IGas Energy : Full Year Results

RNS Number : 5939U

Igas Energy PLC

07 April 2021

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION.

7 April 2021

IGas Energy plc (AIM: IGAS)

("IGas" or "the Company" or "the Group")

Full year results for the year ended 31 December 2020

IGas announces its full year results for the year ended 31 December 2020.

• Adjusted EBITDA is considered by the Company to be a useful additional measure to help understand underlying performance.
  2 Net debt is borrowings less cash and cash equivalents excluding capitalised fees

Operational Summary

• Net production averaged 1,907 boepd for the year (2019: 2,325 boepd), within revised guidance,
  while operating costs for the year were c.$33/boe (at an average 2020 exchange rate of £1:$1.29)
  (2019: c.$30/boe).
• In 2021, we anticipate net production of between 2,150-2,350 boepd and operating costs of c.$32/boe (assuming an exchange rate of £1:$1.35), albeit subject to the ongoing challenges that COVID-19 presents.
• Reserves and resources upgraded in DeGolyer & MacNaughton (D&M) CPR as at 31 December 2020
• • IGas net reserves and resources (MMboe)*

• 2P reserves replacement ~ 250% (1P ~275%)
• 1P NPV10 of $150 million: 2P NPV10 of $204 million*

*based on forward oil curve of: 2021 $53/bbl; 2022 $56/bbl; 2023 $58/bbl; 2024 $59/bbl; 2025 $62/bbl (for full price deck see CPR).

• Planning for Stoke-on-Trent geothermal project granted by Newcastle-under-Lyme, awaiting Stoke- on-Trent approval.
• The Renewable Energy Association (REA) and ARUP will launch a report in April 2021 into the economic opportunity of harnessing deep geothermal energy to solve the decarbonisation of heat in the UK.
• First sites for hydrogen production in South-east England identified
• • Planning submissions Q2/3 2021
  • Final Investment Decision to follow within 3 months of planning approval
  • First production of hydrogen could be in 2022

Corporate and Financial Summary

· Successful redetermination under the Group's Reserve Based Lending facility (RBL) at 31 December

2020 confirming $31.7 million (£24.0 million) of debt capacity and headroom of $11.7 million (£8.9 million).

• Cash balances as at 31 December 2020 of £2.4 million and net debt of £12.2 million.
• The Group invested £8.5 million across its asset base during the year (2019: £6.4 million). Budgeted capex for 2021 is £5.3 million.
• Underlying loss of £2.7 million (2019: profit £4.6 million). Loss after tax of £42.1 million (2019: loss
  £49.8 million) due to an impairment of £38.5 million of oil and gas assets (2019: impairment of £53.9 million primarily relating to our shale assets) being recognised on oil and gas assets due to lower oil price forecasts. Ring fence tax losses of £256 million as at 31 December 2020.
• As at 31 December 2020, the Group had hedged a total of 369,600 bbls for 2021, using a combination of collars (166,800 bbls at an average downside protected price of $43.0/bbl) and fixed price swaps (202,800 bbls at an average fixed price of $44.7/bbl).
• Foreign exchange hedges in place at 31 December 2020 of $3 million for 2021 at an average rate of $1.20:£1.

Commenting today Stephen Bowler, Chief Executive Officer, said:

"2020 was an exceptionally difficult year for everyone. Despite these highly challenging circumstances, the Company has continued to make progress in a number of key areas and continues to adapt its business to operate, both in the current environment, and to develop its business strategies to deliver a long-term and sustainable business.

We still retain a sharp focus on costs and conserving cash but as commodity prices improve we will continue to invest in our assets where appropriate and to move ahead purposefully with our geothermal and hydrogen projects."

A results presentation will be available athttp://www.igasplc.com/investors/presentations.

Ross Pearson, Technical Director of IGas Energy plc, and a qualified person as defined in the Guidance Note for Mining, Oil and Gas Companies, March 2006, of the London Stock Exchange, has reviewed and approved the technical information contained in this announcement. Mr Pearson has 20 years oil and gas exploration and production experience.

