A North Sea firm that won backing from US billionaire Warren Buffett for a pioneering field development has seen its shares plunge 40 per cent after it highlighted the impact of the steep fall in gas price since last year.
IOG said the market environment has become increasingly challenging after seeing the price slump since August, amid mild weather conditions and concerns about the outlook for the global economy.
“The Company has come under increased pressure from severe gas market volatility,” said IOG chief executive Rupert Newall, who noted the relevant UK gas price had fallen by over 85% in the last 10 months.
IOG warned that the resulting fall in income had left it likely to breach one or more of the conditions set by lenders. It said firms faced great uncertainty about what will happen to gas prices in coming months.
The update underlines the scale of the change in market conditions seen since last summer.
Following a series of operational setbacks for IOG, the update will likely be regarded with concern in the industry.
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IOG shot to prominence with a plan to start production from a range of gas finds that had been left undeveloped by other firms, which had concluded they were uneconomic.
The company achieved a coup in 2019 when Mr Buffett’s CalEnergy Resources bought into the acreage concerned.
The deal provided a boost for the North Sea regulator’s efforts to ensure the UK maximises the potential of the resources held in the hundreds of finds that have been left idle in the area.
Industry leaders have claimed that firms will slash investment in the North Sea following the introduction of the windfall tax last year.
IOG’s faith appeared to be vindicated after it started production from the Blythe and Elgood fields in March last year in time to benefit from the surge in gas prices that followed the launch of Russia’s full scale invasion of Ukraine the preceding month.
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IOG got an average 201.4p per therm for its gas last year.
The company noted yesterday that the relevant gas price had fallen to 64p per therm on Tuesday.
Analysts have noted the impact on prices of moves by countries in Europe to reduce reliance on Russian supplies and fears about the risk of a slowdown in the global economy as central banks battle inflation.
IOG cautioned: “The recent substantial further falls in gas prices means the Company is now likely to breach one or more of the covenants under the terms of its €100 million (£85m) senior secured bond at the next covenant test date of 30 June 2023.”
The bond is due for repayment in September 2024.
Mr Newall said IOG has initiated constructive discussions with an ad-hoc group of its largest bondholders around potential short and longer-term solutions. The IOG board views the talks as constructive to date.
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IOG has suffered operational setbacks in recent months.
It said yesterday that work on a second well on the Blythe field had been delayed by a well control event. The H2 well has produced gas at a lower rate than expected.
In October IOG said Andrew Hockey had decided to retire as chief executive with immediate effect. The announcement came soon after the company cut estimates of the amount of gas it would recover from Blythe and Elgood following production issues. Mr Newall took charge that month.
The company has suffered disappointments in its efforts to develop the Southwark field.
IOG lost £28m in 2022 after writing £52m off the value of its assets. It generated around £80m sales revenues. Production costs averaged 13.9p per therm.
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The company won a boost in January when Cal Energy Resources teamed up with it to bid for more North Sea exploration acreage.
Shares in IOG closed down 2.8p at 3.91p yesterday, leaving the firm with a stock market capitalisation of around £20m.
The shares sold for 37.6p in January last year.
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