29/06/2023

IPO Profile: EnergyPathways

Raise: Up to £4m

Market cap on listing £10m

Summary: Energy Pathways (EP) is a natural gas development and production company, which plans to list on the UK’s AIM market of the London Stock Exchange in September via a reverse take-over by Dial Square Investments plc.

EP will be raising up to £4m via a primary placing, which will value the company on listing at around £10m. This compares to Optiva Securities’ NPV15 value of £81m. EP is therefore offering significant upside to investors who invest into Energy Pathways at this stage of the company’s development. Its initial focus is on the Marram Gas field in the UK’s Irish Sea, which is a simple, low cost development in shallow water. EP’s broker Optiva Securities is targeting an EBITDA of £89.8m for 2025.  By 2028 Optiva forecasts £167m of Net Assets as against the IPO market cap of £10m.

An Optiva Research Note derives a value for Marram of £81m and a near term target price of 24p, NPV equates to 47p per share. EP intends to develop additional fields in addition to Marram, which would clearly flatter numbers and values currently on the table.

Background To Energy Pathway’s IPO:

There have been clear themes as far as the economy and politics have been concerned, since the war in Ukraine began in February 2022. One of the main ones has been a shock in terms of supply side inflation and energy prices, with this colliding with concerns regarding climate change and the need to race for net zero. This has created a perfect storm centred on energy security, and a battle between those who prefer the status quo, and those who feel we should wean ourselves off fossil fuels, and progressively rely on renewable energy – referred to by some cynics as “unreliables.” However, as things stand, reliability of supply. The problem is that even if we are to deliver energy transition over the next few years, the journey will have to be punctuated by not only existing sources, but new ones if only as a stop gap before the handover to sustainable sources can be made. All of this means that companies like East Irish Sea focused Energy Pathways are critical to UK energy supply, whatever the trajectory of energy policy is in coming years. UK based gas projects will help the UK move towards its zero carbon goals by displacing higher emission and higher cost LNG imports. They also open up the opportunity for long duration energy storage, hydrogen production and flexible power generation – all of which feature in EP’s longer-term strategy as a provider of clean energy solutions for UK.

The Marram Gas Field Opportunity

EP’s flagship asset is the Marram Gas Field in the Irish Sea. This is important to note in contrast to the already mature North Sea, and the way that operationally it is relative low cost, and in shallow water. The 46 BCF gas resource is fully appraised, and there is room for expansion given the way that the East Irish Sea is called to have the potential of up to 2,000 BCF. EP has additional license requestions in progress for another 134 BCF and is hopeful of these being awarded in H2’23. Marram itself can be brought into production in under a year from FID, with the capex for the development close to £70m, nearly three quarters of which has already been secured through a term sheet with lending arm of a Major.  With strong free cash flows in excess of £100m in the first 2 years of production, the project has exceptional rates of return with payback in less than a year.

With the breakeven cost of 35p/therm the economics of Marram are a stand out at current gas prices – and even more so when compared to the forward price curve. This means that the NPV10 of the Marram project equates to 15x the pre-money valuation, not something which one finds around the stock market on a frequent basis currently. If one adds in a board with not only grey hair, but proven experience, and skin in the game, EP looks to be one of the IPOs of 2023, which is in the right place at the right time.