Infrastrata Plc is an AIM listed company who own 100% of Islandmagee Storage Ltd (ISML) which holds the strategic gas storage project in County Antrim, Northern Ireland. The project commands local, national and international importance evidenced by the backing of UK and EU governments detailed below.
Ignoring for a moment the strategic importance of the project, with a market capitalisation of c£4m at the time of writing versus a substantial cash balance estimated to be c£2.4m*, the points below illustrate why this company is, in the authors view, worth the time to dig a little deeper:
- The company has undergone a significant turnaround in the last few months by becoming strategically financed to deliver the Front End Engineering and Design (FEED) elements which will prove up the project and secure completion of project financing.
- Potential for no more dilution for shareholders from capital raises for G&A or, more importantly, construction of the project
- Project capex has been indicated as non dilutive which is intended to comprise of 2/3rds debt (where the company has been preapproved for the UK Guarantee Scheme) and 1/3rd project level equity which would mean issuing shares in the ISML subsidiary, not Infrastrata Plc
- Warrant exercises and contractor loans can provide incremental amounts of seed capital to draw down the remaining EU grant funding which becomes available as key milestones are met along the path of completing the FEED and commercialisation of the project
- Industry leading contractors / Global leaders in their field have been appointed
- Costain – £1.7b revenue in 2017, to complete above ground FEED work
- DEEP.KBB – aka Sclumberger, to complete below ground FEED work
- CBRE – Global leader in commercial property retained to advise on project level equity investment. Worth noting CBRE manage a £100m Northern Ireland investment fund created specifically to invest in low carbon energy infrastructure and commercial property
- WPS – One of the largest professional services groups globally & an industry leader in Salt Cavern Storage projects
- Compelling economics which are expected to grow significantly
- Low market cap £4m vs historic project NPV of £67 million based on 20 years project life
- Management expectation of a 40+ year project life
- Phased development potential with significant reduction anticipated on c£300m initial capital expenditure
- Potential to further increase economics via EU Grant funding for construction
- Well financed and scheduled to deliver FEED in December 2018
- Management warrants at 1p exercise of which are linked to value driving events where the first tranche (1/3rd) become exercisable on completion of FEED
- The Board of Directors has been strengthened to reflect the importance of the project and the companies seriousness to deliver
- John Wood – a well respected Oil & Gas industry veteran has joined the board as Chief Operating Officer and is in charge of managing all aspects of the FEED. John also bought a shareholding equivalent to 1.49% of company.
- Andy Duncan joined the board as Chief financial officer
- Strong local, national and european government support:
- UK Government Guarantee Scheme backing 100% of the principal and interest payments of any project finance debt
- European Project of Common Interest which enabled grant funding for Development (accessed) & possibility for grant funding for Construction
- EU Grant funding support €4m, €2.4 remains to be drawn
- Ideally situated to make use of the SNIP (Scotland Northern Ireland pipeline) for Gas trading & fast access to supplies / storage across the UK
- Literally situated next door to Ballylumford Gas fired power station
- Obvious synergies for Gas storage and supply
- Not so obvious that a deep water jetty exists here where coal was historically imported. This jetty can be used for Liquid Natural Gas (LNG) imports which can then be vaporised and stored at Islandmagee thus significantly increasing safety vs storing LNG on land and reducing cost of storing LNG at sea.
- The project is sorely needed – Islandmagee will supply 25% of UK gas storage requirements. After the closure of Rough the UK has only 2% of its annual gas demand covered by storage vs 30% of mainland european counterparts
- The front end engineering and design (FEED) is a key value driver equivalent to a bankable feasibility study. Infrastrata indicate all on track for completion December 2018.
- Current economics indicate a perfect fit for Pension funds and Infrastructure funds (Note CBRE fund above) given long term guaranteed returns on the basis of UK Guarantee scheme who want to see c10% rate of return.
- Project of huge strategic importance to UK energy security in the wake of a move towards colder weather conditions aka Beast From The East, dependence on Russian imports given recent hostilities and also European imports given uncertainty about tariffs etc in light of Brexit.
