Independent Resources Research
Speculative Buy
Valuation: For now we value the company predominantly on the CBM and a typically
risked valuation for Tunisian exploration. We include very little value for the gas storage
which offers considerable ‘post-planning’ upside. Our price target of 143p thus equates to;
66.7p CBM; 61.5p Tunisia exploration; 14.6p gas storage
Strengths
¾ Positive CBM news helps underwrite valuation
¾ Free carry in exciting exploration prospects with significant
upside potential
¾ ERG involvement and political will improve prospects for
granting of permits for gas storage
Independent Resources
2
HB Markets plc, Registered No. 2693942, 131 Finsbury Pavement, London, EC2A 1NT
Authorised and regulated by the Financial Services Authority (Register No 155104)
Members of the London Stock Exchange and PLUS Markets
Research
Valuation overview
Category £m Value Value P/psh
Tuscany CBM 30.5 66.7
Rivara Gas Storage 6.7 14.6
Tunisia Exploration 28.2 61.6
Totals/Price target 65.4 143.0
Potential Share price Catalysts
Independent has potential for newsflow in relation to each of its 3 arms;
• Exploration, Tunisia: News on advancement and results of exploration in Tunisia, first up Oryx
• CBM, Tuscany: Advancement of work programme potential farm-out of CBM assets
• Gas Storage, Rivara: Granting of licences for gas storage in Rivara would have a material impact on valuation in our view
CBM – Medium term, with excellent well recent results
IRG’s CBM acreage is located in Tuscany. Independent was awarded the Casoni exploration licence adjacent to the south of
Fiume Bruna with the environmental impact study for the Casoni licence currently under review. Fiume Bruna has a prospective
resource of 92 bcf. Independent has recently conducted hydraulic fracturing on the Fiume Bruna 2 well which yielded very
positive results, suggesting a greater resource and an additional shale play.
The work programme is aimed at proving the commercial prospect for Fiume Bruna this year and recent fraccing results suggest
greater potential than originally envisaged. We have ascribed 66.7p of value of for the CBM assets, which accounts only for the
licenced acreage. We ascribe 83p per mcf of value for the assets and apply a 50% risk discount which also incorporates some
dilution for farm out (which now seems likely).
Tunisia Exploration – near term, with significant high risk exploration upside potential
The Tunisian prospects are attractive late stage exportation opportunities with relatively high possibility of success (PoS) of
>30%, which though still high risk is relatively attractive in terms of exploration. Two prospects are to be drilled this summer. The
first prospect is Oryx (well scheduled to spud immanently). Oryx has P50 gross prospective recoverable resource estimate of
25mmbls and an ascribed possibility of success at 34%. Drilling the second and larger Sidi Toui prospect is expected to follow
immediately. Sidi Toui has a P50 gross prospective recoverable resource estimate of 88mmbls and a higher PoS 40%.
We have been fairly conservative in our means of valuation for Tunisia. Firstly, we have only valued the 2 initial wells set to spud
this summer and not the wider prospect, in so doing ignoring a further prospective 207mmbls. Second, while we have used the
appropriate PoS ratios (34% & 40%) we have ascribed a low value per barrel of £3.4 (a low NPV per barrel) to arrive at our in-situ
valuation of £28.2m net to IRG or 61.5p per share (£148.6m in total for the two prospects). To provide an indication of potential
upside (as discreet to valuation which must always be appropriately risk weighted) on and un-risked basis the same methodology
would suggest £72.8m of value net to IRG or c.160p per share
Rivara Gas Storage – very attractive but uncertain strategic opportunity
Rivara's working capacity, estimated at c.113 bcf would make it one of the largest underground gas storage facilities in Europe.
The value of gas storage assets can really be attributed to the differential between winter and summer time gas pricing i.e. a
hedge on buying gas in the summer and selling it at better pricing in the winter. Thus simplistically the summer winter
differential x the number of storage units – costs = potential value of gas stored, which can then be appropriately ascribed an
NPV valuation. In truth ultimately this is more a utility infrastructure play and we would expect a farm out down the lone for the
heavy capex phase of the project thought to be around $400m. The company has advanced its planning application to within two
stages of completion but with the 120 days timescale for the first already passed, timing for an eventual decision is really
anybody’s guess.
While we have focussed on the risk, it is also appropriate to mention political will behind the project. With Italy, heavily import
dependent for its gas (with Algeria and Russia supplying around 33% combined) prone to blackouts and security of supply is a key
issue. A recent letter from Prime Minister Berlusconi specifically outlined the strategic importance of the Rivara storage project.
With €300-400m value the gas storage assets are potentially the most valuable of the company’s three main assets, but of
course are largely worthless without permitting. Thus we have taken a cautious view, discounting the value implied by the ERG
deal by a massive 85% to account for the regulatory risk. It is not difficult to envisage the much geared impact merely removing
that risk (which would immediately be warranted following approval in our view). The pre-permitting undiscounted value per
share is around 97p and merely accounting for the pre-planning transaction value, the true value of the project post planning is
likely to be multiple but this still looks some way off. Even following approval, there will be a two year appraisal period including
3D seismic acquisition |
