The shale company IGas has raised questions about its ability to operate as a going concern.
In interim accounts issued this morning, the company predicted it would not be able to comply with two upcoming financial agreements.
IGas blamed the low oil price and said it may try to sell assets and ask bondholders for a temporary waiver of covenants.
After tax, IGas posted a loss of £25.2m for the six months to the end of June compared with £19.3m for the same time last year. Revenues fell to £12.1m from £17.6m.
The company’s planning application for shale gas exploration at a site in north Nottinghamshire will be decided next week.
This morning’s announcement said:
“The ability of the Group to operate as a going concern is dependent upon the continued availability of future cash flows and the bonds not becoming repayable earlier than their stated maturity date.”
The statement continued:
“[this] in turn is subject to the holders of the bonds not exercising their rights to early repayment which they would be entitled to do if the Group did not continue to comply with its bond covenants.”
“The Group is currently compliant with all its bond covenants but despite delivering on the cost savings initiatives and with significant cash balances, the continuing low commodity price environment means that the Group’s current forecasts project non-compliance with its daily liquidity covenant in the second half of October 2016 and its leverage covenant as at 31st December 2016.”
During the summer, an investor acquired what is said to be about 34% of secured bonds in IGas. This represented a potential blocking vote on any amendments or waivers in bond terms, the company said.
IGas said it was likely to reach agreement with its investors but it added:
“The risk that the Group will be unable to secure a consensual solution with its bondholders represents a material uncertainty that may cast doubt upon the Group’s ability to continue as a going concern.”
To generate more cash, IGas said it may try to sell assets or enter into a pre-paid swap of its oil production from 2017. The company also said it may try to secure a temporary waiver of its daily liquidity covenant with bondholders.
Chief Executive, Stephen Bowler
“We acknowledge the challenges that our current capital structure presents and are engaged with our bondholders and potential strategic investors to right-size our balance sheet in light of the current oil price environment.”
Following publication of the accounts, the IGas share price was down 10.76% at 12.27p (at the time of writing).
Summary financial figures
According to the accounts, IGas gross borrowing was £111m and net debt was over £80m. Operating cash flow for the period before working capital movements was £4.9m but the cost of servicing the debt was £5.1m.
Mr Bowler added there was a “potential material upside in our assets”.
IGas has now been formally awarded nine petroleum exploration and development licences (PEDLs) from last year’s licensing round. They cover a total of 257,000 acres across the East Midlands/Yorkshire, North West England and southern England.
Earlier this week, planners at Nottinghamshire County Council recommended approval of IGas’s planning application for shale gas exploration at Springs Road, Misson (above). The council’s planning committee will decide on the scheme on Wednesday 5 October 2016.
Another IGas shale application, for Tinker Lane, also in north Nottinghamshire, is before the council but no date has been set for a decision.
North west England
In north west England, IGas said 3D seismic surveying had confirmed potential for shale. The company was now identifying drilling locations, it said.
“[The data] will allow us to firm-up a development programme that will lead to commercial gas production following successful appraisal testing which would involve flow testing using the process of hydraulic fracturing.
“Such a development could provide local gas to major industrial consumers thereby sustaining local industry and employment.”
The company said it would begin what it called “a comprehensive stakeholder/community engagement programme” in areas around potential drilling sites.
The accounts said an evaluation by DeGolyer & MacNaughton of IGas hydrocarbon interest estimated net shale gas risked prospective resources of 2.5 trillion cubic feet (tcf)
Last year, the Oil and Gas Authority said only companies with necessary financial, technical and environmental competency were considered for PEDL licences.
A report by Company Watch in January 2016 gave IGas a financial health score of 13 out of a possible 100. A score below 25 puts companies in a “Warning Area”. Company Watch said at the time: “Nine out of 10 companies that fail have been identified by the H-score in advance”.
Well well well , or not , another one going under , my prediction is getting off to a good start.
‘Earlier this week, planners at Nottinghamshire County Council recommended approval of IGas’s planning application for shale gas exploration at Springs Road, Misson (above). The council’s planning committee will decide on the scheme on Wednesday 5 October 2016’.
Is it appropriate for a council to pass a planning application for an Applicant of this nature who may start works and then be unable to complete due to liquidation? Surely the licences are for companies who are viable?
My only concern following this news is that all the gas and oil companies in UK onshore and offshore will will accelerate their efforts to get the fossil fuels out of the ground in order to get some revenue, and that all the corners will be cut and all environmental concerns thrown to the wind to achieve that. Also if IGAS and others do fail, they are likely to sell everything off to less scrupulous operators, something there about the devil you know perhaps?
The presence of shale gas in the UK has been known about for decades. It is the dearest form of natural gas to extract so it gets left till last. Basic economics. The trick is when to ‘dip your toe in the water’. To soon and you will crash and burn. To late and the boat will have sailed. In 2010 the price was trending up. All aboard. However for some strange reason the shale industry forgot to take into account how much the Saudis like Ferraris and all things gold. They were not going to loose global market share. Prices fell to make sure fracking sites were not viable. Prices will rise until the US pick up their fracking rigs at which point prices will drop again. Opec will not be losing market share any time soon. With that goes any hopes of UK shale being viable. No wonder IGas is circling.
Interesting because Third Energy is in at least as much debt and I understand AJ Lucas one of Cuadrilla’s main backers has had financial difficulties.
You have to ask yourself why igas has left it so late to raise some cash with days left before a breach .whoever has bought the 34 % minority blocking bond stake is very unlikely to play ball if they fail to raise some funds asap. Selling the bonds they just bought back into an illiquid market or selling future oil is absolute desperation . Theres a debt dor equity swap om its way just the terms need to be revealed