IOG – Blythe and Saturn Banks ready to go stellar

I do not pretend to know anything about the oil and gas business but what I do know about is market sentiment – and this £110m company is beginning to really see quite an uplift in investor attention.

Especially so with analyst predictions of £38.5m profits next year.

The Business

This group defines itself as a Net Zero UK gas and infrastructure operator focused upon a number of high-return projects.

From its 50% owned and operated, low-risk offshore gas portfolio, the company is set upon becoming a material gas developer and producer into the UK energy market.

Furthermore, it considers itself to be ideally positioned to supply the substantial UK gas demand, providing energy security to the UK, while also helping the balance of payments and creating jobs.

Git Pumpin’

And it looks as though IOG (LON:IOG), which was formerly known as Independent Oil and Gas, really is about to start pumping some cash into its coffers.

The company is engaged in the exploration and development of oil and gas opportunities in the Southern North Sea.

Its Portfolio

The group’s gas portfolio comprises the proven and probable reserves at Blythe, Elgood, Nailsworth, Elland and Southwark gas fields in the Southern North Sea.

Its gas will be transported through co-owned infrastructure, to deliver significant cost savings and maximise returns for its shareholders.

IOG also owns the soon to be renamed Thames Pipeline, which is a 24-inch concrete coated pipeline, that runs over 90 kms from the Thames platform to the Bacton gas terminal on the coast of Norfolk.

The new name pays tribute to a series of seabed sandbank features in this part of the Southern North Sea. The former Thames Pipeline and associated onshore facilities, which the company is recommissioning as the backbone of its production system, is now to be known as the Saturn Banks Pipeline System.

Its licences

The group’s licences include P1736 covering blocks 48/22b and 48/23a in which lies the Blythe gas field; P1609 covering block 9/21a in which lies the Skipper oil discovery; P2085 covering blocks 48/23c and 48/24b (Truman and Harvey), and P2260 covering block 48/22c (Elgood, Hambleton, Tetley and Rebellion).

IOG also holds a 50% operated stake in Licence P2589 containing the Panther and Grafton gas discoveries. These assets are directly adjacent to the group’s existing portfolio.

Corporate expansion is part of its strategy

In addition, IOG continues to pursue value accretive acquisitions to help generate significant shareholder returns.

Recent results

Two weeks ago on 26 August, the company announced its interim results for the six months to end June. It showed a profit of just £0.21m against a £3.65m loss in the same half of 2020. Earnings came out at 0.04p per share (0.8p loss).

Importantly, though for a company operating in its particular sector, it has very ample cash balances, some £56m as at the end of June, which should be able to take it through for quite a period.

The tap is about to be turned on

Its first gas from the Saturn Banks Project should be coming through in the next couple of months.

That will help to give it a springboard for the group’s other portfolio of gas plays being put into gear.

Marketing agreements

The recent results follow on from the late July announcement that the group had tied up a gas sales agreement with Gazprom Marketing & Trading, relating to the first two years from the Elgood and Southwark fields, part of the group’s Phase 1 development, and the Nailsworth and Elland fields, part of Phase 2.

In February 2014 BP Gas Marketing signed off a deal for Blythe, the other part of the Phase 1 field.

Brokers’ estimates

Analyst Jonathan Wright at the group’s brokers, finnCap, is estimating current year revenues of £9.9m (£nil) for the year to the end of December, together with an adjusted pre-tax loss of £1.8m.

However, it is what is coming next year that should excite the share price in due course.

Wright goes for revenues to increase strongly to £82.1m for the 2022 year, with the group making a profit of £38.5m, generating 6.4p per share of earnings.

He reckons that the company is entering the final straight – “fortune favours the brave and IOG’s gas is scheduled to come on stream into a rampant UK gas market, with winter prices well over 100p per therm.”

The broker has put out a 47p price aim.

While over at Peel Hunt, analyst Werner Riding, has a ‘buy’ out on the shares with an objective of 40p. He is impressed at the way the group has hit its key milestones. He sees it as being “at a very exciting phase of its development, which in the short term will see it transition to becoming a material gas production business at a time of very significant gas price strength.”

Good equity spread

The group has some 489.5m shares in issue.

Large holders include London Power Corp (29.8%), Lombard Odier Asset Management (18.8%), Premier Miton Group (8.1%), Richard Griffiths (6.13%), Chelverton Asset Management (4.1%), Stonehage Fleming Investment Management (3.3%), Burggrabben Holding (2.90%), AzValor Asset Management (2.82%), and Cavendish Asset Management (2.59%).

My View

With its shares trading at around 22.5p, the company is capitalised at just £110m.

That is why I believe that this group’s shares are significantly undervalued – they have 50p written all over them.

But in the meantime, until we have confirmation that the gas is starting to flow through, and the cash gets generated, I am cautiously putting out a Target Price of 30p.

If you consider the gross valuations on so many other companies in the oil and gas sector, I really do feel that IOG stands out as a very exciting speculation at the current price.