26 November 2014

IGas Energy plc ("IGas" or "the Group")

Interim Results for the six months ended 30 September 2014

IGas, one of the leading producers of onshore hydrocarbons in the UK, is pleased to announce its interim results for the six months ended 30 September 2014.

Highlights

·      Average net production of 2,766 boepd (2013: 2,704 boepd)

·      Ellesmere Port exploration well spudded on 15 November and we continue drilling

·      Successful completion of Dart Energy acquisition on 16 October - integration on track

o  Group now has approximately 1 million net acres under licence

·      IGas now operates on behalf of Total E&P UK Limited ("Total"), GDF SUEZ E&P UK Ltd ("GDF") and INEOS Upstream Ltd ("INEOS")

·      Barton Moss well results support reservoir model and help refine appraisal programme

·      Updated estimates of GIIP at 148 tcf mid case

·      Applications made in 14^th Onshore Licensing Round

Financial Highlights

·      Revenue of £34.5 million (2013: £36.2 million), impacted by forex

·      Gross profit of £12.5 million (2013: £16.4 million)

·      Adjusted EBITDA¹ of £14.8 million (2013: £17.3 million)

·      Underlying profit before tax² of £1.1 million (2013: £6.1 million)

·      Net back to IGas, on a pre SG&A basis, averaged US$66.2 per barrel  (2013: US$70.3 per barrel)

·      Cash and cash equivalents at period end of £29.1 million (2013: £15.4 million)

·      Net debt of £80.8 million (31 March 2014: £80.4 million)

·      Hedging arrangements contracted to 30 September 2015 for 517,000 barrels of oil, at a blended rate of US$87.7 per barrel

Footnotes:

¹Adjusted EBITDA relates to earnings before gains/(losses) on oil price derivatives, net finance costs, tax, depletion, depreciation and amortisation, acquisition costs and IFRS 2 charges

²Underlying profit before tax excludes the gain on oil price derivatives of £0.3m (2013: £1.6m loss), gain on revaluation of warrants £2.4m (2013: £5.3m loss) and net foreign exchange losses of £2.3m (2013: £5.4m gains)

Commenting on the announcement Andrew Austin, CEO, said: "The six months to the end of September saw significant work undertaken to materially progress the scale and potential of our operations and position us for further growth.

We have continued to maintain the pace of progress across our assets and, following the Dart acquisition, we are now operating an $80 million gross work programme, funded by partners, to further appraise gas from shale and coal bed methane. Our forward plans on the producing assets will be shaped by the developing oil price environment.

We anticipate drilling two further wells in 2015 which will subsequently be flow tested, subject to the necessary planning and permitting approvals.

The potential of the untapped natural resources onshore offers an opportunity for Britain to increase its energy security, create jobs and support economic growth.  We are excited about continuing to be part of that opportunity."

ENQUIRIES

Interim Statement - six months ended 30 September 2014

Operational Review

During the first half we have made further progress across the business.  Since the period end we completed the acquisition of Dart Energy Limited which has confirmed our position as a market leader in UK onshore oil and gas with an enhanced asset base and an area under licence of approximately 1 million net acres across all the major British shale basins. 

We now operate an $80 million gross work programme, funded by partners, to further appraise our shale and coal bed methane assets. In relation to our producing assets, despite our hedged position, the uncertainty of the oil price in the short to medium term means that it is prudent to review our capital expenditure and to focus on maximising production rates and revenues.

Existing Producing Assets

The average net production in the six months to 30 September 2014 was 2,766boepd (2013: 2,704 boepd).  We expect net production for the second half of the year to remain broadly flat at ca. 2,700 boepd.

Progress on the 'Chase the Barrels' initiative continues with a focus on sustainable long-term production enhancements as well as identifying further production potential from our existing producing assets.

The installation of the pilot water injection project at Gainsborough is now complete and injection has commenced with the aim of increasing oil recovery from the field. Our focus will now turn to the installation of the Welton pilot water injection scheme which is expected to commence in Q1 2015.

