Shares in IOG PLC (AIM: IOG) declined by 13% following the announcement of first-half revenues that fell short of expectations due to what one city analyst referred to as “a peculiarity in farm-out royalty terms”.
The company’s revenue for the first six months of 2023 amounted to £9.5 million, as the average gas sale prices dropped to £124 per therm from £201.4 per therm (FY 2022).
Simultaneously, gas production volumes decreased to 13.8 million cubic feet per day from 21 million in 2022, as the company grappled with interventions to restore optimal production at the Blythe field.
IOG indicated that it anticipates production volumes to normalize to the range of 20-30 million cubic feet during the latter half of 2023, with the current rate noted at 32 million.
While market analysts expected lower prices and reduced production, the specific terms of IOG’s production royalty contract might not have been fully grasped by investors.
The company explained that under these royalty terms, its share of production revenues diminishes during “periods of declining production and gas prices”. The total royalty payable is capped at £91 million, and to date, the company has paid £16.1 million.
As of June end, IOG held £20.3 million in cash, with £7.3 million being restricted. The company emphasized that optimizing near-term cash flow is a crucial priority.
IOG also mentioned ongoing “constructive discussions” with bondholders concerning the company’s short-term liquidity and long-term capital structure.
Jonathan Wright, an analyst at house broker finnCap, viewed the investor update positively as it affirmed stabilized production within IOG’s anticipated range.
He further noted: “Revenues for the first half of 2023 were lower than expected due to the peculiarities of the joint venture farmout royalty terms. However, guidance for the second half points to a significant recovery in production.”
“Still, IOG has a long way to go. Consistent operational performance coupled with successful debt restructuring is essential for its long-term aspirations.”
At the same time, IOG shares traded at a 13.4% lower value of 3.1p, leading to a company valuation of just under £16.5 million.
As of today’s price, the AIM-quoted share has seen a depreciation of approximately 81% of its value in 2023 thus far.
