The UK may face a looming energy supply shortage from which power producer Alkane looks well set to profit. Industry regulator Ofgem warned just last month that there is a rapidly increasing risk of power shortages by the middle of the decade - heightening fears that the UK could face its first sustained wave of blackouts since the 1970s, in addition to rising power prices.
- Rising power prices
- Decent growth in power generation
- Recent acquisitions
- Blue-sky upside from shale gas
- Debt and convertible bonds
- Share price at all-time high
Poised to profit from this pressing problem is Alkane Energy (ALK), a leading UK power generator with a very specific niche. It captures methane gas by drilling into coal seams at Britain's many abandoned coal mines, then converts that gas into electricity using on-site generators. And the profits it makes by selling that electricity to National Grid (NG.) are impressive. Gross margins for the core power-production business averaged 49 per cent last year.
After acquiring its main competitor in early 2012, Alkane is now the largest producer of coal-mine methane (CMM) in the UK, boasting 17 long-life projects. It also has more than 10 projects in the pipeline that are being progressed to development. Combined with a few lucrative power response sites - where Alkane buys gas wholesale and turns it into electricity during peak demand times, when prices are highest - Alkane expects to generate about 94 gigawatt hours (GWh) of electricity output in the first half of 2013, up from 65 GWh in the same period last year. While this rapid growth rate is likely to slow next year, Alkane plans to add at least a third more power capacity over the coming years. And because of the fixed-cost nature of the business, coupled with forecast price increases, earnings should rise by significantly more than that.
ALKANE ENERGY (ALK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 38p | MARKET VALUE: | £47m | |
| TOUCH: | 37.5-38.5p | 12-MONTH HIGH/LOW: | 41p | 19p |
| FWD DIVIDEND YIELD: | 0.3% | FWD PE RATIO: | 12 | |
| NET ASSET VALUE: | 20p | NET DEBT: | 37% | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 6.6 | 1.37 | 1.92 | nil |
| 2011 | 9.50 | 2.00 | 1.89 | nil |
| 2012 | 14.7 | 2.88 | 2.24 | 0.10 |
| 2013** | tbc | 3.47 | 2.50 | 0.10 |
| 2014** | tbc | 4.55 | 3.25 | 0.11 |
| % change | - | +31 | +30 | +10 |
Normal market size: 3,000 Market makers: 6 Beta: 0.42 *Underlying PBT and EPS figures **Liberum Capital estimates, turnover forecasts to be confirmed following Maltby acquisition | ||||
Admittedly, with the shares near an all-time high some of this upside already looks priced in. But this also reflects very positive trading updates and some exciting acquisitions. Alkane raised £6m in May to buy the coal-mine methane assets of Maltby colliery, which the company has already put into production some five weeks ahead of plan. Yet Liberum calculates fair value for Alkane at around 44p a share for the core business without even taking into account the company's exciting shale gas licences. It does, however, take into account £2m of unsecured bonds that are convertible at a fixed price of 17.5p a share.
Alkane has some 830 square kilometres of onshore gas licences in the UK, about 60 per cent of which are within the prospective Bowland basin, where Cuadrilla Resources and IGas Energy (IGAS) operate. IGas holds licences covering 1,259 square km, by comparison. And while Alkane doesn't plan on immediately exploring their shale gas potential, it might bring in a partner to do so. The company is rumoured to be calculating the potential shale gas resource of its licences and could announce the figures later this year.
