Small cap oil and gas stocks including IGas Energy PLC (AIM:IGAS, OTC:IGESF), Egdon Resources PLC (AIM:EDR), Union Jack Oil PLC (AIM:UJO) and Deltic Energy PLC (AIM:DELT) could be among the beneficiaries as incoming Prime Minister Liz Truss focuses on energy security.
It is certainly not the first time that investors have bought into the possibility that the UK could strengthen its domestic hydrocarbon industry, particularly onshore.
For around a decade now, there has been an appetite to tackle vast volumes of seemingly inextractable gas in the shale beneath swaths of UK land.
The anti-fracking lobby, the specter of man-made earthquakes, nimble protests and a political system that passes the buck between council committees and Westminster have over the years added to widely held expectations that decades of gas supplies would go untapped.
While the environment seems to have become more favorable in recent months, it remains to be seen whether this time will be any different from the past when reform stalled at the on-ramp.
Whether or not talks of energy security are just opportunistic fodder for the new prime minister, green light plans for fracking are sure to be divisive and likely problematic for at least one side of British politics.
Nonetheless, the clearly out-of-control fuel price spike is perhaps providing a new, more pressing context for what cynical market watchers might otherwise consider pie in the sky.
One suggestion that emerges from broadsheet editorials and online musings is that, through a combination of localized incentives – basically, “you can have lower gas bills if you let us fracture next door” – and the desperate need for the new government to win a big victory , can provide the difference maker this time around.
Certainly there is renewed interest and giddiness among investors, at least in the small cap space.
Igas Energy has apparently developed a very strong fan club with shares up more than 100% in the past month amid hedge fund interest in the stock.
Notably, Brexit-backing hedge fund manager Crispin Odey has built a career and personal fortune estimated at over £800million on his ability to spot a market opportunity.
It was revealed in early August that the former Harrovian’s Odey Asset Management had taken a 3.17% stake in the natural resources minnow – not directly but through unnamed financial instruments, quickly sparking wild speculation on online forums. online and social media.
It is nevertheless a risky bet, as the outcome will most likely be binary. Either the light will turn green or it will stay red, the latter leaving gas projects buried at least until the next speculative cycle.
Currently there is a moratorium on the controversial fracking technique, which is believed to have triggered a mini earthquake near Blackpool three years ago.
The British Geological Society has been asked to compile a ‘drill or dump’ report on the UK’s vast shale resources. The BGS handed in their homework early last month.
The hope among shale evangelists is that the BGS report will provide just enough scientific justification (or, alternatively, be absent from major red flags) that the moratorium can be lifted.
If so, the plan for IGas is pretty simple, get to work.
An April 2022 corporate presentation revealed that with the appropriate financial support, IGas plans to deliver five well pads.
Each platform is envisaged with up to 16 wells, drilled over 18 months, and could supply 3 million homes with cheaper domestic gas.
Meanwhile, Egdon Resources, which is also a UK onshore play that has plans for the future of shale gas, also rose sharply in August.
Elsewhere in the sector, Union Jack Oil & Gas is another UK onshore small cap that has been in the spotlight in recent months.
Alongside partners Europa and Egdon, UJO has the single-well Wressle field in Lincolnshire which exceeded production targets while crude prices hit recent highs.
For Union Jack and his friends, a lot of hay was made while the sun was out.
Now, with more cash in the bank than investors had originally anticipated, next steps will need to be watched.
If the UK shale sector does indeed take off, it will be well placed to play a role, should that be the direction management chooses to go.
Opportunities in the North Sea
While shale resources are believed to be vast, a perhaps easier route to improving UK energy security would be new projects in the North Sea.
The controversial windfall tax introduced earlier this year, while unpopular among producers, has provided support to a select group of small caps.
So those with projects ready or under development will benefit from Rishi Sunak’s sweetener which has increased tax relief on new investments to 91p in the pound.
This means that large producers in the region can bypass the majority of the windfall tax, provided they invest the money in developing new projects instead.
Potentially, this is a massive boon for small-cap companies that would otherwise have to fight for financing on less favorable terms than capital market conditions.
Instead, team deals with producers potentially see small-cap explorers and developers seizing acceleration opportunities.
Deltic Energy is an ambitious junior explorer with a high profile thanks to its partnership with Shell, which is about to start work on the Pensacola exploration well.
Pensacola happens to be one of the most anticipated sinks in the North Sea for years. It has a chance to unlock a large gas resource that is close enough to existing infrastructure that production can be delivered faster than usual.
All of this relies on the well finding the gas that the partners are targeting, and in exploration there is no dead certificate.
Progress toward the September start date has so far captured the imagination of small-cap investors, as well as Deltic’s management.
“We’re really excited about Pensacola,” Deltic chief executive Graham Swindells told Proactive in August.
“It’s a very important prospect that can be put into operation quite quickly [if the exploration well is a success] and it would be a real opening game for the southern North Sea.
Swindells says Deltic, which has yet to test a prospect in its portfolio, is positioned for “transformational growth” if Pensacola, or any of its other UK North Sea prospects, are successful.
“We are a relatively small company, with our market capitalization (just over £40m today) and low overhead, we are truly poised for exploration success. So I don’t think it’s an exaggeration to say that success in this well would be absolutely transformational for us and our shareholders.
Deltic is of course one of several London-listed North Sea companies with big ambitions, although market attention will be very high on this in the coming weeks.
But that shouldn’t overlook other players such as I3 Energy and Europa who are also advancing the Serenity this month and who will similarly launch new high-profile development if the rating project comes to pass.
Across the sector, it’s clear that the appetite and excitement is there. Investors will now look with hope to the new government. Time will tell if this results in precious gas or if it all blows away like fleeting hot air.
. companies gas UK small capitalization could be ready for blow inch Truss