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”.