Independent Oil & Gas PLC’s £88mln (€100mln) bond issue was significant on a number of levels.
For a start, it was the pivotal element to a farm-out agreement worth up to £165mln with CalEnergy Resources, part of Warren Buffett’s Berkshire Hathaway empire.
It also provided a major, third-party tick in the box for the UK offshore gas industry – the focus of IOG’s efforts.
And, raising such as significant sum in debt funding probably reflects favourably on the management team, led by chief executive Andrew Hockey.
It should be noted that it hasn’t been plain sailing for IOG’s jigsaw puzzle-like portfolio which has been pieced together, joining offshore gas with accompanying infrastructure to create what it has today – an oven-ready opportunity with plenty of upside.
But it is also fair to say the market has been slow to react to the transformation if the company’s current valuation is anything to go by.
What IOG owns
With the foregoing in mind, it is probably worth assessing what IOG owns and why, with CalEnergy’s help, the next 18 years could change the business beyond recognition.
The former first: the company’s ‘core assets’ are the Vulcan Satellites, the Blythe Hub and Goddard areas in the Southern North Sea, together these are host to proven and probable reserves and 2C resources of 206bn cubic feet (bcf) of gas.
Its also owns appraisal assets including Harvey which has the potential to move the dial further for IOG.
Around 60km offshore, IOG’s projects are in shallow waters and are tapped into the UK via the recently refurnished Thames Pipeline, also part-owned by the AIM-listed firm.
Owning infrastructure of this kind lowers both the capital and operating costs of projects in the vicinity.
Meanwhile, there has never been a better time to be sitting on near-production assets of a decent scale.
Why? Well, from being a net exporter of natural gas the UK now imports 56% of its gas, which makes up around 40% of the nation’s energy requirements.
In the parlance, the price curve looks pretty good for companies such as IOG. In fact, owning a gas business at the moment is about as Brexit-proof as it gets.
One suspects the Sage of Omaha’s CalEnergy is cognisant of these facts, which probably explains why it agreed to farm-in to IOG’s core assets.
CalEnergy is making a £40mln upfront payment, while the UK minnow will be carried for £60mln on the first phase of development and £65mln on the second.
First gas is expected by 2021, with production hitting a net 69mln cubic feet a day, or the equivalent of 12,000 barrels of crude.
The bond issue was pivotal as it effectively completes the farm-out conditions and gets IOG and Cal to a very important landmark – the final investment decision.
The next major landmark after that is approval of the field development plan.
As Peel Hunt’s veteran oil analyst, Werner Riding, pointed out: “IOG is now achieving significant new milestones on a regular basis as its core project continues to gain momentum.”
He believes the shares are worth 50p each – more than double their current market value.