Investec Bank plc (NOMAD and Joint Corporate Broker) Tel: +44 (0)20 7597 5970

Sara Hale/Jeremy Ellis/Virginia Bull

Chairman's Statement

At the time of writing, England is slowly emerging from its third national lockdown in less than 12 months. This reporting period has seen extraordinary challenges for individuals and businesses alike, as we all respond to the global public health emergency - COVID-19 - which has impacted, and continues to impact, all aspects of our lives.

As the scale and seriousness of the COVID-19 pandemic emerged, the initial focus and principal concern for the Company was, and remains, the health and safety of its employees, contractors, and communities. In this regard, all office-based employees have been working from home where possible since March 2020. The Company has established procedures and plans to ensure the continued safe operation of its production sites whilst adapting operations to enable and implement social distancing. Oil and gas workers are classified as 'key workers', recognising the importance of maintaining oil and gas supply to meet the UK's energy demands.

The oil price had already been impacted early in the year by OPEC's failure to reach an agreement on supply. The end of the first quarter saw a further significant reduction in commodity prices, principally due to COVID-19 related drop in demand for oil and gas, which affected both our revenues and profitability. We took swift action to reduce costs and preserve cash in the business always being mindful of the longer- term effects those measures may have.

Despite these highly challenging circumstances, the Company has continued to make progress in a number of key areas and continues to adapt its business to operate, both in the current environment, and to

develop its business strategies.

In 2020, we delivered production within the revised guidance, brought our waterflood projects online, which will bring increased production in 2021 and beyond, and completed a significant transaction with the acquisition of the geothermal energy developer, GT Energy (GTE).

The geothermal acquisition is a major strategic milestone for IGas. It provides us with an exciting entry point into this highly attractive growth market, one that has seen material progress in Europe over the past five years. The decarbonisation of electricity generation has already made significant steps forwards with renewables and gas replacing coal. The next significant area that must be addressed, namely to achieve the UK's net zero ambitions, is the decarbonisation of heat. We anticipate that this will dramatically increase the development of deep geothermal heating plants in the UK and across Europe.

There are considerable growth opportunities for IGas as we continue to look at ways of maximising returns from our existing operations and engineering expertise, repurposing our extensive infrastructure and seeking to high-grade potential opportunities for other forms of energy, including electricity generation and storage.

In October 2020, we announced a partnership with BayoTech, a leading technologies business in hydrogen generation systems. We have identified existing sites where the gas resource can be reformed into hydrogen which will then be sold to local or national customers.

In November 2020, the Government announced its "Ten Point Plan" for a green industrial revolution setting out a roadmap for the country's economic recovery: Building back better, supporting green jobs, and accelerating our path to net zero. We welcomed the long awaited Energy White Paper which was released the following month which acknowledges that the UK's domestic oil and gas industry has a critical role in maintaining the country's energy security and is a major contributor to the economy.

The projection for demand for oil and gas, though much reduced, is still forecast to continue for decades to come and whilst Government stresses the importance of sourcing lower emission fuels, it does not tackle the issue of growing imports of oil and gas. According to the most recent analysis by the Climate Change Committee (CCC) for the Sixth Carbon Budget using their 'Balanced' and 'Headwinds' scenarios, import dependencies will rise to between 61% and 83% for gas and up to 40% for oil by 2050.

As we broaden our energy portfolio, engaging effectively with all our stakeholders helps inform our future plans. Listening and responding to the views of communities, regulators, policy makers and shareholders helps us better refine our business objectives and deliver value. A sustainable and responsible company is one that is committed to protecting and enhancing the wider environment and working with communities to provide them with lasting socio-economic benefits. Last year, we aligned ourselves with a number of the UN Sustainable Development Goals and we will continue to develop and grow our environmental KPIs.

Despite the significant challenges the pandemic has presented us with, IGas's operations were safe and environmentally responsible. It is a reflection of our high standards that led to us again receiving the RoSPA President's Award, representing 14 consecutive years of commitment to Occupational Health and Safety. Our ISO9001 and ISO14001 accreditation was also renewed during 2020, important benchmarks in managing our production processes and environment responsibilities.

