Arden Partners initiate coverage of IOG with a target price of 62.2p

40 Pages·2017·2.02 MB·English

Daniel Slater
[email protected]
020 7614 5947

26 May 2017 Oil & Gas Producers (AIM) IOG.L
Independent Oil and Gas# Buy
Initiating coverage
18p

IOG is a UK E&P company focused on the southern North Sea. It Key Data
has established a 389bcf portfolio of development-ready assets, Market Capitalisation £20.0m
Shares in Issue 109m
and recently agreed to acquire the nearby Thames pipeline,
Free Float 72%
which connects to the Bacton terminal. The development could
Average Daily Volume 1.0m
be onstream in Q2 2019, though significant funding will be 12-Months Trading Range 11.9p – 34.8p

required. There is a risk/reward balance in the asset position
versus the funding, and overall we initiate coverage with a Financial Forecasts
Yr to 31 December 2016A 2017E 2018E
speculative Buy recommendation.
Sales £0.0m £0.0m £0.0m
(cid:1) Development-ready assets. IOG holds five development-ready gas Operating Profit (£1.0m) (£2.7m) (£2.8m)
Adjusted PBT (£1.9m) (£3.6m) (£4.9m)
fields in the UK southern North Sea, with combined 2P/2C resources of
Adjusted EPS (2.0p) (3.3p) (4.5p)
389bcf. The company is advancing plans to bring these onstream over the
EPS Growth nm nm nm
next two years, with first gas planned for Q2 2019.
P/E nm nm nm
(cid:1) Hub strategy in action. IOG is pursuing a hub strategy, aimed at tying EV/EBITDA nm nm nm
Dividend - - -
smaller fields together to make up economic developments. Its
Yield - - -
Blythe/Elgood and Vulcan Satellites clusters follow this principle, with
Dividend Cover - - -
shared infrastructure and a shallow water location helping to keep costs
Net Cash/(Debt) (£14.3m) (£20.5m) (24.1m)
down and boost returns. Interest Cover nm nm nm

(cid:1) Pipeline ownership gives control. IOG recently agreed to acquire
Price Performance
the Thames gas pipeline, which it can use to transport gas from its
1 Month -2.7%
developments to shore. This, and 100% ownership of its assets, gives IOG
3 Months +5.9%
control of its developments and offtake route going forward.
12 Months +37.1%
(cid:1) Experienced management and technical team. IOG has, and
continues to augment, a team with strong North Sea and acquisition Price Performance (p)
experience. 40
35
(cid:1) Upside from other assets, acquisitions. The Harvey asset provides 30
follow-on development potential close to IOG’s other projects. IOG is also 25
targeting new acquisitions, including production. 20
15
(cid:1) Supportive operating environment. UK regulator the OGA has 10
5
been supportive of IOG, and the history of the North Sea means there is
0
significant expertise and services capacity for the company to draw on. May 14 Nov 14 May 15 Nov 15 May 16 Nov 16 May 17

(cid:1) Funding required. IOG will need significant funding (£296m) to Source: Bloomberg.
progress development. Existing debt from partner LOG is, we believe, also
likely to be highly dilutive (£10m facility plus interest converts at 8p/share).
(cid:1) Valuation and recommendation. At 40p/therm and fully diluted, our
IOG NAV is 62.2p/share risked, 138.6p/share unrisked. IOG has a strong
asset portfolio, but the financing position creates risk. We initiate with a
speculative Buy recommendation.
*Arden Partners acts as corporate broker to this company. #This company is a research client of Arden Partners.
This research material is a marketing communication and has not been prepared in accordance with legal
requirements designed to promote the independence of research and is not subject to any legal prohibition
on dealing ahead of dissemination. Arden Partners plc is authorised and regulated by the Financial
Conduct Authority and is a member of the London Stock Exchange. www.arden-partners.co.uk
26 May 2017

