AJ Lucas raises $20m to resume exploration now UK freeze on hydraulic fracturing is over

Four working days after flagging the UK’s decision to lift the moratorium on hydraulic fracturing, introduced in November 2019, AJ Lucas (ASX: AJL) entered into a trading halt ahead of an expected capital raising.

Resumption of trading tomorrow is expected to coincide with revelations that the drilling services and gas exploration company is raising $19.7m via an (institutional) share placement.

The company is offering new shares at 11¢ each, a 27% discount to the last close and 39.3% lower than the 15-day volume weighted average price.

Back to business

Proceeds will be used to capitalise on the 9 September decision by UK prime minister Liz Truss to abandon the three year ban on hydraulic fracturing for shale gas as the country seeks to put its foot on energy supply.

Lifting the moratorium is expected to help the shale industry unlock UK onshore natural gas in quantities sufficient to meet the UK’s needs for decades to come.

Cuadrilla Resources

To the uninitiated, the little-known small cap ($185m) owns 96% of UK-based shale gas explorer and producer Cuadrilla Resources which focused on discovering and recovering natural resources, primarily natural gas, from shale rock.

Established in the UK in 2007, the privately-owned British exploration and production company has onshore exploration licences in the North and South of the UK.

However, the operation has been on ice since the UK’s hydraulic fracturing ban was introduced.

Temporarily plugged and suspended until at least the end of June 2023, Cuadrilla’s two wells are the only horizontal wells drilled and hydraulically fractured into UK shale rock.

High-quality natural gas resource

The wells were drilled into the Bowland Shale to vertical depths of approximately 2.25km and onwards horizontally for a further 0.75km each through the shale.

Fracturing and flow testing of each well has confirmed the presence of a high-quality natural gas resource, which flowed to surface from the underlying shale.

However, seismicity induced during the fracturing process, above the UK regulatory limit of just 0.5 on the Richter scale, meant that neither well could be fully fractured, or flow-tested, to properly assess how much gas might be commercially produced.

Community dividend

Meantime, the gas resource that Cuadrilla’s shale exploration wells have discovered remains in-situ and available to be further appraised and produced.

While light on specifics, Cuadrilla plans to deliver a portion of all shale gas revenue to local residents as a community dividend.

The AJ Lucas share price is up 278% in 12 months and virtually doubled from $0.10 early September to $0.20 mid-September, before bouncing back to around $0.15.

Consensus does not cover this stock.

Based on Morningstar’s fair value of $0.33 the stock appears to be significantly undervalued.

AJ Lucas reported FY22 earnings (EBITDA) of $18m for the year ended 30 June 2022, down -13.9% on the previous year.

The company had $3.1m cash, $110.1m debt and $33.1m 12-month liquidity before the capital raising.

AJ Lucas share price snapshot.