Re: IRG Stream Log - Independent Resources PLC, (LSE AIM:...

Independent Resources PLC, (LSE AIM: IRG) Our price target of 143p thus equates to; 66.7p CBM; 61.5p Tunisia exploration; 14.6p gas storage the management team at Independent Resources operates on a model that tightly integrates oil and gas exploration and storage. IRG’s model tightly integrates its upstream oil and gas assets in North Africa and Italy with the development of a major storage facility and sees this as a way to maximize its production projects as the basis of a business that returns a high value. Independent Resources has confidence that it’s unique brand of partnerships and acquisitions, when tied to its assets result in a strong business model. At the moment, IRG is involved in many major projects including the Rivara underground gas storage facility. This project, which uses a naturally fractured deep reservoir in Italy’s Po Valley, not only has gained government concessions, believes that this project will be a major step in alleviating a major hole in the gas distribution and storage system that has existed for some time. This storage facility, when it is online will handle an estimated 3.2 billion cubic meters of natural gas. This, the company notes, would make it one of the largest storage facilities in both Italy and Europe. The key to profitability here would be building a long-term partnership on the project. The company believes the first stage of this will be online in about five years. At the moment, Independent Resources is partnering with ERG Rivara Storage srl, a subsidiary of ERG SpA, a leading Italian energy business. Another business IRG is investigating is creating “shale gas”. “Shale gas”, an exploding trend in the United States, can be contained in not only coal beds but also in sedimentary rock, called carbonaceous shales, where the gas collects in micro-structures and fractures, is relatively easy to extract and can be extracted horizontally or vertically. Independent Resources are involved in another, more limited coal bed methane from the Fiume Bruna parcel in Tuscany. It is quite an extensive project and is expected to extend south into their Casoni lease. It is a large reservoir and is also based on earlier mining efforts in the region which have substantial upgraded the reservoir’s size. In an effort to inject some environmental consciousness into this project, Independent Resources believes it will be able to inject CO2 into a coal bed to recover gas that would remain otherwise trapped. IRG believes there are many opportunities for this to be used to help cut the amount CO2 in the air. As an oil developer, IRG holds an 18.97% percent interest in the Ksar Hadada block in Southeast Tunisia and it believes that recent discoveries of light oil in various structures will prove profitable from its Acacus well field in this area. IRG believes there is substantial profit from possible shale oil deposits in this area as there is believed to be significant “shale oil” (oil trapped in layers of shale) that may also be brought online. Independent Resources is an oil and gas exploration company with a focus on CBM and gas storage opportunities in Italy and a share of oil exploration activities is Tunisia. The company should be considered a good strategic investment. Italy is in gas deficit, Independent has gas and, perhaps more notably, is seeking to develop strategically important storage facilitates that will help temper future gas shortages and ease security of supply. The valuation looks underwritten by CBM assets with further upside in the form of very near term Tunisian exploration and potentially, game changing upside if it is able to finally secure permitting for its proposed Rivara gas storage operation. Better Politics Could Lead Italy Towards a Technologically Advanced Energy Market Italian Prime Minister Letta took an open-minded approach towards new energy resources, including shale gas, and we hope to see improvements on the technical investigation front in the coming months too. Do you know of any shale gas projects in Italy? The Independent Resources PLC project in Tuscany should be the only unconventional gas extraction project under way to date. It is believed that, besides Central Italy, there may be resources in the North (the Po Valley) and probably in other areas. However, deeper investigation is needed through specific studies. Regarding the first experiments carried out in Tuscany, the press has mentioned that Independent Resources PLC uses a “hydraulic fracture operation coupled with a ceramic proppant. What is the regulatory framework for shale gas operators in Italy? Are there any specific laws applicable only to shale gas operators (and not to companies involved exclusively in conventional gas activities)? There are no specific regulations concerning shale gas in Italy. ¾ CBM news: Recent news on the CBM front has been extremely positive. Not only did this confirm very gassy coal but also suggests shale gas potential and the ability to frac both zones enhancing their potential commerciality. In addition new licence applications could double the size of resource from around 92bcf currently. A minor negative is that the additional zone will necessitate a new work programme and move back production but this is largely positive as such a programme will aim to enhance the production rate and therefore value of the resource. ¾ Free carry on Tunisian exploration: IRG has an 18.97% interest in the Petroceltic‐operated Ksar Hadada permit, onshore Southeast Tunisia. The Ksar conventional oil targets have prospective* resources of 320mmbls, with a risk weighted potential of 43.7m for the first two wells (see section following). Seismic data completed in January identified a number of prospects and 2 (potentially 3) exploration wells are planned for this year, the first of which is due to spud in June/July this year with a second to follow immediately after. Independent is fully carried through the 2010 work programme. ¾ Storage, the long and winding road: Permitting in Italy is well known to be extremely protracted. When it involves a unique gas storage installation in Italy’s industrial heartland, as in the case of the Rivara Under Ground Gas Storage, there are even more boxes to be ticked. The prize though is substantial; the company estimates the post planning prospect to be worth €300‐400m. The pre‐planning involvement of Italian national distributor ERG greatly enhances the potential and provides a benchmark for valuation of c.€63m (c.£53m) ‐ extrapolating the implied value of the €9.5m paid for its 15% stake. ¾ Supportive management: Exec Chairman Grayson Nash holds c.15% of the company and, as in past rounds, has supported the placing purchasing 200k shares. ¾ 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 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 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.