Other projects have included a workover and reinstatement of a well at Singleton, in the Weald Basin, resulting in a 6% increase in average daily production at this site; we continued to roll out the installation of rod pump controllers across the remainder of our fields and are focussed on further deployment of our "digital oilfield" initiative with a goal of utilising, wherever appropriate, IT capability to instrument and control the oil fields and gain both cost savings and efficiencies through the deployment of this technology.  As well as enhancing performance in the existing mature fields, our experience of applying this technology can be utilised in deploying similar systems to manage the shale developments when they are implemented.

We have begun trialling a wax reduction tool in a number of wells with encouraging results. The benefits include increased well up-time and a reduction in expensive workovers.

We continue to advance our gas monetisation projects at Albury (LNG), Bletchingley (gas to wire) and Lybster (potential CNG).

Planning permission was granted earlier this year for a change of use for the Albury site, including the installation of a Liquefied Natural Gas (LNG) plant.  This will allow natural gas production from the site to be compressed into LNG for transportation off-site.  There are many uses for LNG, including use as an alternative road fuel and advanced commercial negotiations are currently under way for the offtake of the LNG from the site.  The potential for using this mini LNG technology elsewhere in the portfolio as a means of monetising stranded gas is something we are actively pursuing and evaluating.

A number of field development studies are in progress aimed at increasing ultimate recovery and reserves and identifying infill well drilling opportunities.

Acquisition of Dart Energy Limited

The acquisition of Dart Energy was completed on 16 October. The integration of all its people and assets is on track.

Progress continues to be made in the disposal process of the non-core assets.

In August, INEOS, the world's fourth largest chemicals company, announced its purchase of a 51% share of the shale section of PEDL 133 licence in the Midland Valley of Scotland.  The other 49% share of the shale section licence was owned by Dart Energy. IGas is operator of the licence.  The area is estimated to contain 4.4 tcf of gas (source: Dart Estimates).

Dart Energy recently won an appeal against a refusal by Wrexham County Borough Council to grant planning permission for a coal bed methane exploration well in Holt, near Wrexham.  The Planning Inspectorate of Wales overturned the Council's decision and allowed the appeal.

Appraisal Assets                                                                                                                                                                                

Following the acquisition of Dart Energy we now have gross funded acreage of 395k. acres and a carried work programme of over US$80m gross for a total of 15 licences funded by Total and GDF.

We operate on behalf of a number of companies including Total, GDF and INEOS.

North West Acreage

In early November, we announced the results from our Barton Moss exploration well.  The well encountered 15 gas bearing coal seams in accordance with the pre-drill prognosis.  The well also encountered a Namurian Shale section, consisting of the Sabden Shale and the Upper and Lower Bowland Shales. Approximately 400 ft of core was recovered, including from the shale section. The analyses indicate Total Organic Carbon of up to 5.72% with an average of ca. 1.9%.  The measured permeabilities are comparatively high for the observed porosities when compared with typical US shale plays. The mineralogy of the Bowland Shales in this area is very comparable with key US plays, notably the Marcellus and Fayetteville, when comparing quartz/clay/carbonate content.

The results of the well are encouraging in respect of the shale potential of the area as they have helped further refine the existing basin models and verify the earlier preliminary prognosis and these results were employed in our 14^th licence round applications.

We spudded the well at Ellesmere Port on Saturday 15 November and we continue drilling.

The 2D seismic acquisition in the North West is now complete.  We are also planning the acquisition of 3D seismic across some of our acreage with a view to submitting applications for multi-well sites in 2015 for drilling and hydraulic fracturing of gas from shale.

East Midlands Acreage

3D seismic acquisition, on behalf of our partners, was completed in the period and has now been interpreted.  The results from this analysis are being used to refine our site selection with a view to a well being drilled in 2015, subject to timely receipt of necessary permits and planning consent.