Contents
Investment case 3
Investment risks 5
Upcoming activity 7
Company history 7
Current shareholders 9
Company strategy 9
Asset position 11
Blythe and Elgood – Hub 1 11
Vulcan Satellites – Hub 2 13
Regional pipeline – acquisition agreed 15
Potential third Southern North Sea development – Harvey 16
Skipper oil discovery 17
Next steps – development plans 18
Funding and capital structure 18
Current funding position 18
Cash burn rate 20
Potential dilutive shares 20
Upcoming cash requirements – acquisitions and CAPEX 20
What is LOG? 21
North Sea M&A environment 22
UK gas prices 25
Board, management and technical team 27
Valuation and financial forecasts 30
Valuation 30
Financial forecasts 36

2 Independent Oil and Gas# – Initiating coverage | Oil & Gas Producers (AIM)
26 May 2017

Investment case
Development ready asset position and material gas resources
IOG has assembled a material portfolio of southern North Sea gas assets across the
Blythe, Elgood and Vulcan Satellites fields. These contain gross 2P/2C of 389bcf, and
IOG holds all of the assets 100%. The fields are development ready, and planning is well
advanced – a draft development plan for Blythe was submitted in Q4 2016. IOG is
currently targeting first gas from the fields in Q2 2019, ramping up to a total peak rate
in excess of 150mmcf/d. At a 40p/therm gas price, this could generate peak annualised
revenues of £219m for IOG. This would represent huge growth for a company that
currently has a market cap of £20m. The development ready nature of the assets and
their shallow water location also help reduce the risk of achieving this.
Hub strategy designed to extract value from smaller discoveries
The North Sea contains numerous small oil and gas discoveries that struggle to be
economic as standalone developments. They can often be commercialised by tying in to
existing processing and transport infrastructure, but this can create problems if host
platforms are large relative to the new fields, potentially meaning higher US$/boe costs
and the risk of early shutdown. Negotiations with existing infrastructure owners can also
be lengthy. IOG is aiming to solve this by developing several small fields itself, using its
own newbuild platforms and export infrastructure. By sharing the cost of new facilities
over a number of small fields, this can render these developments more economic.
Ownership of facilities and transport infrastructure (in this case all the way to the UK
coast) removes the risk of early shutdown by third party owners. This is exactly what IOG
is moving into a position to achieve on its Blythe/Elgood and Vulcan Satellites hub
developments.
Pipeline ownership gives control of offtake to the UK coast
IOG recently signed a sale and purchase agreement to acquire the Thames pipeline,
which was decommissioned in 2015 for lack of available production to make use of it.
This is located to the south of the company’s Blythe/Elgood and Vulcan Satellites
developments, and IOG plans to use it for production from both. The pipeline has
capacity of 300mmcf/d, meaning it should be able to support peak production of
150mmcf/d from the existing planned developments, and still have capacity for the
potential development of the 113bcf Harvey field, and any other assets IOG may be able
to acquire nearby. Not only does the pipeline give IOG an offtake route, but it gives the
company 100% control of that route. This should mean that it remains available for as
long as IOG requires it, that IOG can dictate maintenance schedules to suit the
company, and allow IOG to capture margin that would otherwise be paid to the pipeline
owner (including potential for use by third parties).
Shallow water location helps control costs
IOG’s Blythe/Elgood and Vulcan Satellites developments are all located in the UK
southern North Sea. This is a shallow water region, with no field at greater water depth
than 30m. This is expected to allow development using unmanned fixed platforms,
helping reduce both upfront CAPEX and ongoing OPEX. We estimate total CAPEX for
the Blythe/Elgood and Vulcan Satellites developments of £296m, or £4.6/boe. This
compares favourably to CAPEX elsewhere in the North Sea, and helps increase NPV and
reduce commerciality thresholds of the developments.
First gas by mid 2019, fast ramp up thereafter
IOG is planning to develop its assets on an aggressive timetable, targeting first gas from
Vulcan South, Vulcan North West and Blythe in Q2 2019. The other fields would then
come on in the following months, such that they would all be producing by Q4 2019.
The company’s 100% ownership of all its assets should help it keep to this timetable,
driving significant cash flows for the company within two years.
Oil & Gas Producers (AIM) | Independent Oil and Gas# – Initiating coverage 3
26 May 2017

