospects, as well as the Pentre Chert formation at its historical Ellesmere Port well. These prospects could provide significant upsides for the group’s production, rewarding shareholders. The good news is that IGAS is well funded as cash is flowing, so management can finance well development without building up more debt. 

Overall, I view IGAS as a sort of lottery ticket. Right now, the company is treading water although over the next few years, as it explores for further resources, there could be an enormous upside for investors if it strikes the black gold. If not, the company will continue to chug along at its current pace. 

The post Is IGAS Energy plc your opportunity to make a million? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

I’m seriously starting to think that 2018 could be a very good year for oil & gas investors, and I reckon Soco International (LSE: SIA) could be one to go for.

Soco, focused on Vietnam, has seen its share price crash by 67% over the past five years as the end of a previously lucrative exploration cycle faded. But over the long term the company has produced powerful returns for investors, and we could be heading for a new profit spell coupled with the prospect of a few years of tasty dividends.

New look

In the firm’s latest update on Wednesday, chief executive Ed Story said: “The new Soco vision is to build a growth-oriented E&P company of scale, generating through-cycle total shareholder returns whilst adhering to the company’s historic focus on financial discipline and an annual dividend.” The latest signs look good to me.

Production averaged “8,276 boepd net to Soco’s working interest during 2017,” and development of the company’s Te Giac Trang interest is on time and within budget.

For the full year, the firm’s balance sheet has been strengthened and boasts cash and liquid investments of $137.7m. And, of enormous importance, there’s no debt. Soco reported an enviable cash operating cost of only $14 per barrel, while the company realised an average crude oil price of $56 per barrel.

And with prices starting to climb, reaching $63 as I write, I think 2018 could be a very good year for Soco.

No profit yet

Another oily that’s been making waves in recent months is IGAS Energy (LSE: IGAS), which is moving ever closer to profit. IGAS, with onshore hydrocarbons in the UK being its focus, significantly improved its balance sheet in 2017 after Kerogen Capital invested $35m (£29m) in the firm, an open offer raised a further $22m (£18m), and net debt was reduced from $122m (£100m) at 31 December 2016 to just $9m (£7m) by 30 June.

With £16m in cash on the books at the end of June, chief executive Stephen Bowler told us” “We are well funded for the future and continue to be cashflow generative at current oil prices.” And it looks increasingly like we’re heading into the sustainable oil price recovery that the industry has been awaiting for a few years now.

Fall arrested

The IGAS share price had been in freefall, but it’s bounced back in the past few months, having put on 85% since late September to today’s 92p. The institutional investors out there appear to be happy with the company’s capital restructuring, and sentiment is clearly far more positive now than in the middle of last year.

I’ve been basing my own investment thoughts on a sustainable long-term price of around $70 per barrel, and we’re heading in that direction. After a flat spell of around $56 towards the end of 2017, the past month has seen a surge to $63, and I’ll be surprised if we’re not looking at significantly higher levels by the summer.

If IGAS was cash-flow positive at oil prices back when first-half results were released in September, I’m cautiously optimistic that 2018 and beyond should reward investors well.

The post A rising oil stock I’d buy alongside IGAS Energy plc for 2018 appeared first on The Motley Fool UK.

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Alan Oscroft 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.

Specialist media company Future (LSE: FUTR) delivered pleasing full-year results today driven by organic and acquisitive progress towards what chief executive Zillah Byng-Thorne describes as an ambition to “build a global platform business for specialist media with data at its heart.”

A plan that’s working

She explains that the company aims to focus on enduring content that connects with a substantial and expanding audience base. The figures suggest that the plan is working with revenue 43% higher than a year ago, adjusted operating cash inflow shooting up 160% and adjusted earnings per share following close behind with a 144% rise.

Acquisitions during the period of Imagine, Team Rock and Home Interest serve to increase the size and range of the firm’s offering. Meanwhile, we can see pockets of vibrant growth within the company’s overall revenue performance, such as a 34% organic advance in Media Division revenue, a 107% explosion in eCommerce takings and a 21% uplift from digital displays. Turnover from the magazine division ratcheted up 43% mostly powered by the firm’s acquisitions.

It seems to me that Future is adapting well to the needs of the modern digital media consumer, managing to secure more than 53m monthly online users during the fourth quarter of the trading year. That’s an 18% year-on-year improvement, 12% of which the directors chalk up as organic growth. The share price has responded well to the firm’s progress, up more than 100% since the beginning of 2017. Yet at today’s 385p, the forward price-to-earnings (P/E) ratio works out a little over 18, which looks manageable, suggesting further progress is possible if the company keeps up its strong operational performance.

Financial restructuring boosts growth prospects

I reckon Future could sit well in my portfolio alongside onshore oil & Gas exploration and production company IGAS Energy (LSE: IGAS), which continues to generate exciting potential and is moving closer to profits. After a major financial restructuring and fundraising event earlier in the year, the directors reckon the firm has the capital to deploy on growth projects across its conventional assets and a US$240m carried work programme on its shale acreage. At current oil prices, cash is flowing into the coffers, which bodes well for continuing progress alongside an already well-funded balance sheet.

IGAS claims to be one of the leading producers of hydrocarbons onshore in Britain and in September’s interim report, chief executive Stephen Bowler told us that the capital restructuring has enabled the company to bring forward an active programme of maintenance.”  He also expects incremental projects to boost the firm’s conventional production levels over the medium term.