We submitted applications for the 14^th onshore licensing round on 28 October, with Partners, and in our own right. We have applied for a number of licences across a number of key basins.

Community and Industry Initiatives

As a further extension of our community engagement in June, we launched a new community-facing website www.igas-engage.co.ukwhich gives details of our exploration sites.

We have now launched the 2015 round of our IGas Energy Community Fund. This independently administered fund was established to make a valuable contribution to the communities where we operate.  We have extended this year's fund to include a number of the existing Dart sites.  Over the past few years we have been able to help a significant number of local groups, who are making a real difference by running pioneering projects in their neighbourhoods.

In early September, IGas was involved in an initiative launched by UKOOG, the representative body for the UK onshore oil and gas industry, called "Let's Talk About Shale" (www.letstalkaboutshale.com) aimed at encouraging people to ask questions about natural gas from shale.

The campaign which was piloted in Blackpool and Preston in the North West and Lincoln and Worksop in the East Midlands, is now in the process of having the questions answered by third party experts, including leading academics. In addition, promotional events took place in town centres where the public submitted their questions to the "Let's Talk About Shale" digi-van.  Local clubs and community groups are also being offered the chance to discuss the subject and ask questions of independent local speakers.

Government support for the onshore oil and gas industry is clear, with Energy Minister Matthew Hancock recently announcing a £1.5 million initiative to establish a National College for the industry.  Jointly funded by the Department for Business, Innovation and Skills and the industry, the National College will draw together a number of leading education and training institutions and industrial partners to deliver training programmes which will meet the onshore industry's future skills needs and help the UK to become an international centre of excellence for onshore operations.  The National College will operate a 'hub-and-spokes' model, and the headquarters will be at Blackpool and The Fylde College.  A number of other leading institutions will be participating including University of Chester, Weir Group in association with the University of Strathclyde, Redcar and Cleveland College, and Highbury College Portsmouth.

Financial Review

The first six months of the year have been another busy period for the Group including the announcement of the acquisition of Dart Energy.  This acquisition completed on 16 October 2014 on a share for share exchange basis with the issue of 89,997,626 Ordinary IGas Shares of 10p each to Dart Energy shareholders.  With the timing of completion of the acquisition being post the balance sheet date, the results presented for the six month period do not include any results from the Dart Group.

The Group is protected to a material degree against short term oil price volatility. Over the six months to 31 March 2015, 367,000 barrels are hedged using options with a strike price of US$90 per barrel and for the six months to 30 September 2015, 150,000 barrels of production are hedged using zero-cost collars. Those collars protect against downside risk at a blended rate of US$82 per barrel, with a maximum average payment of US$12 per barrel in that period.

Income statement

The Group recognised revenues of £34.5m in the period (2013: £36.2m). Group production in the period was 489,389 barrels of oil, with ca. 7,730 Mwh of electricity sold, which together represents an average of 2,766 boepd (2013: 2,704 boepd). Revenues for the period also included £4.5m (2013: £3.4m) relating to the sale of third party's oil, the bulk of which is processed through our gathering centre at Holybourne in the Weald Basin. The strengthening of sterling to US dollar in comparison to prior periods (2014: US$1.68:£1 vs 2013: US$1.55:£1) was the principal reason for the reduction in revenue.

The Group uses zero cost collars. The cash cost to the Group for hedging was £nil in the period (2013: US$2.90 per barrel). The realised price per barrel pre and post hedge averaged £62.9 (US$104.2) (2013: pre-hedge £67.4 (US$104.2) and post hedge £65.6 (US$101.3)).

Cost of sales for the period were £21.9m (2013: £19.8m) including depreciation, depletion and amortisation (D,D&A) of £5.7m (2013: £4.9m), and operating costs of £16.2m (2013: £14.9m).  Operating costs include a £4.2m charge (2013: £3.3m) in relation to processing third party oil, an increase of £0.9m from the comparative period due to the increased number of barrels purchased and processed by us from third parties.  The contribution received from processing this third party oil was £0.4m.  Excluding the costs of processing third party oil, operating costs increased by £1.3m on prior period of which £1.0m relates to the increased costs relating to Caithness, which was acquired by the Group on 6 December 2013.

