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Stock pick for 2022: IOG
Shares expects 2022 to be a breakthrough year for North Sea gas play IOG (IOG:AIM). Production should commence imminently of natural gas from its Saturn Banks project in the Southern North Sea.
This production is coming on stream at a time of exceptionally high gas prices and, despite a strong run for the shares in 2021, they do not yet fully reflect the company’s near-term potential.
Based on forecasts from FinnCap, IOG should be in line to generate free cash flow of £71.8 million in 2022, or a little under half the current market valuation of the firm.
The cash generated will be used to progress the phase one development of Saturn Banks which includes the Blythe and Elgood fields, due on stream imminently, and the Southwark field where the company is in the process of carrying out development drilling. The second phase will involve the Goddard, Nailsworth and Elland fields.
IOG has 50% ownership and is operator of these assets which combined encompass 76 million barrels of oil equivalent of proved and probable reserves and contingent resources.
Significantly it owns and has recommissioned the infrastructure required to produce this gas, including the Saturn Banks pipeline and Saturn Banks reception facilities, which are part of the Bacton gas terminal on the Norfolk coast.
The medium to long-term strategy for IOG is likely to involve adding new developments which can use its existing infrastructure.
Once development drilling has completed on the Southwark field, with first output expected by the middle of 2022, the same rig will be used to drill the Goddard and Kelham North/Central appraisal wells which could act as a further catalyst for the shares.
Significantly, IOG is expected to have one of the lowest carbon emissions profiles in the industry; the company has estimated lifetime Scope 1 and 2 average emission intensity at 3.97 kg CO2e/boe (kilogrammes of carbon dioxide per barrel of oil equivalent) for phase one of Saturn Banks, compared to the North Sea average of 20.2 kg CO2e/boe.
One risk for investors to weigh is a €100 million bond due to mature in September 2024. This has a coupon of the Euro Interbank Offered Rate plus 9.5%, paid quarterly. However, the company has flagged an opportunity to refinance this debt at the end of the year, which would reduce borrowing costs.