People

The great majority of IGas staff who are able to work from home are still doing so and appropriate precautions in operations and offices have been implemented.

I am deeply impressed by the resilience our people have shown as we have adapted to new ways of working, while retaining an unrelenting focus on safety and delivery. I want to thank each and every one of our hardworking colleagues for their commitment and determination during such a tough year.

Outlook

The ongoing impacts of the COVID-19 pandemic continue to present a volatile and challenging trading environment. Whilst the International Energy Agency expects a strong oil price recovery in the second half of 2021, it has warned that fresh restrictions related to the SARS-CoV-2 virus will depress demand in the short term.

We remain firmly focused on cost and capital discipline, controlling what is within our power in the near- term, whilst still continuing to build our business for the future. Given that the shape and pace of economic recovery is uncertain, it would be imprudent to rule out future impacts on the business.

That said, we will continue to invest in our existing assets where appropriate to realise future benefits and to move ahead purposefully with our geothermal and hydrogen projects. What is clear, is that the UK has set out a pathway to net zero and recognising there is a role for oil and gas, as part of that evolution, IGas is committed to maximise the value of its extensive skillset and existing infrastructure to further progress its own energy transition pathway.

Chief Executive's Statement

Introduction

The announcement by the World Health Organisation in March 2020, declaring the coronavirus outbreak a pandemic was an intensely sobering moment for everyone. As a company, we made clear from the outset that our overriding priority was the health and safety of all our employees, contractors and other visitors to sites, maintaining operations and supporting the safe and reliable production of energy.

Like every other company operating in the UK, we are not immune from the wider economic impacts of coronavirus and the significant reduction in global demand for oil and gas impacted our financial results. It is our job to guide the Company through this continued period of uncertainty and ensure it is well-placed for the economic recovery when it comes.

We moved quickly to mitigate the immediate impacts of COVID-19 and the fall in oil price by shutting in sites to preserve cash and as low commodity prices continued we undertook a further, in-depth review of costs. The outcome of that exercise resulted in a redundancy programme, salary replacement for the Board and senior executives, and a reduction in benefits across the organisation. These measures, coupled with the cost savings made in the first half of the year, have amounted to a cash saving in 2020 of £0.6 million. Further savings of £1.0 million are expected in 2021. We vacated our London premises at the earliest opportunity, at the end of March 2021, and until there is more certainty, our London based employees will continue to work remotely.

2020 was a pivotal year for the company. Last year, I outlined our desire to position IGas to deliver a variety of energy sources to the UK and, in September, we took a bold step in realising that aspiration by acquiring a deep geothermal development business. We also took our first steps to allow us to advance hydrogen production opportunities through the partnership agreement we announced in October 2020, with BayoTech. This will enable us to monetise stranded gas reserves and increase the value of the gas we produce, whilst pioneering the use of small-scale steam methane reformation (SMR) equipment in the UK.

During the year, as part of our approach to responsible and sustainable development we undertook to align ourselves to a number of the United Nation's Sustainable Development Goals. We recognise the need to reduce greenhouse gas (GHG) emissions and strive to reduce them through new initiatives, including the installation of best available technology to all new projects to minimise their carbon intensity.

Operating Review

Production

Net production for the period averaged 1,907 boepd, in line with our revised forecast of 1,850 - 2,050 for the full year. We anticipate net production in 2021 of between 2,150 boepd and 2,350 boepd, assuming there are no further significant disruptions to our business from COVID-19.

In May 2020, when the oil price was trading at c.$25/bbl, we announced a temporary shut-in of a number of fields for the months of May and June. The impact of the shut-ins was a reduction in production by c.600 boepd for this period. This action had a positive impact on cash flow during these two months of c. £0.5 million. Those employees that were impacted by the shut-ins were furloughed in line with the Government scheme.

We have, since then, returned all but two fields back to production following improvements in the oil price. As the majority of our sites are 100% owned and operated by us, it gave us the flexibility to take shut-in decisions quickly and the ability to rapidly restore production, at some of our fields, once energy prices improved.

