Developing oil wells is an expensive hit and miss business, and like almost all early-stage oil and gas companies, IGAS Energy(LSE: IGAS) had a rocky start to life.
To add to the group's woes, the oil price crash of 2014 cut its cash flow dramatically. With seemingly everything going wrong for the business, the shares have cratered by more than 96% over the past five years, although they have bounced back recently.
However, 2018 looks to be somewhat of an inflection point for the fledgling hydrocarbon group. With oil prices rising and low operating costs, IGAS is well positioned to return to profit in the years ahead, and long-suffering shareholders look set to profit.
IGAS' interim results showed off what the group is capable of. For the six months to 30 June, the firm reported adjusted earnings before interest, tax, depreciation, and amortisation (EBITDA) of £2.5m. Cash generated from operations during the period was £0.4m.
Management's estimate of the overall operating cost per barrel of oil produced for full-year 2017 was $40.50, equivalent at the time of the interim results. Since then, the price of Brent crude has risen by nearly 40% indicating that today, the firm is profitable and generating plenty of cash. Anticipated average production for 2017 was 2,250 boepd with output increasing to 2,500 boepd by year-end.
After a transformative restructuring last year, IGAS is now almost debt free. The group restructured around $130m of debt to just $30m at the end of June. Net debt at the end of the period was $9.3m, giving the firm plenty of headroom to fund capital spending. Following the rise in the oil price, increased cash generation should help reduce this deficit even faster than expected.
So IGAS is generating cash and has plenty of resources to support its growth, but what's next for the business?
Management is progressing with several growth projects to help improve output. The Welton Waterflood expansion project and Stockbridge production recovery projects are both expected to complete this year, yielding an estimated 100 boepd for a capital outlay of less than £2.5m. During the year, the company is also planning to start the exploration and development of its Springs Road and Tinker Lane shale prospects, as well as the Pentre Chert formation at its historical Ellesmere Port well. These prospects could provide significant upsides for the group's production, rewarding shareholders. The good news is that IGAS is well funded as cash is flowing, so management can finance well development without building up more debt.
Overall, I view IGAS as a sort of lottery ticket. Right now, the company is treading water although over the next few years, as it explores for further resources, there could be an enormous upside for investors if it strikes the black gold. If not, the company will continue to chug along at its current pace.
High risk high reward
IGas could still make you rich, but that does not mean that you should wager all of your wealth on this one business. It is prudent to hold to the company as part of a well-diversified portfolio.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.