Experienced management team building capability to execute
IOG is led by CEO Mark Routh, who founded CH4 Energy in 2002 and sold it to Venture
Production in 2006 for £154m. Mark joined IOG in 2011 soon after it was founded by
Head of Business Origination Peter Young, where the initial focus was assembling the
company’s portfolio. The team has now been grown substantially with the addition of
further expertise (most recently Andrew Hockey as Deputy CEO, Hywel John as CFO and
Graham Cox as SNS Project Manager) aimed at giving the company the ability to run its
upcoming development projects. The team now has considerable and varied experience
of North Sea developments, giving comfort that it has the capabilities that will be
required going forward.
Upside potential in addition to upcoming developments
In addition to the fields expected to be developed in its upcoming projects, IOG holds
100% of the Harvey discovery. This is subject to appraisal, and holds P50 resources of
113bcf. Harvey lies close to Blythe, and could be developed and directly tied in to the
Thames pipeline at a later date. If proved up, this would rank among the largest of
IOG’s Southern North Sea fields, and could provide a further phase of growth beyond
the upcoming development projects.
Potential for further acquisitions, including production
IOG has recently shown itself adept at adding to its portfolio, acquiring the Vulcan
Satellites fields in 2016, and recently signing an agreement to acquire the Thames
pipeline. The company has a stated aim of continuing with acquisitions, including
targeting producing assets. These could provide cash flow to the company (augmented
by the £32.9m of tax losses held), taking some of the burden off the existing debt
funding lines and helping to support the company going forward. It could also improve
IOG’s position in discussions to finance its upcoming developments.
Supportive regulator in the UK’s Oil and Gas Authority
The UK recently undertook an overhaul of the way it administers and regulates the UK
North Sea. On the back of the Wood Review published in 2014, responsibility for this
passed to a new body: the Oil and Gas Authority (OGA). The central aim of this body is
the maximisation of economic recovery of oil and gas in the UK North Sea (the MER UK
strategy). This aim speaks directly to IOG’s business, which is aimed at developing fields
previously deemed too small to be developed economically, and finding a solution for
this via hub developments and (where appropriate) the use of existing infrastructure.
The OGA has already been helpful to IOG in extending the timelines for its various
licences as the company pulls its development projects together, and we would hope
this support would continue as the projects move forward.
North Sea a politically stable environment with good access to services
The North Sea has been a major oil and gas province for over 50 years, and continues to
exhibit considerable activity. This has allowed not only a significant build-up of
knowledge and expertise in the region (which IOG is already taking advantage of with
its current team), but also means oil services companies have considerable capability
there too. The UK is a politically stable country from the point of view of oil and gas
(despite recent noise around Brexit and the potential for a second Scottish
independence referendum – IOG’s southern North Sea assets are all within English
jurisdiction), and the fiscal regime has seen tax cuts in recent years aimed at allowing
operators to make new investments. If you can put together a position like IOG, where
you are not reliant on other companies for infrastructure, then the North Sea is an
attractive area in which to operate.

