Egdon Resources — Update 10 October 2016

Egdon Resources (AIM: EDR)

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Research: Energy & Resources

Egdon Resources — Update 10 October 2016

Egdon Resources

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Egdon Resources

A volatile but positive week for shale gas planning

Planning newsflow

Oil & gas

10 October 2016

Price

15.75p

Market cap

£35m

$1.45/£

Net cash (£m) at 31 January 2016

5.3

Shares in issue

221.3m

Free float

46%

Code

EDR

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

17.8

53.7

72.6

Rel (local)

15.1

41.2

56.7

52-week high/low

17.6p

7.0p

Business description

Egdon Resources is an AIM-listed onshore oil and gas exploration company. The group has conventional and unconventional assets in the UK and France.

Next events

Judicial reviews

November 2016

Preliminary results

November 2016

Analysts

Sanjeev Bahl

+44 (0)20 3077 5700

Ian McLelland

+44 (0)20 3077 5756

Will Forbes

+44 (0)20 3077 5749

Egdon Resources is a research client of Edison Investment Research Limited

Nottinghamshire County Council’s deferral of its decision on the Springs Road planning application (PEDL140, in which Egdon has a 14.5% carried interest) was a minor setback. Nevertheless, this was more than offset, from a sentiment perspective, by news that Cuadrilla has received approval to drill and frack at Preston New Road, Lancashire. While it is likely that this decision will be subject to appeals from anti-fracking campaigners, it cements the Conservative view that shale gas has potential to be of significant benefit to the UK economy from a financial, employment and security perspective. Energy price inflation post Brexit has helped emphasise this viewpoint.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

Debt
(£m)

Net cash
(£m)

Capex
(£m)

07/13

3.3

0.8

(1.1)

0.0

2.0

(1.3)

07/14

3.0

0.3

(1.5)

0.0

9.7

(2.8)

07/15

2.1

(2.9)

(4.5)

0.0

5.2

(3.3)

07/16e

1.8

(1.2)

(3.1)

0.0

2.8

(2.4)

Note: *PBT is normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Shale gas: Positive momentum and next steps

Springs Road: Egdon remains carried by Total for the initial exploration wells for its 14.5% interest alongside operator IGas. After a late legal challenge, Nottinghamshire County Council has deferred its planning decision, with a meeting expected to reconvene on 15 November 2016. Kirby Misperton-8: Third Energy’s KM-8 received planning approval earlier this year, but this decision is facing judicial review on 22/23 November after a Friends of the Earth legal challenge. Preston New Road: The secretary of state (SOS) agreed with the planning inspector’s conclusions, deciding to allow the appeal and grant approval for Cuadrilla to drill and frack up to four horizontal wells. Drilling is expected in 2Q17 with two wells drilled and fracked ready for flow test by Q118. Roseacre Wood: The SOS has given Cuadrilla the opportunity to provide further evidence on highway safety issues before reaching a decision on the planning appeal.

Egdon in a UK shale context

Egdon has a material 204,292 net acres of UK shale, a c.44% increase on acreage prior to the 14th licensing round. Our update note, published 16 May 2016, provides a breakdown of both conventional and unconventional assets.

Valuation

Our last published standalone 22p/share (RENAV) valuation of Egdon’s conventional business sits higher than the current share price. We use a tentative $/acre valuation for net unconventional acreage at 22p/share. We believe Egdon retains financing flexibility, holding more than £5m cash and no debt as of January 2016, and we expect further farm-downs to fund near-term exploration. We will review our forecasts after Egdon’s preliminary results in November.

Exhibit 1: Financial summary

£000s

2012

2013

2014

2015

2016e

Year end 31 July

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

2,614

3,341

2,957

2,068

1,781

Cost of Sales

(1,532)

(1,762)

(1,982)

(4,060)

(1,899)

Gross Profit

1,082

1,579

975

(1,992)

(118)

EBITDA

 

851

811

284

(2,944)

(1,189)

Operating Profit (before amort. and except.)

 

(3,171)

(984)

(1,455)

(4,539)

(3,124)

Intangible Amortisation

406

0

0

0

0

Exceptionals

0

393

1,083

0

0

Other

0

0

0

0

0

Operating Profit

(2,765)

(592)

(373)

(4,539)

(3,124)

Net Interest

(126)

(126)

(84)

(2)

(21)

Profit Before Tax (norm)

 

(3,297)

(1,110)

(1,539)

(4,540)

(3,145)

Profit Before Tax (FRS 3)

 

(2,891)

(718)

(456)

(4,540)

(3,145)

Tax

0

0

0

0

0

Profit After Tax (norm)

(3,297)

(1,110)

(1,539)

(4,540)

(3,145)

Profit After Tax (FRS 3)

(2,891)

(718)

(456)

(4,540)

(3,145)

Average Number of Shares Outstanding (m)

131

132

221

221

221

EPS - normalised (p)

 

(2.5)

(0.8)

(0.7)

(2.1)

(1.4)

EPS - normalised and fully diluted (p)

 

(2.2)

(0.5)

(0.2)

(2.0)

(1.4)

EPS - (IFRS) (p)

 

(2.2)

(0.5)

(0.2)

(2.1)

(1.4)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

41.4

47.3

33.0

-96.3

-6.6

EBITDA Margin (%)

32.6

24.3

9.6

-142.4

-66.7

Operating Margin (before GW and except.) (%)

-121.3

-29.4

-49.2

-219.5

-175.4

BALANCE SHEET

Fixed Assets

 

16,201

15,812

26,894

26,703

27,151

Intangible Assets

8,281

8,485

18,399

17,864

20,249

Tangible Assets

7,920

7,327

8,495

8,838

6,902

Investments

0

0

0

0

0

Current Assets

 

4,274

4,668

15,170

8,120

4,547

Stocks

33

0

0

0

0

Debtors

860

2,611

5,453

2,889

1,726

Cash

3,331

2,006

9,667

5,180

2,771

Other

50

50

50

50

50

Current Liabilities

 

(2,109)

(2,568)

(4,365)

(941)

(980)

Creditors

(1,092)

(2,568)

(4,365)

(941)

(980)

Short term borrowings

(1,017)

0

0

0

0

Long Term Liabilities

 

(946)

(1,112)

(1,288)

(1,827)

(1,780)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(946)

(1,112)

(1,288)

(1,827)

(1,780)

Net Assets

 

17,421

16,800

36,411

32,054

28,938

CASH FLOW

Operating Cash Flow

 

840

(382)

572

(1,437)

5

Net Interest

(104)

(150)

(41)

(0)

0

Tax

0

0

0

0

0

Capex

(1,854)

(1,317)

(2,833)

(3,255)

(2,435)

Acquisitions/disposals

612

500

547

78

0

Equity Financing

11

0

9,551

0

0

Other cash flow

131

4

919

35

5

Net Cash Flow

(363)

(1,346)

8,715

(4,580)

(2,425)

Opening net debt/(cash)

 

(2,652)

(2,314)

(2,006)

(9,667)

(5,180)

HP finance leases initiated

0

0

0

0

0

Other

(26)

(1,038)

1,055

(93)

(16)

Closing net debt/(cash)

 

(2,314)

(2,006)

(9,667)

(5,180)

(2,771)

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Egdon Resources and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Level 15, 171 Featherston St

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Egdon Resources and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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