Cuadrilla becomes the first UK operator to have been awarded final consent to hydraulically fracture an onshore horizontal shale exploration well in the UK. On 24 July 2018, the Department for Business, Energy and Industrial Strategy awarded Cuadrilla consent to fracture the first of two horizontal wells at Preston New Road (PNR) well site. The company will now apply for consent to fracture the second of two wells drilled at PNR. Cuadrilla has previously indicated that initial results from a 90-day flow test are expected in Q418. The valuation of UK shale assets remains uncertain; however, our recent analysis indicates a 67% chance of commercial success (NPV15>0), which appears to be materially higher than current market expectations suggested by the valuations of listed small/mid-caps including AJL, IGAS and Egdon. Our current P50 valuation of AJL stands at $0.86/share.
UK shale valuation – a probabilistic approach
Given current uncertainty around Bowland shale type curves, well costs, rig availability and gas prices, we used a probabilistic approach when determining the likelihood of commercial success for UK shale valuation. This analysis indicates a commercial success of 67% (NPV15 >0), and a net risked P50 valuation of A$690m or $0.92/share (after assumed 50% value dilution through development farm-out). This equates to a unit value of US$2,142/acre. Key sensitivities include initial production rate, estimated ultimate recovery, gas price and well cost. Our P50 (mid-case) group valuation for AJL stands at $0.86/share including net debt and operating business units.
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