Given the fall in oil prices, we reviewed our capital expenditure programme for the year and reduced it broadly by half to focus on maintenance capex, abandonment and capital for projects already in execution which amounted to £6.0 million. IGas retains significant flexibility over its capital expenditure, and will ensure that as we move forward, expenditure commitments are appropriate in the macro environment.

It is our highest priority to continue to operate all of our assets in a safe and responsible manner, to ensure the safety of our workforce and communities in which we work and to minimise the potential risk to the environment. Throughout 2020, we worked closely with all our regulators to ensure we met the stringent guidelines in respect to COVID-19.

Reserves and Resources

In February 2021, IGas announced the publication of the Competent Persons Report (CPR) by DeGolyer & MacNaughton (D&M), a leading international reserves and resources auditor.

The report comprised an independent evaluation of IGas conventional oil and gas interests as of 31 December 2020. The full report can be found on the IGas websitewww.igasplc/investors/publications-and-

reports

IGas Group Net Reserves & Contingent Resources as at 31st Dec 2020 (MMboe)

The report confirms a continuing high reserves replacement of 2P reserves of approximately 250% reflecting the good performance of our production assets and progression of projects demonstrating the significant upside that remains in our conventional portfolio. Some 75% of the 2P is developed meaning it does not require any capital investment to produce.

IGas has a track record of significant reserves replacement with a three-year average of over 200%.

This independent report valued our conventional assets at c.$204 million on a 2P NPV10 basis: 1P NPV10 of $150 million (based on forward oil curve of 2021 $53/bbl; 2022 $56/bbl; 2023 $58/bbl; 2024 $59/bbl; 2025 $62/bbl).

Development

Conventional

In spite of the considerable challenges related to the COVID-19 pandemic, we commenced water injection at our Scampton North site on schedule and on budget in July 2020. As well as increasing oil production, the in-field pipeline and a new processing facility at the Scampton North C-Site will provide greater efficiency and environmental improvements by reducing venting, the need to truck water to the Welton Gathering Centre, as well as increasing the amount of gas available for power generation. The latest D&M CPR estimates this project will increase production from the Scampton field by 180 Mbbl (2P-Proved plus Probable reserves) and our mid-case economics for the project have an IRR of over 40% and a NPV of £2.5 million (which assumes a long-term oil price of $55/bbl).

Our second waterflood opportunity in the southern section of the Welton Field experienced delays predominantly with the supply chain and resource availability due to the pandemic, however, the project was brought online in January 2021, slightly behind our planned initial production of Q4 2020 and largely in line with budget. This is a material project in IGas's inventory, developing approximately 660 Mbbl of 2P reserves and adding over 100 bopd incremental production with a base case NPV10 of c.£7 million (assuming a long-term oil price of $55/bbl).

Both these projects are important advancements in developing the Company's 2P reserves.

Work on other projects, to appraise the potential that exists in our prospective resources such as the prospect at Godley Bridge in the South-east, will ramp-up again once there is more certainty in energy prices.

Gas from Shale

The effective moratorium on high volume hydraulic fracturing for shale-gas, that was introduced by the Government in November 2019, remains in place until new evidence is provided. IGas, along with its industry peers, continues to be committed to working closely with the OGA and other regulators to demonstrate that we can operate safely and in an environmentally responsible manner, and we remain confident of doing so by adopting a rigorous scientific approach.

It is worth noting that the Gainsborough Trough, where our world-class Springs Road gas asset is situated, is characterised by its structural simplicity and limited faulting. This has been confirmed by the recent reinterpretation of the 69 sq km reprocessed 3D seismic data around the Springs Road area which was originally acquired in 2014.

In November 2020, IGas submitted a Section 73 Planning Application to vary a condition of our existing Planning Permission in order to extend the operational period of the site for a further three years. The application was validated by Nottinghamshire County Council the same month.

Ellesmere Port Appeal

Our application to conduct a well test at our existing Ellesmere Port well, originally drilled in November 2014, was submitted on 21 July 2017. Following the Planning Committee's refusal against Officer

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