Egdon’s operational update highlights lower production for FY18 at 84boed versus guidance of 100boed as a result of unplanned downtime at Ceres. Management remains confident in future production expectations and potential for increased gas recovery at Ceres based on pressure build-up analysis during shutdown. Our conventional asset RENAV moves to 12.5p/share from 12.8p/share (-2%) as a result of lower FY18 production and a higher risking applied to Wressle, offset by an increase in our short-term EIA-based oil price forecasts and higher NBP gas price assumptions. The valuation of Egdon’s net shale resource (205,000 net acres) remains uncertain but in our view has the potential to be worth over risked 100p/share based on current expectations of well cost, type curves and forward gas prices.
Our valuation of Egdon’s conventional asset portfolio has been negatively affected by a short-term production deferment at Ceres and higher commercial risking applied to Wressle (from 90% chance of success to 60%), which remains contingent on planning approval. This is partly offset by an increase in expected recoverable gas at Ceres and higher oil and gas price expectations (we move our CY18 UK gas price assumption from 41p/therm to 56p/therm, in line with a year to date NBP gas price of 56p/therm). Initial production guidance for H119 stands at 160–180kboed (Edison 160kboed for FY19).
Drilling operations are expected to commence at Biscathorpe (Egdon 35.8% part carried) in October/November 2018, with the aim of evaluating the 1987 BP oil discovery with net mean prospective resource of 5mmbo. Spud of the play opening unconventional exploration well at Springs Road-1 in the Gainsborough Trough (Egdon 14.5% carried) is expected in Q418. Drilling at North Kelsey and Resolution/Endeavour remains contingent on farm-down/external investment.
At end January 2018 Egdon had cash of £4.1m, which we expect to cover anticipated costs (post farm-down) to end FY19. Our conventional valuation stands at 12.5p/share (from 12.8p/share). We believe the key value proposition for shareholders is Egdon’s net UK shale exposure and conventional E&A.