We have re-visited our conventional valuation of Egdon post the company’s interim results (to end January 2019) and the recent resource assessment for Resolution. We also factor in a decrease in our short-term gas price expectations, lower than previously forecast production for FY19 and the removal of the risked value for Biscathorpe-2 exploration. As a result, our RENAV is reduced by 1.2p/share to 11.5p/share. These reductions are partly offset by an increase in our valuation for Resolution (from 3.2p/share to 7.1p/share), driven by Schlumberger’s 2019 resource assessment and our revised economic model. We continue to believe that significant uncertainty remains regarding the commerciality of Resolution ahead of further appraisal, but we believe recent industry interest in SNS Zechstein gas appraisal increases the likelihood of a farm-out.
Schlumberger has provided an assessment of un-risked 2C recoverable gas (excluding Carboniferous) for the Resolution field at 206.4bcf (1C 100bcf and 3C 389bcf), versus Egdon’s last published internal estimate of 2C 337bcf. We continue to believe that there is significant uncertainty around recoverable resource and hence commerciality ahead of further appraisal. Key resource uncertainties include limestone fracture porosity, matrix porosity and gas recovery factor. Egdon is actively looking for a farm-in partner to fund the acquisition of 3D seismic, followed by an appraisal well.
Egdon has a 14.5% carried interest in the Springs Road-1 shale gas appraisal well operated by IGas. Further details on the core and log analysis is expected in Q219. The drilling performance (rate of penetration) has been ahead of operator expectations and reports of gas indications in the Millstone Grit, deeper parts of the Bowland Shale and the Arundian Shale are encouraging. We expect to review our probabilistic UK shale valuation model as further details emerge from SR-1.
Based on our current forecasts, Egdon is funded through to the middle of CY20, with activity at Springs Road fully carried and planned 3D seismic at Resolution expected to be funded by a farm-out. Our current valuation is 1.5p/share for producing assets, cash and net of SG&A, rising to 11.5p/share if we include risked exploration potential. Maintaining our last published UK shale model, we estimate an indicative P50 value of c 100p/share for Egdon’s UK shale acreage of 188,000.
