The Royal Bank of Scotland (LON:RBS) said in a research note that the widely reported potential for shale gas to revolutionise the UK’s energy mix makes companies like IGas Energy (LON:IGAS) look very attractive as offering a low risk unconventional alternative.
RBS said it does not believe that attractions of the IGas investment case will stay below investor’s radar much longer and sees significant upside from the current share price.
The potential of shale gas as an unconventional gas source has enjoyed extensive coverage in the media recently, and RBS said that IGas’ coal bed methane resource could make for an even better alternative as it is carrying less of a risk, in its view.
The press interest, including yesterday’s article in the Sunday Times, was drawn to a well that is being drilled by Cuadrilla Resources northwest England. This well is a part of a programme to determine the potential for shale gas resources in the region.
Shale gas is natural gas trapped in relatively low permeability rock which is produced by hydro-fracturing, essentially improving the permeability by blasting the rocks with a mixture of water and proppants to create and keep open cracks which enable the gas to flow.
As the production of the UK’s conventional gas resources including those in the North Sea continues to decline, unconventional gas sources are likely to move into the into limelight as they could help the UK reduce its reliance on imports.
The US successfully diversified its gas supply with shale gas, triggering a land grab for the most prospective acreage occurring in most regions.
RBS noted that the industry may not evolve as quickly in Europe as it did in the US, but any challenges for the shale gas industry highlight the attractiveness of the IGas Energy investment case.
CBM is an already established part of the US and Australia gas supply mix and its coals are unlikely to need anywhere near the level of hydro-fracturing as the shale resource.
In addition to that, IGas’ coal bed methane resource of 807 billion cubic feet across its UK acreage carries a lower risk, according to RBS.
The company has a number of full production sites permitted and should shortly announce the scale and scope of its first full production site.
“In summary, while UK shale gas is generating headlines, IGas is way ahead in its efforts to supply significant quantities of gas from uncoventional resources,” said RBS.
Quantifying its bullish stance on the IGas’ prospects, RBS retained its conceptual valuation of 265 pence given the company upon initiation of coverage in early November.
It is interesting to note that this valuation that is far ahead of the current market value of 64 pence is based on a UK gas price of 48 pence per thermal unit , while day ahead prices have just spiked to 63.4 pence/therm as a result of a renewed focus on the country’s levels of storage that are relatively low when compared to those of major European gas consumers.
The conceptual valuation would rise to a staggering 430 pence at this price.
RBS stated that IGas should go for further fundraisings to increase interests in key licenses and fund an aggressive development programme.
The note from RBS basically echoes a similar report from Goldman Sachs (NYSE:GS), which came out a little over a month ago.
The investment bank said that the market was applying excessive risk to IGas’ coal bed methane assets, which offered an “attractive exposure to unconventional gas assets in the UK”.
Goldman initiated coverage with a 'buy' rating, targeting 119 pence within 12 months.
In the research note, Goldman said that even conservative estimates highlight the stock’s significant potential, given the large reserve size.
“[Independent reservoir evaluation company] Equipoise has estimated that gas in place net to the company is almost 4 trillion cubic feet, although a study by DeGolyer and MacNaughton has put 2C reserves at just over 800 billion cubic feet - taking into account that access to the gas will not be obtained in certain areas of the acreage,” said the report.