* The cash balance of c£2.4m is estimated based on the £375k placing in January + £925k from the SI Capital strategic investment + 1.6m euro of grant monies / c£1.4m = c£2.8m. Minus c£400k for G&A & recent activity
Energy security is a serious issue. With the Beast from the East still fresh in people’s minds, and the increased air time that gas supply issues have had where the UK had to terminate supplies to industry to keep the lights on at home, the importance of the Gas energy infrastructure will mean more to investors than it may have done previously. Infrastrata offers an investment into this sector of significant strategic importance to the UK via it’s sole project, the Islandmagee gas storage facility (the “Project”). The Project is a proposed underground salt cavern gas storage facility located on Islandmagee in County Antrim, Northern Ireland and management believe that it will be the largest gas storage facility in the UK once operational.
Very real possibility of no further dilution for shareholders
Infrastrata currently have a substantial estimated cash position of c£2.4m which has been achieved by the most recent placing and EU grant drawdown. It is fair to say that the company has been mired historically by discounted placings and this has rightly caused many investors to disconnect from the strategically important story that is Islandmagee. However, the last equity raise was key to accessing EU grant monies and completion of the FEED; Infrastrata now finds itself at the start of it’s transformational journey.
Another, perhaps overlooked, major achievement by the Company was obtaining the status of an EU Project of Common Interest (“PCI”) for the Islandmagee gas storage project which meant that the Project qualified for an EU Connecting Europe Grant facility of up to €4.024m to cover 50% of the FEED costs. This grant is accessible on the basis that Infrastrata obtains matched funding from other sources and meets certain milestones.
Under the terms of the EU Grant, certain activity milestones are expected to be met, including completion of the FEED engineering report by 28 September 2018 and completion of the FEED by 20 December 2018. These milestones provide clear catalysts for progress for Infrastrata and are big steps towards the commercialisation of the Project.
It’s been a shame so much dilution has been imposed on shareholders but the author, at least, can envision a future where no more top co placings are required given a bit of luck and fair wind behind the share price where the following criteria are met:
- £925k comes in from 0.48p warrants (qualifying for matched funding from EU Grant)
- £375k comes in from 0.6p warrants (also qualifying for matched funding from EU Grant)
- Balance of current secured EU Grant facility of €2.4m (£2.12m) to be drawn down on a matched basis once the FEED is complete
- Contractor loans of up to £1.1m come to fruition (mentioned in rns dated 22 Dec 17)
- Costain have deep pockets and had revenue of £1.7bn (for y/eDec 2017)
- DEEP.KBB are owned by Schlumberger who also have very deep pockets
- Government guarantee scheme debt is available, note the company has already been pre approved for this scheme which means that any lender has a guarantee for 100% of the principal loan amount and interest that they are owed.
- The company has received expressions of interest from a number of parties who are interested in taking substantial equity stakes in the project at ISML project level which is non dilutive to Infrastrata shareholders There may potentially be new interested parties yet to be declared. This is reinforced in the recent interview the company did with LSE.
Further funds of £300k will be unlocked via 30m director share options which are exercisable at 1p and would also attract matched EU grant funding. These are in line with key milestones achieved by the directors and are exercisable in three tranches:
- One third at FEED completion
- One third at start of construction following a successful conclusion of Financial Investment Decision (FID) and
- One third upon the date of first gas stored at the Project.
The options become exercisable immediately In the event of a sale of Infrastrata whereby the Project is subject to the sale and also in customary “good leaver” circumstances.
The Project and Commercialisation
The Islandmagee gas storage Project is a 500 million cubic metre underground natural gas storage facility consisting of 8 salt caverns. The storage caverns will be developed in a natural salt structure below the seabed and will enable gas to be delivered, stored and then returned to the UK’s national transmission system.
Each Gas storage chamber will be situated 1km underground and will measure 200m tall and 80m diameter. It will be situated adjacent to the Scotland Northern Ireland (gas) Pipeline (SNIP) and the Moyle 500 Megawatt Electricity Interconnector.
The storage facility will be able to inject gas very quickly into the pipeline which makes the Project attractive to gas traders.
