Shares inIGAS Energy(LSE: IGAS) have crashed today after a panel oflawmakers recommended that fracking forshale for oil and gas in the UK should be put on hold. Risks to public health, the environment andthe rights of citizens were all reasons put forward as to why fracking should be restricted in the country.
Plenty of opposition
At time of writing, IGASs shares have fallen by around a third following this news and it is undoubtedly a huge blow for the company and its outlook. The report, published by parliaments Environmental Audit Committee, was released only hours before parliament was due to debate an infrastructure billthat would allow fracking companies to drill deep under land without the owners permission a move thats been called profoundly undemocratic.
Whats more, this news comes only a few days after an amendment to the bill was proposed, which recommended imposing a moratorium on fracking, in which water, sand and chemicals are used to free oil and natural gas from shale formations, because it could risk the UK efforts to tackle climate change.
And while politicians have been debating the issue in London,the UKs fledgling fracking industry has come under additional pressure withinLancashire. Whereplanners last week recommended the county councils Development Control Committee should reject an application for shale drilling.
Planners are concerned about noise pollution resulting from fracking developments.Cuadrilla, the operator trying to get permission to drill in the region, hassubmitted new noise-reduction proposals and asked the council todelay a decision to allow for proper consultation.
All in all, the future of the UKs fracking industry looks to be in jeopardy. Theres certainly plenty of uncertainty surround the industrys future.
The question is, how will these developments affect IGAS? Well, the biggest issue will be the companys liquidity. Further delays to planning applications and a general move against fracking in the UK, will cost the company precious time and money. That being said, unlike many small-cap oilies, IGAS is already producing hydrocarbons so the company has some cash flowing into its coffers.
Nevertheless, IGAS is still subject to international energy prices. Even though the majority of the companys production is hedged until September 2015, high production costs mean that the company will struggle to finance operations after this date. In particular, IGAS reported operating costs per barrel of oil equivalent were of 22.8 per barrel for the six months ended 30 September 2014, thats around $34 per boe. Add interest and admin costs onto this, and with Brent oil trading at $48/bbl, theres not much room for manoeuvre.
Still, the companys balance sheet is in relatively good shape with a cash balance of 29.1m and net debt of80.8m reported at the end of September. During the reported six-month period, cash generated from operations covered all capital spending and interest costs. So IGAS is not struggling just yet. However, with opposition against fracking in the UK building, the companys future is uncertain.
And if you are thinking about buying IGAS, you need to be prepared for volatility — thisis a high risk/high reward company, not suitable for widows and orphans.
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