By Stewart Dalby
For most of 2014 reporting on AIM listed Egdon Resources seemed dominated by the company’s entry as a significant player in the UK’s embryonic shale gas business. The idea that the UK might replicate the US’s shale “revolution”, which has meant import substitutionand security of supply for the US, has gripped the imagination of shareholders in Britain and for a while sent Egdon’s shares soaring by to stand well over 30p. With scant news about shale developments later in 2014 the shares cooled off somewhat and now stand at at a 52p low of 9.7p.
Yet late last year Egdon had a success with the conventional Wressle-1 exploration well onshore the UK in the East Midlands.Wressle -1 is to be tested shortly and this will come as a timely reminder that while shale gas could be a company- maker for Egdon eventually, it does not mean everything for the small cap company in the short term.
In a real sense Egdon has had a transformational year according to broker Cantor Fitzgerald, which saw Egdon’s evolution into a leading UK unconventional business. It acquired the shale-gas interests of Alkane Energy in 10 licences and had a landmark farm-out to Total involving a carried work programme of up to US$46.5m (gross). In addition, the company secured an option agreement with Total for PEDL209 with a cash payment of £0.92 m and an optional work programme of £13.5 million.
The acquisition of Alkane ‘s ten licences containing shale gas potential resulted in an almost doubling of Egdon’s assessed prospective shale gas acreage to 140,176 acres (91 per cent increase). As part of the due diligence during the transaction for Alkane ERC Equipoise completed a review of Gas in Place (GIIP) in Egdon’s shale gas licences, including the licences acquired from Alkane, reporting combined mean undiscovered GIIP of approximately 28 trillion cubic feet of gas.
But Egdon has not given up on its conventional assets; quite the reverse. Egdon holds interests in 36 licences. Thirty–three of them are in the UK and are onshore. Many of them are operated. The company’s reported proven and probable (2P) reserves are estimated at 0.25 mmbls. The best estimate of the group’s contingent and prospective resources is 632 million barrels of oil equivalent (mmboe).
The company has stated often in the past this resources estimate of 632 mmboe highlights the significant potential for growth in the existing exploration portfolio. Post the year-end the company drilled two exploration wells, including Wressle-1 resulting in a potential hydrocarbon discovery to be tested for commerciality in this current quarter.
Wressle-1, in which Egdon has a 25 per cent interest, reached TD of 2,240 metres, having encountered almost 30 metres of potential pay in three intervals: Nineteen point eight metres in the Penistone Flags, 5.64 metres in the Wingfield flags and up to 6.1 metres in the Ashover Grit. Both the stratigraphy and reservoir horizons encountered by the well were in line with the pre-drill forecast.
After the testing of Wressle the coming year will see Egdon embark on a multi-well drilling campaign. Subject to planning consent this will comprise three operated onshore exploration wells at Laughton (1mmbbls gross), North Kelsey (6 mmbbl gross) and Biscanthorpe (14.1mmbbl gross). In addition there is the Kiln Lane prospect in the adjacent licence to Wressle with could hold 2.9 million barrels.
Broker Edis on Investment Research recently said in a note “We see the shares as pricing in little of the opportunity in UK shale,with our stand alone 24p/share (RENAV) valuation of Egdon’s conventional business sitting considerably higher thanthe current share price.