Its been a rough start to the year forIGAS Energy(LSE: IGAS). In only four weeks the companys shares have declined by 11%, as shareholders have become concerned about the viability of fracking in the UK.
Nevertheless, IGAS has started to recover over the past few days. Luckily, several pieces of good news have helped pull the companys shares higher but theres a certain amount of uncertainty regarding IGASs future.
And it all comes down to the state of the UKs fracking industry. For example, IGASs shares took a dive last week whena panel of lawmakers recommended that fracking for shale for oil and gas in the UK should be put on hold. Whats more, planners inLancashirerecommended that thecounty councils Development Control Committee should reject an application for shale drilling in the region.
But only a few days ago, both of these issues were resolved. Theproposed moratorium on fracking by Parliament has been rejected and the new infrastructure billprovides clarity on the rules for new and existing operators seeking to invest in shale.
Deals taking place
There has also been some M&A going on in the UK fracking sector over the past week.In the latest corporate shale deal, Newton Energy UK Ltd which holds four onshore production, exploration and development licenses in the East Midlands was sold to Hutton Energy.
For IGAS, this deal and others like it are great news as it indicates a growing interest in the UKs shale prospects. The more interest the sector generates, the easier itll become to push projects forward and cost of drilling should be pushed lower.
IGAS itself has also been the subject of bid speculation recently. Indeed, it has been rumoured that Swiss chemicals group Ineoshas been in talks to buy a share of IGASs acreage.
However, these talks are only the beginnings of Ineoss ambitions. Analysts have begun to speculate that the Swiss group could be weighing up a 30mequity stake in IGAS to help fund drilling and development costs.
Difficult to value
Overall,IGAS is set to benefit from an increasing amount of activity and investment in the UKs fledging fracking industry. However, its difficult to try and place a value on IGASs shares at present. It will take time for IGAS to generate cash flow from the extraction of shale gas in the UK and the company has a weak balance sheet IGAS has28m of cash and 108m of debt.
Moreover, based on earnings forecasts for 2017, IGAS looks expensive as the company is currently trading at a 2017 P/E of 18.4.
So based on the company’s rich valuation, it might not be time to buy IGAS at present levels. But if you are thinking of taking a position, the best strategy is the use a basket approach.
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