4 Independent Oil and Gas# – Initiating coverage | Oil & Gas Producers (AIM)
26 May 2017

Numerous upcoming catalysts over the rest of 2017
IOG has a number of catalysts coming up over the rest of this year that could positively
impact the share price. The biggest of these is achieving funding for its upcoming
development projects, and we know this is currently a key focus for management.
Timing is uncertain, but this will have to come through this year if IOG is to keep to its
development schedule. Otherwise, there is completion of the Thames pipeline
acquisition (Q2 2017) and follow up work to assess this, a new CPR (H2 2017)
submission of the Blythe/Elgood development plan (Q2 2017) and Vulcan Satellites
development plan (Q3 2017), and FID on the developments (Q1 2018). There could also
be further acquisitions.
Valuation and recommendation
We have valued IOG using field DCF models for each of its assets. Using a 40p/therm
gas price, this returns a risked NAV of £169.5m, going to £378.1m unrisked. If we
assume that the £10m LOG loan (plus an assumed £1m accrued interest) converts to
equity at 8p/share, this would imply 62.2p/share risked, 138.6p/share unrisked. Were
LOG not to convert and the loan remain as debt, this would imply 125.8p/share risked,
280.7p/share unrisked. Subject to full drawdown of its loan facilities, LOG could be in a
position to take a stake of over 50% in IOG were it to convert, and this is hence an
important consideration for investors. Nevertheless, even if LOG were to convert, on a
per share basis IOG would remain substantially undervalued at current levels.
IOG holds a substantial resource position in the UK southern North Sea. The company is
strongly progressing development of these resources, with the recent pipeline
acquisition agreement an important step forward here. IOG has assembled a strong
team to execute its developments, and could achieve peak annualised revenues of
£219m (at 40p/therm) in two to three year’s time on success. Risks remain, principally
development funding (which is being actively pursued) and the potential dilution on
conversion of the LOG loan. On balance there is much to recommend IOG, and though
it is somewhat speculative, we initiate coverage with a Buy recommendation.
Investment risks
Development funding
IOG is likely to require £296m of funding for its upcoming Blythe/Elgood and Vulcan
Satellites developments. This could come from diverse sources (including offtake prepay
and CAPEX deferral), but if it does not come through it could create delays and
potentially put IOG’s assets in jeopardy.
Potential dilution from £10m LOG loan
IOG has a £10m loan facility (with additional accrued interest) with LOG, which can
convert at 8p/share (at LOG’s option). This is currently strongly in-the-money. Were this
to occur, it would likely give LOG over 50% of plc equity depending on accrued interest
and exercise of its warrants. This creates not only potential dilution in the share price,
but could also give LOG a controlling stake in the company. It could even result in a
mandatory offer for the company, potentially at 8p/share if LOG had not acquired other
shares above this level. Any changes to this structure, potentially as part of development
funding, will be important going forward.
Closure of acquisition of pipeline and reception infrastructure, pipeline integrity
IOG recently signed a sale and purchase agreement for the Thames pipeline, and
completion is expected in due course. Onshore reception facilities connected to the line
are also expected to be acquired. Post pipeline acquisition, intelligent pigging work is
required to test pipeline integrity.
Oil & Gas Producers (AIM) | Independent Oil and Gas# – Initiating coverage 5
26 May 2017

The pipeline is key to IOG’s current development plans, and failure to acquire it or the
reception facilities, or not to be able to cost effectively bring them back on line, would
be a significant setback. The acquisition process is already well progressed, however, the
pipeline was operational until 2015, and IOG carried out significant feasibility work prior
to acquisition, so risks here are mitigated.
Bacton gas terminal availability
The Thames pipeline connects to the Bacton gas terminal, which will then allow IOG’s
gas into the UK national grid. We note that Bacton has capacity of 1,000mmcf/d, and
over 25% of this was available over 2014 to 2018 (as of the last update from owner
Perenco in June 2014). Figures from Woodmac (which also include the 900mmcf/d Shell
Bacton terminal) report throughput across the two of 270mmcf/d for 2016.
Engie/Centrica/Bayerngas’ 660bcf Cygnus development came onstream in late 2016, is
connected to Bacton and expected to contribute 5% of UK gas supply at peak. IOG is
confident there will be sufficient capacity at Bacton to accommodate its developments,
but were this not to be the case it could impact the commerciality of the developments.
Development approvals
IOG still needs to secure full UK government approvals for its developments. As long as
the other elements required (funding, the pipeline etc) fall into place, this should be
relatively straightforward.
Licence expiry
The Blythe licence expires at the end of 2017, Elgood is in the process of being extended
to January 2018, and two of the licences related to the Vulcan Satellites also currently
expire at the end of 2017. Approval of development plans are required in order to
secure these for the long term, and FDPs are to be submitted in order to achieve this.
The OGA has been helpful in extending licences for IOG in the past, so if there are any
delays, this risk should be limited.
Gas price sensitivity
Our modelling shows all of IOG’s fields to be economic (strongly in most cases) at a gas
price of 40p/therm (average over last 12 months 39p/therm). The valuation has a level of
sensitivity here, though the Vulcan Satellites still return a positive NPV down to around
18p/therm, and current forward pricing could allow hedging at or above 40p/therm.
CAPEX and OPEX levels
IOG expects to develop and operate its assets at CAPEX and OPEX levels that look very
attractive. This is based in part on their shallow water location, acquisition of the
Thames pipeline at minimal cost, and the current state of the oil services market post
the downturn. Were the company to experience upward pressure on costs from the
levels we have assumed, it could affect the value of the assets.
Requirement for reservoir stimulation on Vulcan Satellites fields
Previous wells and nearby fields mean that it is expected that reservoir in the Vulcan
Satellites fields will be of lower permeability, and require fracking in order to be
successfully developed. Stimulation has been carried out successfully on other nearby
gas fields (notably Clipper South, amongst others). IOG expects to carry out tests in
order to define its stimulation programme as part of its development programme for the
fields (i.e. no further work is required for development sign-off), and this gives comfort
that this is not expected to be a significant issue. It is worth investors being aware of,
however.