Operating costs per barrel of oil equivalent were £22.8 per barrel, excluding the third party costs (2013: £21.8 per barrel).

Adjusted EBITDA¹ in the period was £14.8m (2013: £17.3m).  Gross profit of £12.5m was recognised in the period (2013: £16.4m).  Administrative costs increased by £0.3m to £4.4m (2013: £4.1m) principally due to the continued investment we have made in our subsurface team.

Net back per boe (on an Income Statement basis)² was US$51.5 (£30.7), (2013: US$57.5 (£37.2)) and on a pre SG&A basis was US$66.2 (£39.5) (2013: US$70.3 (£45.5)).

Net finance costs were £6.2m in the period (2013: £6.2m), including interest on borrowings of £6.1m (2013: £5.9m), gain on fair value of warrants £2.4m (2013: loss of £5.3m) and net foreign exchange losses of £2.3m (2013: gains of £5.4m).

Cash flow

Net cash generated from operating activities in the period amounted to £12.4m (2013: £9.3m). The prior period amount included a payment of taxation of £3.0m which related to tax payable for the Star group for the period to 31 December 2011. The Group expended £5.3m across its asset base in the period (2013: £4.3m), of which £2.3m was invested in the conventional assets, where we continue to see the benefits of this investment in our current production levels.

IGas repaid £2.5m (US$4.1m) of principal on borrowings to bondholders in the period in accordance with the terms of the bonds (2013: £2.7m (USD$4.1m)), which represents a repayment of 2.5% of the original principal amount of the secured bonds. IGas paid £5.6m (US$9.3m) in interest (2013: £5.5m (US$8.3m)). Cash and cash equivalents were £29.1m at the period end (2013: £15.4m).

¹Adjusted EBITDA relates to earnings before gains/(losses) on oil price derivatives, net finance costs, tax, depletion, depreciation and amortisation, acquisition costs and IFRS 2 charges

²Net back per boe on an Income Statement basis is realised oil price, less operating costs and SG&A

Balance sheet

The Group's non-current assets were £246.7m at the period end (31 March 2014: £245.7m) with net assets remaining broadly in line at £73.7m (31 March 2014: £74.3m).

Net current assets improved by £4.9m to £23.2m, which continues to include, for technical accounting reasons under IAS39, a current liability of £3.3m (31 March 2014: £6.8m) in relation to the Company's outstanding warrants which, if exercised, would result in a nil or positive cash impact for the Company.

Net current assets include a derivative financial asset in respect of the Group's zero cost collars of £0.2m (31 March 2014: liability of £0.1m).  The gain of £0.3m in the six months ended 30 September 2014 was recognised in the income statement.

Net debt, being borrowings less cash, at the period end amounted to £80.8m (31 March 2014: £80.4m).

Principal Risks and Uncertainties

The Group constantly monitors the Group's risk exposures and management reports to the Audit Committee and the Board on a regular basis.  The Audit Committee receives and reviews these reports and focuses on ensuring that the effective systems of internal financial and non-financial controls, including the management of risk, are maintained.

The principal risks for the Group remain as previously detailed on page 25 of the 2013-2014 Annual Report and Accounts and can be summarised as:

·   Planning, environmental, licensing and other permitting risks associated with its operations and, in particular, with drilling and production operations

·   Risks associated with geological uncertainty

·   Market price risk through variations in the wholesale price of oil in the context of the production from oil fields it owns and operates

·   Market price risk through variations in the wholesale price of gas and electricity in the context of its future unconventional production volumes

·   Exchange rate risk through both its major source of revenue and its major borrowings being denominated in US$

·   Liquidity risk

·   Capital risk resulting from its capital structure

·   Political risk

·   A variety of other risks including those related to:

   -    competition;

      -    key personnel;

      -    litigation.