Egdon well set ahead of crucial year for the UK shale industry

(MENAFN- ProactiveInvestors)With broker valuations out there of 37-39p a share one wonders then why stock in Egdon Resources (LON:EDR) in bumping along at just 9p. That price point is probably more reflective of investor disenchantment with the oil sector than it is indicative of the firm's prospects as it gears up for a busy and possibly transformational year. Egdon which is a key stakeholder in one of the larger conventional onshore discoveries of recent years is also at the vanguard of shale exploration here in the UK. Springs Road in Nottinghamshire in which it has a 14.5% carried interest is one three major unconventional prospects that will be drilled in 2016. Subject to receiving all the necessary consents the plan is to sink two wells – one vertical the other horizontal – that will test the potential of the shales of the Gainsborough Trough. Success would be huge for Egdon whose acreage in this geologically promising part of the East Midlands is estimated to host 28trln cubic feet of gas in-place. Sentiment may be further buoyed if Cuadrilla successfully overturns planning objections to test the Bowland Shale that underlies huge swathes of the north-west while Third Energy may actually be first cab off the rank in the Cleveland Basin. Chief executive Mark Abbott is pragmatic about the role Egdon is likely to play in any future shale revolution. 'The reality of shale gas is for a company of our size we are never going to be into drilling hundreds of wells' he told Proactive Investors. 'That's not where we can deliver value. We are very much about exploration and appraisal pilot production: prove resource and look to monetise.' Springs Road is just one potential catalyst. It has a number of conventional oil and gas targets that should start moving the production dial and/or boost the firm's reserve base. The programme kicks off modestly with the Laughton Prospect just down the road from the Igas-run Corringham Field in Lincolnshire. The target is a net 780000 barrels the chance of success is around 25% and work is expected to commence early in the new year. That will be followed in the first quarter by the side-track on the 'late life' Keddington field also in Lincolnshire. The Biscathorpe appraisal well with 40% chance of success (CoS) and targeting a meatier net 7.4mln barrels and North Kelsey (24% CoS 6mln barrels net) are among the highlights of the first half. Being fast-tracked is the Wressle-1 well near Scunthorpe which Egdon operates as well as owning a 25% interest. It will produce first from the Ashover Grit reservoir one of the three it uncovered with initial production expected to be a none-too-shabby 500 barrels a day. The field development plan will assess how Egdon and its partners extract the maximum from all three horizons - and from the gas that was also found at Wressle. Finally there is the A Prospect an offshore gas discovery drilled by Total 50 years ago and estimated to be host to 160bn cubic feet of gas which is the equivalent of 25mln barrels of oil. Egdon has come up with the bright idea of drilling it from onshore which significantly lowers the capital investment needed. But of course the project will require planning permission which means work will start in the second half of 2016 at the earliest. Egdon which owns 100% of the A Prospect will look for funding and technical partners before it sinks an appraisal well. So don't be surprised to see this one kicked into 2017. As at July 31 Egdon had around £5.2mln in the bank – enough to meet its conventional resource commitments. However it may look to make its money go a little further still by farming down its holding in certain assets where its stake is above its 'natural' 25-40% equity level. It will add to its portfolio if it is lucky in the second tranche of 14th onshore licensing round in the UK.  Production for the coming year is expected to be around current levels at 180 barrels a day with the 2016 conventional drilling campaign making a more marked impact in 2017. VSA Capital has the lower of the two punchy price targets quoted in the first paragraph. It sees 2016 as a defining year for UK shale with Egdon set to benefit materially from the success of Springs Road. However it points out that its three conventional exploration prospects are targeting 22mln barrels of gross unrisked resources – which is material. Cantor Fitzgerald is explicit in the way it derives share valuation. Current production is worth 3.7p the exploration and appraisal programme 14p and Egdon's shale interests 23.4p. Take away 1.8p a share for general and administrative expenses and you arrive at figure of just over 39p a share. 'The company continues to execute its long term plan of limiting financial exposure to drilling activity by bringing in well-capitalised partners to prove up its significant conventional and unconventional resource base' said analyst Sam Wahab.