AJ Lucas Group Ltd (AX:AJL) offers investors exposure to the most advanced UK shale appraisal programme in the UK. Current activity is focused on a drilling campaign at Preston New Road where the company has approval to drill and test up to four horizontal wells. Prior to appraisal, which is aimed at reducing technical and economic uncertainty, we utilise a probabilistic approach to valuation estimating a 67% chance of commercial success for UK shale (NPV15 >0) with a net P50 risked value of A$0.92/share. At a group level, incorporating AJL’s operating business units and net debt, we derive a P50 (mid-case) valuation of A$0.86/share.
De-risking UK Bowland Basin shale acreage
AJ Lucas has interest in 256,000 net shale acres, and is currently participating in the drilling and completion of up to four horizontal wells at the Cuadrilla operated Preston New Road (PNR) site. Initial results from PNR are expected in Q418, with potential to be followed by an extended well test during which produced gas is sold in to the local gas grid. Whilst there is significant uncertainty around productivity, Cuadrilla is confident that results from the planned c 1km horizontal will exceed those of the nearby Preese-Hall 1 where gas flowed from the Bowland at 400-500mscfd in 2011 from three vertical frac stages. Consultancy, Anderson Thompson, has constructed probabilistic-type curves for the Bowland using US analogue and core data, implying that a mid-case EUR of 6.5bcf and 30-day IP rate of c.15mmscfd (Edison interpretation from published data) is achievable from a 2.5km lateral. Confidence in our valuation will increase once a type curve (initial production rate, decline rate and gas recovery) has been established.
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