6 Independent Oil and Gas# – Initiating coverage | Oil & Gas Producers (AIM)
26 May 2017

Upcoming activity
IOG’s immediate focus is submitting its Blythe/Elgood and Vulcan Satellites development
plans, securing funding for these projects, and completing its pipeline acquisition. As
long as the company is successful here, it is set for a busy period as it proceeds to
develop these projects and establish cash flows.
IOG Planned Activity Timetable
2017 2018 2019
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Blythe/Elgood Development Planning
Blythe/Elgood FDP Submission ☆☆☆☆
Vulcan Satellites Development Planning
Vulcan Satellites FDP Submission ☆☆☆☆
Development Funding Discussions
Pipeline Acquisition Closure ☆☆☆☆
Pipeline Testing
Pipeline Reception Infrastructure Acquisition ☆☆☆☆
Blythe/Elgood and Vulcan Satellites FID ☆☆☆☆
Blythe/Elgood Development
Blythe Onstream ☆☆☆☆
Elgood Onstream ☆☆☆☆
Vulcan Satellites Development
Vulcan South Onstream ☆☆☆☆
Vulcan North West Onstream ☆☆☆☆
Vulcan East Onstream ☆☆☆☆
Source: IOG.
Company history
IOG was established by Peter Young (current Head of Business Origination) in 2010,
who was then joined in 2011 by Mark Routh (current CEO and interim Chairman). Mark
had previously founded CH4 Energy in 2002, growing this to 3.6mboe/d of North Sea
gas production and selling to Venture for £154m in 2006.
IOG originally held 50% of the Blythe field and 50% of the Skipper discovery, as a result
of an all-share combination of the UK assets of MOST and Ebor Energy in 2011. Early
funding was provided by management and previous MOST and Ebor shareholders.
IOG was subsequently awarded the P2085 licence (which contains the Harvey discovery)
in 2013, and the P2260 licence (which contains the Elgood field) in 2014. The Vulcan
Satellite fields were then acquired from Verus in 2016.
After funding problems at Blythe and Skipper partner Alpha Petroleum (which had
bought the interests from ATP Oil and Gas), IOG acquired 100% interests in these
licences in 2016.
IOG went through a period of uncertainty in 2014 and 2015 as it tried to finance
development of its assets. The Skipper well was eventually financed largely by
contractors, and debt was secured from LOG to continue funding company overheads
and acquisitions. Management has generally taken a significant proportion of salaries as
share options to reduce cash burn. IOG has done well to retain and progress its assets
during what has been a very difficult period for E&P companies, and is now at the point
of needing to secure significant development funding.
In March 2017 IOG announced a number of board/management changes. David Peattie
resigned as Chairman to take over as CEO of the UK Nuclear Decommissioning
Authority, with CEO Mark Routh also becoming Interim Chairman. Andrew Hockey
Oil & Gas Producers (AIM) | Independent Oil and Gas# – Initiating coverage 7
26 May 2017