Currently management are assessing the following routes to commercialisation which are not necessarily mutually exclusive:
- Letting caverns on a long-term arrangement to a gas trading company or companies;
- Letting caverns to the Government to ensure it has a strategic reserve supply of gas in storage to meet demand spikes in periods of high demand; or
- For the Project’s operator to purchase and trade gas via the facility as principal.
From the above it is apparent that there is interest for letting the caverns to the Government and other tenants such as gas operators and traders. Infrastrata has at this stage discounted the possibility of purchasing and trading gas from the facility as the focus is currently on financing and constructing the Project. The author believes one early route to revenue would be from advance letting of caverns to tenants. This is echoed by management who said that it may be likely to see pre-letting agreements and possibly pre-sale agreements as early as this year. Trading gas is however another revenue stream available to the company at a later date.
What is clear is that Infrastrata has multiple routes to commercialisation for it’s gas storage Project and management are actively pursuing the best way to deliver value from the facility.
Comments in the Half Year report, Rns dated 30 April states that:
“Detailed negotiations have been entered into and are ongoing with major gas storage and trading companies with a view to achieving forward commitments to utilise the Islandmagee storage facility once it has been constructed, and we are hopeful that these negotiations will progress to a conclusion in principle prior to the conclusion of the FEED process.”
Infrastrata has successfully negotiated 100% ownership of the Islandmagee gas storage project company (“IMSL”) putting them firmly in the driving seat for negotiating the project finance terms and commercialisation.
Management have renewed focus on cost management and in a recent Share Views interview Adrian Pocock describes how he envisages Infrastrata as a “lean, mean and potentially very profitable” project.
The current Project economics are based on the  Baringa model and allow for a 20 year Project life which yields an NPV of £67m with a robust Internal rate of return (IRR) of 12% which is a robust return for a typical infrastructure project. Current capital expenditure is estimated at c£300m upfront cost.
However, management believe that there is significant scope to improve these numbers and are exploring the following scenarios:
- Reducing upfront capex;
- Phasing upfront capex- by construction of the Project in 2 cavern increments. This allows both debt drawdowns to match costs (hence reducing debt costs) and revenues to be received earlier;
- Increasing the operational life of the Project from 20 years to 40 years; and
- Assessing the possibility of obtaining more grant finance as the Project is classed as a “Project of Common Interest” by the EU
These are enhancements that individually could have a significant impact on the existing NPV of £67m but a combination of some or all of the above would mean that the economics of the Project would be greatly increased making the Project attractive to a wider reach of Project level finance providers. News is expected to come on these developments to the economics as they occur and this adds an exciting dimension to the share price upside.
It becomes apparent that a lot of work has been ongoing behind the scenes and management’s active engagement with the Government has paid off. The Project is classed as a Project of UK National Importance and has pre qualified for the UK Government Guarantee Scheme as it is an eligible UK infrastructure Project. Under this Scheme the debt proportion of the Project Finance will benefit from “unconditional and irrevocable financial guarantee of scheduled principal and interest” from the Government.
This clearly highlights the value of Islandmagee gas storage to the Government and makes the Project Finance debt much more accessible to Infrastrata as the Guarantee renders the Project an attractive and safe proposition to any lender.
“The Company has opened dialogues with a number of potential providers of debt finance for the Project construction. These discussions are expected to gather momentum as the FEED engineering progresses and further definition is produced on the budget and scope of the next phase of the Project.”
Infrastrata currently offers an attractive long term government backed proposition which will attract investors such as infrastructure specialist funds and pension funds
Backdrop and History
Gas plays an important role in the UK energy mix. Around 25% of the UK’s electricity is generated by gas fired power stations. The end of unabated coal fired power stations and a move to be greener will result in a shift to gas as the primary source of fuel for electricity generation.
