Transfer of onshore shale gas business

RNS Number : 9136G

Alkane Energy PLC

13 May 2014

 



13 May 2014

Alkane Energy plc

("Alkane", "the Company" or "the Group")

Transfer of onshore shale gas business and assets for shares

Highlights

·      Transfer of shale assets to Egdon Resources gives Alkane 18% of this newly created Big 3 shale player

·      Alkane's acreage will be progressed by Egdon Resources, one the UK's most respected onshore operators, who are raising funding to take the acreage through the appraisal stages

·      Alkane will remain focussed on growing its core business and retains the rights to all coal gas within its acreage 

Alkane Energy plc (AIM: ALK), the independent gas to power producer, today announces a conditional agreement with Egdon Resources Plc ('Egdon') to transfer Alkane's rights over its shale interests in 10 licence areas to Egdon in exchange for Egdon shares issued to Alkane pro rata based on independent resource estimates.

Alkane has more than 800km2 of acreage under various onshore Petroleum Exploration and Development Licences ("PEDLs"). The Company has been reviewing its options with respect to its shale interests and evaluating the potential in the acreage against the time, resources and development risk. During this review Alkane received a number of proposals and the Board believes that the proposal from Egdon leaves Alkane best placed to benefit from any uplift in shale development while enabling the Group to continue to focus on its core power generation business. 

An independent assessment was carried out on both Alkane and Egdon's shale prospects, following which Alkane agreed to accept an offer of 40,000,000 ordinary shares in Egdon as consideration for the transfer of Alkane's rights over its shale interests in 10 licence areas.This represents approximately 18 per cent. of Egdon's enlarged issued share capital following the issue of these shares to Alkane and the equity fundraising announced by Egdon today. The 40,000,000 Egdon shares are valued at £8m based on Egdon's equity fundraising price of 20 pence per share.  This will be treated as an exceptional profit in Alkane's 2014 accounts after offsetting deal costs and some acreage carrying value.

The enlarged Egdon group will then have a total of 140,176 acres of shale gas prospective acreage under various onshore PEDLs, making it one of the largest UK onshore oil and gas operators. The licence interests will be split on a horizontal axis with Egdon acquiring a 100% interest in the lower interest which contains the shale gas potential and Alkane retaining a 100% interest in the upper interest. The enlarged Egdon group will have a strengthened position to compete in DECC's 14^th Onshore Licensing round.

As a condition of this agreement Egdon have also undertaken a £6.4m Placing with an associated £0.6m Open Offer to existing Egdon shareholders. The purpose of this fundraising is to provide working capital for the enlarged Egdon group to fund exploration and development of its shale gas acreage over the next 3 years allowing the group to work up a number of drill ready prospects.

The transaction remains conditional on an EGM of Egdon shareholders expected to take place on 5 June 2014, and on gaining permitting consent from DECC.

Alkane has entered into a lock-in and orderly market agreement under which Alkane has agreed not to sell any of the Egdon shares, subject to certain limited exemptions, for a period of 12 months from the date of the lock-in agreement, and is subject to orderly marketing provisions for a further period of 12 months. 

Alkane and Egdon have also entered into a relationship agreement pursuant to which (i) Alkane has the right to nominate a director to the Egdon board subject to Alkane maintaining a minimum shareholding of 10 per cent; and (ii) the parties agree to regulate their relationship such that Egdon and its subsidiaries can operate independently of Alkane. It is currently anticipated that the initial Alkane appointee will be Neil O'Brien.  

In addition, Alkane and Egdon have signed a Memorandum of Understanding providing for Alkane to supply engines for Egdon and connectivity to the grid for any gas produced.

This sale of the business and assets to Egdon will allow Alkane to focus on growing its core electricity generation business whilst benefiting from any upside in Egdon's shale gas operations. The UK energy market is likely to see tighter generating margins over the coming years and Alkane is investing in additional supply assets ahead of this potential energy crunch.

Commenting, Neil O'Brien, CEO of Alkane, said:

"Alkane Energy's review highlighted our desire to work with partners who could bring skills, resources and scale to our shale acreage to enhance its value through the development stages.  In addition, we believe the deal with Edgon will create an entity which can powerfully bid for further acreage in the 14^th Onshore Licensing Round.

This is a very important strategic agreement for Alkane. It will enable us to benefit from the potential upside from the development of shale gas in the UK whilst we remain focused on growing our core business. Working in combination, Egdon and Alkane have the scale and expertise to fund the development of shale assets. In addition, through its  shareholding in the enlarged Egdon, Alkane will have an important voice on the board."

For more information please contact:

Alkane Energy plc Neil O'Brien, Chief Executive Officer Steve Goalby, Finance Director	01623 827927
Liberum Clayton Bush Tim Graham	020 3100 2000
VSA Capital Limited Andrew Raca	020 3005 5004
Hudson Sandler Nick Lyon Alex Brennan	020 7796 4133

Background information

Alkane is one of the UK's fastest growing independent power generators. The Company operates mid-sized "gas to power" electricity plants providing both base load and fast response capacity to the grid. Following the acquisition of the Wheldale power response assets, Alkane now has a total of 90MW of installed generating capacity and an electricity grid capacity of 110MW.

Alkane's base load operations, where power is generated 24/7, are centred on a portfolio of coal mine methane ("CMM") sites. Alkane has the UK's leading portfolio of CMM licences, enabling the Company to extract gas from abandoned coal mines.

As CMM declines at any one site, Alkane retains valuable generating capacity and a grid connection which can be redeployed to power response. Power response sites are connected to mains gas and produce electricity at times of high electrical demand through peak running, or in order to balance the electricity grid through participation in the National Grid's short term operating reserve programme ("STOR"). Participants in STOR are paid premium rates when called upon by the Grid to meet temporary supply shortages.  Alkane now operates 43MW of power response on mains gas.

The Group operates from 24 mid-size (up to 10MW) power plants across the UK, 15 CMM only, 6 mains gas only, and 3 using both fuel sources. Alkane uses standard modular reciprocating engines to generate the electricity and sells this power through the electricity network. The engine units and other plant are designed to be flexible and transportable allowing additional capacity to be brought onto growing sites and underutilised plant to be moved to new sites to maximise efficiency.

Alkane has a range of core skills encompassing the entire project development cycle including planning and permitting, sourcing plant and managing the build and commissioning stage. This has enabled Alkane to establish a design, build and operate ("DBO") business for third party clients in the biogas and oil & gas industries.

The Group has more than 800km² of acreage under various onshore Petroleum Exploration and Development Licences ("PEDLs").

The licences which are the subject of the transaction with Egdon include PEDL001, PEDL011, PEDL037, PEDL039, PEDL043, PEDL169 (net 20 per cent), PEDL191, PEDL161-162, PEDL202 and EXL253.

More information is available on our website www.alkane.co.uk 

 

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