Mr Bowler reckons that IGAS looks set to contribute “a number” of drilling or flowing wells to what he sees as a “significant level of activity” onshore UK over the coming year or so. Such operational progress could help move the company ever closer to profits, which could result in progress with the share price to reflect the improvement. I think ‘right now’ could be a good time to focus on IGAS and to run your own analysis of the firm’s prospects.

The post Why I’d buy this hot growth stock alongside IGAS Energy plc appeared first on The Motley Fool UK.

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Kevin Godbold 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.

I’ll also look at the outlook for oil and gas group IGas Energy (LSE: IGAS). With the price of oil rising and a successful refinancing under its belt, is now the right time to take a fresh look at this firm?

Follow the smart money

IGas’s oil and gas assets fall into two categories. The company has a number of conventional UK onshore oil and gas fields, producing about 2,250 barrels of oil per day. But the big hope for future growth is shale gas, where IGas has one of the largest positions in the UK.

One clue that these assets might have potential is that energy industry specialist Kerogen Capital contributed £29m to the group’s refinancing, giving it a 28% stake in the firm. Kerogen is also a major backer of North Sea success story Hurricane Energy, suggesting to me that the company’s stock picks could be worth following.

As a result of several partnership deals, IGas is set to benefit from up to £183m of funded exploration work by its partners. Although the prospects for UK shale gas are still highly uncertain, the company is now well positioned to benefit if early exploration efforts are successful.

In the meantime, rising oil prices should improve the cash generation of the firm’s conventional oil assets. With operating costs of just $28.50 per barrel during the first half, the current Brent Crude price of about $60 should ensure the group continues to generate cash to fund its ongoing operations.

IGas isn’t without risk, but at under 80p per share, I believe the stock could be a speculative buy.

A surprise winner in 2017?

Tech firm Zoo Digital Group (LSE: ZOO) specialises in providing dubbing services for television and movie content. So if you want your film to be voiced and subtitled in a different language, for example, Zoo Digital could help. According to the group’s website, customers include Sony Pictures and Universal.

The shares have risen by a staggering 511% already this year, and now trade on a demanding 2017/18 forecast P/E of 100. So does the group’s current growth rate justify this premium valuation?

Half-year results published on Monday show that revenue during the six months to 30 September rose by 63%, to $12.7m, compared to the same period last year. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 34% to $1.3m over the same period. Another piece of good news is that the group has reduced its dependency on its largest customer from 47% of revenue to a safer 28%.

I believe this could be a successful growth business. My main concern is that profitability doesn’t seem to be improving as it expands. The firm’s half-year operating profit of $413,000 gives an operating margin of just 3.2%. That’s actually lower than the 4% figure for the same period last year.

Zoo is spending money on expanding its capabilities, which makes sense to me. But I believe profit margins need to rise quite soon to justify the stock’s current valuation. I’d need to do more research before deciding whether to invest.

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Roland Head 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.

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.

The post This AIM stock has millionaire-maker potential appeared first on The Motley Fool UK.

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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.

The collapse of the oil price between mid 2014 and early 2016 put paid to investor interest in a number of stocks that had previously been considered to have outstanding growth potential.

I’ve had my eye on a couple of these forgotten favourites and I reckon the risk/reward outlook for investors at today’s prices is better than it’s ever been.

Scope to re-rate higher

Shares of Gulf Marine Services (LSE: GMS) were trading above 150p before the oil price went into freefall. They reached a low of around 30p in the darkest days but have since recovered to 56p. I believe they have a lot further to go, as the market refocuses on the growth prospects of the business.

GMS is the world’s leading provider of advanced self-propelled self-elevating support vessels serving the offshore oil, gas and renewable energy sectors. Despite the challenging conditions over the last few years, it continued to make a profit, invest for the future and pay a dividend (running yield of 2.9% at the current share price). It was also able to secure a new $620m debt facility on attractive terms, demonstrating the banking community’s confidence in its business model and prospects.

The company is seeing increasing tender activity and vessel utilisation and in a recent trading update said it had a contracts book of $251m at 1 May, compared with $175m at 31 December. Net debt at 1 May stood at $362m — relatively high compared with a market capitalisation of £196m — but management said deleveraging is progressing as planned and the year-end number is expected to reduce to $335m.

GMS trades on a current-year forecast price-to-earnings (P/E) ratio of 10.4, falling to just 5.7 next year. As such, the stock has scope to re-rate considerably higher from its current level and I believe now could be a great time to buy a slice of this business.

Better placed than ever

UK onshore producer and explorer IGAS Energy (LSE: IGAS) suffered a more torrid time than GMS during the oil rout. Indeed, it came within an inch of its life as profits turned to losses and its debt-loaded balance sheet threatened to sink it.

Management — which included a new chief executive — did a remarkable job of saving the business through a capital restructuring, albeit at huge cost to the existing investors. The painful process was completed with a share consolidation earlier this month, which means that the current share price of 73p is equivalent to 3.7p in ‘old money’.

IGAS represents an attractive proposition for new investors today. Net debt is $8m, compared with $122m at 31 December 2016. The company is cash flow generative at current oil prices and its shale development plan is well funded by its partners with a carried work programme of up to $230m.

Now on a considerably firmer financial footing, IGAS looks better placed than ever to become a leading player in the nascent UK shale gas industry. I consider this a more speculative ‘buy’ than GMS but with a current market cap of £89m the rewards for investors could be substantial.

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G A Chester has no position in any 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.

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. 

The post How should investors react following today’s news from IGas Energy plc? appeared first on The Motley Fool UK.

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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.