Currently 43% of our gas supply comes from domestic production. However with declining production in the North Sea, the U.K has become increasingly reliant on gas imports particularly in peak demand periods. As a result the U.K imports gas from the following sources:
c44% gas from Europe and Norway
c13% tankers of Liquified Natural Gas from locations such as Qatar
The U.K currently generates electricity from gas, coal, nuclear and renewables. With the latter set to take a greater share of the energy mix, gas plays a very important part in balancing out the inflexible and intermittent renewable energy sources. Ie. Gas continues to play a vital role in the base load because it is fast switching to account for a sudden drop off in solar or wind that might happen for obvious reasons
Gas storage therefore plays an important role in UK energy supply and security. It provides an important buffer in times of peak demand due to cold spells or if there is disruption to supplies due to technical difficulties. Having storage is also advantageous as it means that the U.K does not have to pay premiums or compete for imported supply in times of high demand and this could make having its own reserves more cost efficient. The Government is keen to support gas storage projects as it is vital from a UK energy security point of view. Back in 2006 Lord Truscott announced £10 billion was to be spent on UK gas storage infrastructure but investment was hindered by concerns over the geological suitability of most projects.. enter Infrastrata..
Add to this that there is a gas fired power station being developed close to Airport Road West in Belfast which is an indication of the move to lower carbon fuel in Ireland. With only 30% of Ireland using gas currently there is a campaign ongoing in Ireland to increase gas utilisation to reduce carbon emissions
The Project will provide over 25% of the U.K’s natural gas storage and will be the only gas storage project being developed on Ireland.
The closure of Rough (due to coming to the end of it’s economical life), the UK’s largest gas storage facility has left an absence in UK gas storage and has prompted concerns on the UK’s reliance on imports especially in the face of Brexit. In the absence of it’s own long term storage solution the UK is dependent on European imports and arguably, after Brexit, on perhaps less favourable terms than before. Furthermore the closure increases the need for LNG imports from Qatar which exposes the UK to some potential political risk.
The Islandmagee Project will consist of 8 salt caverns developed in a natural salt structure below the sea bed and will allow gas to be delivered, stored and then returned to the UK’s national transmission system.
Salt caverns are one of the safest, most environmentally friendly and commercially viable ways of storing large amounts of gas. Salt caverns have proven superior to other storage methods such as aquifers or depleted gas reservoirs as they can provide the highest deliverability in terms of gas injections and withdrawals. This quick cycle can be very useful in times of sudden demand. They are less costly and time consuming than aquifers and whilst more costly than depleted gas reservoirs, the ability to provide several gas withdrawal and injection cycles per year makes them more cost effective overall. Salt caverns also take up less space than depleted gas reservoirs.
Ken Cronin, the chief executive of the onshore gas and oil industry trade body UKOOG, said: “The solution for the UK in the medium term cannot be to transport gas across oceans and continents. The UK needs to ensure that whatever gas replaces that from Rough comes from sources that can deliver the same high levels of environmental and regulatory standards.”
This is a Project of national and international strategic importance and has been recognised as such by the UK Government and the EU.
Infrastrata INFA.L is at the start of a huge turnaround with the foundations laid as evidenced by recent news; 100% ownership,fully funded for the FEED by end of 2018, contractors appointed and in the process of unlocking major value from their 100% owned gas storage Project.
An overlooked point is that this Project could achieve construction without any further dilutive equity raises as the FEED completion unlocks eur 2.4m EU grant monies and there is already substantial interest from potential partners at a Project level. Market cap vs Project NPV gives a compelling upside here and with the following news items to land in the next few weeks the share price may not be around these levels for much longer. Momentum is certainly building here.
Perhaps the upside in share price is more poignant when the following numbers are considered:
Current share price 0.405p = £4.11m
- 1p = £10.14m MCap
- 2p = £20.28m MCap
- 3p = £30.56m MCap
- Updated Project economics based on optimisation of the financial model
- Updated Project economics based on 40 year operational life vs current 20 year
- Potential for industry partners
- Update on negotiations regarding potential tenants
- Non dilutive Project level finance providers
- Debt providers
- Pre sales of storage
- Potential news on additional grant monies
- Q4 18 Tender documentation to be released
- Q1 19 Contractor selection
- Q2 19 Financial Investment Decision point – confirming the decision to proceed
Disclaimer: The authors may hold one or more investments / positions in one or more of the companies / commodities mentioned and therefore this note cannot be viewed as independent research. This note does not constitute investment advice or a recommendation to buy or sell or otherwise engage in any related activity / action with regard to any company or commodity mentioned or any other entity. All information is provided for entertainment purposes only and may be incorrect or outdated.