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Shale gas: Beyond North Sea oil

Drilling for gas in shale formation has started again in the UK, but there are limited ways for UK investors to play the sector - for now.

Garry white employee

by
Garry White

in Features

03.12.2013

Energy prices in the US are significantly lower than in the UK because of the development of shale gas. Last month, the International Energy Agency said that this cheap energy would boost US manufacturing jobs, reinforcing the US’s economic edge over Europe and Asia for the next two decades.

As the recent debate demonstrates, the UK really needs cheap energy. This is something that a shale gas revolution in the UK could provide. It is reckoned that the Bowland shale formation, deep under the North West of England, could contain 172 trillion cubic feet of gas. Just 10% of this would be enough to meet the UK’s energy needs for six years.

The UK is making small steps in the process of shale gas extraction, but the process is controversial. One of the few listed UK players in the sector, Aim-listed iGas, started exploratory drilling at Barton Moss, near Manchester a few days ago to see if it can exploit gas trapped in the Bowland Shale.

The process of “fracking” involves fracturing rock formation by pumping water at high pressure through rock to make it porous. Sand and chemicals are included to keep the holes open and let the gas flow. The drilling near Manchester is just an exploratory well, with no fracking expected to take place, but it has still led to protests.

iGas has a market capitalisation of just £208m and it is at a very early stage in its plans. There are likely to be substantial fundraising in order for it to exploit any discoveries and the company does not even have a permit to frack at the moment, so the shares represent a very high-risk play on the sector. On the plus side, the company has revenues and profits generated from oil production, so it is not a pure explorer. 

There are, however, some larger UK companies that offer indirect exposure to the shale gas sector. The most significant of these is Weir Group, the Scottish-based manufacturer of pumps and valves used in the extraction of gas.

Weir recently issued a profit warning. Drilling for shale gas in the US has slowed over the last few years because low gas prices caused by the glut of gas made it uneconomic. Weir also makes equipment for the mining and oil and gas sector, when spending is being reigned in. This has led to Weir being one of the most shorted shares in the FTSE 100 for quite some time.

Another way to play UK shale gas is through Centrica, the owner of British Gas. In June, Centrica took a 25% stake in Cuadrilla, the privately owned company that is the only company to have fracked in the UK. Drilling earlier in the summer at Balcombe in East Sussex was controversial with protestors from all over the UK descending on the site.

Centrica has wider problems, however, with the group recently issuing a profit warnings citing worsening margin pressure in Centrica’s North American downstream division. The headwinds in the UK business on pricing are also causing some investors to worry about future cash returns.

So, investors wishing to play unconventional gas in the UK have few choices. However, should Cuadrilla and iGas demonstrate that gas can be commercially exploited then many other players are likely to enter this fledgling industry. Investors should keep an eye on this space.

Nothing on this website should be construed as personal advice based on your circumstances.  No news or research item is a personal recommendation to deal

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