joined as Deputy Chief Executive and a board director. CFO Peter Young was moved
over to Head of Business Origination to focus on acquisitions (leaving the board), being
replaced as CFO and board director by Hywel John. Charles Hendry joined the board as
the second LOG nominee, and Graham Cox also joined as Southern North Sea Project
Manager.
IOG Company Timeline
Date Event
November 2010 IOG founded
October 2011 Acquisition of 50% of Blythe and 50% of Skipper completed
May 2013 Skipper West awarded (IOG 100%)
September 2013 AIM IPO raising £2m at 24p/share
December 2013 P2085 licence including Harvey discovery awarded (IOG 100%)
February 2014 Agreement for gas sales from Blythe to BP announced
March 2014 Agreement for acquisition of Cronx discovery (nearby Blythe)
March 2014 US$50m debt facility with a US financial institution announced (closure deferred)
June 2014 Darwin Strategic £1.8m equity swap (at 24p/share) and £0.5m loan entered into
September 2014 AGR taken on for drilling planning services
November 2014 £0.5m placing at 11p/share
November 2014 P2260 licence including Elgood awarded (IOG 100%)
June 2015 Partial drawdown of Darwin equity swap
June 2015 Baker Hughes taken on for work on Skipper
May 2015 Discussions on significant debt and equity development funding announced
August 2015 US$10m equity, US$80m debt and further £400m debt deal abandoned
August 2015 Contractor funding sought for Skipper appraisal drilling – planned for late 2015
September 2015 Contractor funding for Skipper drilling progressed
October 2015 Conversion of remainder of Darwin equity swap and loan
October 2015 £150k placing at 7p/share
November 2015 Further agreements for Skipper contractor funding, including £2m GE loan
Full Skipper funding secured, largely from loans, deferred payments and equity (AGR) to contractors;
December 2015
£2.75m loan agreed with LOG
December 2015 £0.8m loan agreed with LOG
December 2015 Skipper rig contract signed with Transocean
December 2015 IOG assumes 100% interest of Skipper
January 2016 Skipper well delayed
February 2016 £10m debt facility secured from LOG, convertible at 8p/share
April 2016 Deal to acquire balance 50% of Blythe announced
June 2016 Skipper appraisal well rescheduled for July 2016
June 2016 Acquisition of Vulcan Satellites fields announced
June 2016 Blythe acquisition of balance 50% closes
June 2016 New Skipper rig contract signed with Transocean
July 2016 Skipper well spudded
August 2016 Skipper initial well result
September 2016 Skipper sample testing – oil higher viscosity than anticipated, new reservoir modelling required
October 2016 Vulcan Satellites acquisition closes
November 2016 Cronx acquisition abandoned to focus on Vulcan Satellites and Blythe/Elgood
December 2016 Blythe draft FDP submitted
January 2017 Pipeline acquisition announced
March 2017 Management changes
April 2017 Pipeline acquisition sale and purchase agreement signed
Source: IOG.

8 Independent Oil and Gas# – Initiating coverage | Oil & Gas Producers (AIM)
26 May 2017

Current shareholders
IOG Current Key Shareholders
Holder Shares (m) Percentage
Hargreaves Lansdown (Nominee) 19.6 17.8%
TD Direct (Nominee) 9.6 8.8%
Hargreaves Lansdown (Nominee) 7.4 6.8%
Barclayshare (Nominee) 7.1 6.5%
Hargreaves Lansdown (Nominee) 6.6 6.0%
Huntress Nominees 5.8 5.3%
JIM Nominees 3.2 2.9%
Tom Haselton 2.9 2.6%
Viola Ltd 2.8 2.5%
Wealth Nominees 2.7 2.5%

