My most recent idea started with a post I noticed on Linkedin about Infostrata. They have the sole rights to Islandmagee, a potential Gas storage facility in Northern Ireland. I saw the CEO lamenting a 16% drop in the share price after a placement which would dilute the existing shares significantly. The drop seems logical enough, but the fact they were willing to swallow such a “bitter pill” prompted me to do a little bit of research.
Natural Gas Price Shocks
Natural Gas is used to heat 80% of British homes, a lack of storage makes the gas price more susceptible to price shocks; as seen this winter when the “within day” gas price hit a 10 year high of 340p/therm compared to an average of 53p/therm.
How Diverse are Gas Supplies?
Ten years ago the North sea provided two thirds of the UKs gas, it now contributes less than half of the UKs gas consumption. Nowadays we have a mixed supply including gas from Norway and an interconnector to mainland Europe via Holland, not to mention LNG from a few other places (including Russia).
With the UK out of the EU any solidarity policies to assist the UK with gas problems are likely to be out the window. During a prolonged cold snap, supply problems could subject prices to even more pronounced increases.
Gas Storage Capacity
Historically the UK has lower gas storage than Europe. With the closure of the UKs largest storage facility – “Rough” – in 2017 , 70% of the existing storage capacity disappeared.
An increase in business rates for gas storage seems to have exacerbated the lack of storage; SSE actually mothballed some of their storage in 2015 due to it being uneconomic. There are also several other projects which haven’t got off the ground since they don’t currently make economic sense.
Unappealing Economics of Gas Storage
Energy security is talked up a lot, but so far the government has taken the strange approach of disincentivising gas storage by increasing the relevant business rates.
Given that there are limited locations suited to gas storage and the high cost and long timeframes for bringing these online, we seem destined for further winters of discontent.
Will Gas Usage Decrease?
To meet emissions targets gas consumption needs to be lowered. The scenarios produced by National Grid show substantial consumption for the next few decades against a backdrop of steadily decreasing UK production.
Russian Gas and LNG Vessels
Russia is touted as another risk factor in all this, given the power that Gazprom wield over the rest of Europe. Russia and the UK aren’t besties at the moment due to suspicions about poisoning expat Russians. The official line is that Russia only supply 1% of the UKs gas… but over 50% of LNG tankers this winter were from Russia. Their recent history in which they cut off gas to Ukraine isn’t very reassuring.
Fracking in the UK: Third Energy, Cuadrillion and IGas
So aside from LNG, Norwegian gas and interconnectors, fracking seems to be getting more press. It seems a pretty bad idea from an environmental standpoint.
Downsides include the potential for minor earthquakes, pollution of groundwater and release of airborne contaminants. You’d have to be pretty desperate (which admittedly the UK probably is) to start scarring pristine countryside in the quest for gas.
At this juncture it’s worth mentioning the Conservative election pledge to push forward with fracking. There are a smattering of companies involved in this area in the UK: Third Energy, Cuadrillion and IGas. IGas being the only listed company from what I could tell. They could see a decent rise at some point in 2018 if their fracking projects make progress although reports seem to indicate that the geology of the current sites may mean it’s uneconomical.
You can also expect a big nimby turnout to complicate any progress. All things considered an investment in fracking seems very too risky a proposition, and not something my inner tree-hugger wants to be supporting.
Natural Gas And A Low Carbon Future
There’s no escaping the need for natural gas as a bridge to a low carbon future. It’s easy to envisage a situation where fracking hasn’t become a reality, and an unexpected interconnector problem, or a gas leak at an LNG plant causes supply issues. Combined with a cold snap and you have the ingredients for a massive price shock.
Enter Infrastrata Stage Left
Infrastrata plan to create seven salt cavern storage chambers off the coast of Ireland. This would add 500million cubic metres (mcm) to the UK gas storage capacity. To put this into context, Centrica’s Rough storage facility was 3310mcm.
Centrica made plenty of money from operating Rough – see excerpt from their 2014 annual report. For the years 2013, 2012 and 2011 Centrica made on average £75million per year profit.
Islandmagee would be roughly a sixth of the size of the Rough storage facility. If we assume Islandmagee can make a similar profit margin that equates to £11million per year. However, salt caverns have higher injection/withdrawal rates which makes it possible to cycle them more than converted oil/gas reservoirs. Assuming three cycles a year would increase profit to £33million. This is without considering that salt caverns are more suited to peak use which would imply better profit margins. To break-even on the build costs of £285 million would take just under nine years.
I’m no expert though and given I’ve just plucked most of my conclusions out of thin air, take them with a large handful of salt. Hopefully more concrete details will be forthcoming from Infrastrata soon.
Infrastrata Annual Reports
I’ve scanned the Infrastrata annual reports for the last 10 years and it’s a litany of delays and missed delivery dates. BP Gas was a partner but pulled out. EU funding has been crucial throughout, but Brexit casts a shadow over that.
More positive news was the board being replaced in June 2017 and a new placement of shares in early 2018 to finance the design phase. This dilution of share capital has prompted a further 16% drop in share price; the shares stand at around 24p down from a high of £14.00 in 2014.
Message boards are filled with forlorn statements form long suffering shareholders with the current market cap under 2 million GBP with the share price at 2p from a high of £14.00 in 2014.
However, I’m hopeful that the Irish government will deem the project of sufficient importance to help push it along if required. The most recent annual report also mentions discussions with traders which could be crucial in getting this project financed.
Everything hinges on the outcome of the Front End Engineering Design (FEED). The production of this was in doubt for a long time but is now guaranteed with EU funds secured.
The results of the FEED report will either send the price plummeting further or rocketing the other way. Bear in mind that even if positive the construction will take another three years to come online. Check out this video from the Gateway project for an idea of the process.
My 5% Punt-Fund
Each year I cordon off 5% of my investment cash for long shots. Infrastrata definitely falls into this category. It’s not a dividend champion or even a robust and healthy company with a few good years behind it. The only way to classify this share is as a medium term punt. I’ll sit on it until the FEED is produced, and then maybe sit on it some more.
My hunch is that the government is going to make Gas Storage a more attractive proposition for industry to enhance energy security and head off future price spikes. Is this a strong enough argument for investing… Maybe not, and that’s why I’m only putting forward half of my punt-fund. There’s limited downside with a pretty big upside potential.