The equity market is implying very little value for Egdon’s UK shale positions, which span the Gainsborough Trough, Widmerpool and Humber Basins. We see near-term catalysts that could reduce risks and uncertainty relating to the valuation of UK shale assets with initial flow tests from Cuadrilla-operated Preston New Road expected in Q418. Our probabilistic valuation of UK shale assets describes uncertainty in relation to UK shale. We conclude a potential 67% chance of commercial success and net risked P50 valuation of $2,142/acre (we do not include political risk in this metric). Based on our analysis we believe Egdon’s current EV of $22m offers investors a low cost option on over 205,000 acres of UK shale if proven commercial. Our conventional valuation stands at 12.8p/share including risked exploration. The valuation of shale resource remains uncertain but in our view has the potential to be worth in excess of risked 100p/share based on current expectations of well cost, type curves, and forward gas prices.
We believe the market is implying minimal value for Egdon’s UK shale position, despite potential near-term catalysts that could significantly de-risk and provide greater certainty on UK shale economics. For more detail, please refer to our AJ Lucas initiation note published on 9 April 2018.
In this note we revisit the valuation of Egdon’s conventional oil and gas business, removing assets such as Waddock Cross, Avington, Kirklington and Kirkleatham, which have been shut-in, but including higher production expectations for Ceres and Fiskerton. Delays also negatively affect our conventional valuation after Wressle planning appeals were dismissed in January 2018. We also incorporate a higher discount rate of 12.5% (from 10%) to remain consistent with our small-cap E&P coverage. This reduces our conventional valuation from 21.5p/share to 12.8p/share, the bulk of which remains in risked contingent/prospective resource.
Our asset valuation is dominated by Egdon’s shale acreage position, followed by the appraisal of the BP Biscathorpe discovery and Total’s Resolution gas discovery. There is risk and uncertainty in the valuation of contingent or prospective resources; however, Egdon’s shares offer a low-cost option on what we estimate at over 100p/share of risked value.