As part of the above
Peter Young (Head of Business Origination) 13.8m 12.7%
Mark Routh (CEO and Interim Chairman) 4.3m 3.9%
Source: Bloomberg.
IOG’s shareholder register is relatively opaque, being made up of shares in nominee
accounts. Historically, management has taken significant compensation in the form of
equity.
Debt holder LOG is not currently a shareholder.
Company strategy
IOG’s overarching strategy is to build a portfolio of producing assets in the UK North
Sea. The company plans to achieve this by acquiring existing discoveries and developing
them via a hub and spoke methodology. IOG has already built a significant portfolio of
gas discoveries in the Southern North Sea via acquisition, and is also in the process of
buying the Thames pipeline to take production to the UK coast. Funding is planned to
come from a number of sources, including prepayments for offtake and deferred
payments for services from oil services companies, alongside the potential for
conventional debt and equity.
Hub development focus
The hub development strategy is based on the thesis that there are numerous existing
small discoveries in the North Sea which are challenging to develop on a standalone
basis. The idea is that if enough small fields are tied into one set of infrastructure, they
can, in aggregate, make up enough production to justify the cost, allowing them all to
be economically developed.
One solution is to develop these as tiebacks to existing infrastructure. This can be a very
attractive option providing it can be guaranteed that the infrastructure (generally
platforms and pipelines) will remain in place long enough to produce the new field. If
infrastructure (which was typically put in place for large fields which have now declined)
is shut down early, or the new tie-in fields are forced to shoulder a larger proportion of
infrastructure operating costs in the future, then this can negatively impact the
economics of the new fields.

Oil & Gas Producers (AIM) | Independent Oil and Gas# – Initiating coverage 9
26 May 2017

Full ownership of production and offtake infrastructure
IOG has chosen to pursue an independent solution, and is planning to install its own
newbuild platforms to commercialise its Southern North Sea assets. The company is also
in the process of acquiring an old pipeline (which was previously shut down due to a
lack of production for it to carry), which will give IOG control of transport for its gas to
processing facilities on the UK coast at Bacton.
This approach will allow IOG to design platforms specifically for its own fields (and
potential future developments), planning for costs in a way to suit the company. It will
also give IOG full control of these platforms and the route to market, meaning a third
party cannot leave the company’s developments stranded by shutting them down earlier
than IOG would like.
The positive economics of this approach can be seen in our modelling (detailed
elsewhere in this note). In our base case, we value Blythe at US$4.7/boe, but Elgood at
US$7.5/boe. This is because the cost of the platform for Blythe impacts returns, but
allows better returns for fields tied back to it, demonstrating the logic of the hub
approach.
Significant funding and expertise will be required
If control of its own destiny is the upside of IOG’s strategy, the downside is a
requirement for significant funding and North Sea operational expertise. Whatever the
eventual field economics, construction of newbuild platforms is going incur a significant
amount of upfront CAPEX. We estimate a total CAPEX bill of £296m for the company’s
planned Southern North Sea developments, and IOG will be liable for 100% of this.
Historically, IOG has made use of funding from diverse sources including convertible
debt and deferred payments to oil services companies (employed on the Skipper well in
2016). For its developments, it could look at prepayment for offtake (there is an existing
agreement with BP Gas Marketing for offtake of Blythe production), further deferred
payments to oil services companies (this is an avenue IOG is keenly pursuing, and could
potentially include using plc equity), project debt, further convertibles, or a plc equity
raise. Securing development financing is currently the next big step forward IOG needs
to make.
While there is work to do on funding, IOG has made headway increasing its capabilities
as an operator. The company has added significantly to its board and
management/technical team over the last 12 months, augmenting the existing strong
team (details elsewhere in this note). In addition to securing financing, the task now is
completing and submitting development plans, having development licences awarded,
and implementing the developments.

10 Independent Oil and Gas# – Initiating coverage | Oil & Gas Producers (AIM)