The IOG (LSE: IOG) share price shot up by more than 10% on Monday. The oil and gas firm being forced by sanctions to rip up its off-take agreement with Russia’s Gazprom could well be a blessing in disguise.
As an existing shareholder in IOG, I have followed its progress closely in recent months. With western countries worrying about energy security, there’s been a renewed focus on fossil fuels. By the look of it, IOG appears to have the right product coming on stream, in the right location at the right time.
The UK-listed company has been working hard to bring its three new North Sea gas fields into production. Recent announcements indicate that the gas will start pumping this month.
On its own this wouldn’t be enough to persuade me to buy more shares in the company. There was, however, a more important message from management last week that sparked my interest.
As is normal in the fossil fuel industry, IOG put in place agreements for the sale of its gas well in advance of production. BP acquired rights to gas from the Blythe field, but it was Russia’s Gazprom that secured the remaining off-take rights.
Gazprom off-take contracts
With sanctions kicking in over the last fortnight, IOG has been forced to tear up its contract with Gazprom. In a short announcement last week, management broke this news. It also expressed confidence in securing replacement sales agreements.
My view is that this is an understatement. European countries are heavily reliant on the import of Russian gas. I feel that IOG should be able to secure a great deal in the market to replace the Gazprom contract.
Production risks
IOG is in the progress of commissioning its three Phase 1 fields and the gas is due to start flowing later this month.
Not being an expert, I’m not 100% clear about how long gas prices will remain at record levels, but in the short term at least, I would anticipate that the IOG share price will continue to benefit.
But I will be keeping a close eye on company announcements. Gas development is a complex business — particularly in the harsh offshore environment. Any technical delays may cause investors concern and could put downwards pressure on the share price.
There may also be risks in holding this stock for the long term. The current energy crisis will pass and the world will revert to its migration towards low-carbon energy generation. I’m also concerned that the share price may suffer from ‘ethical’ funds shying away from fossil fuel stocks.
A strong partner in Berkshire Hathaway
Yet my overall confidence in IOG is also bolstered by the fact that CalEnergy (an offshoot of Warren Buffett’s Berkshire Hathaway empire) is its joint venture partner in these developments.
With such a strong ally, I take the view that financing is unlikely to be difficult to source. This bodes well for the company’s strong pipeline of further projects in the Thames catchment area.
All things considered, I am confident about the future for IOG. My hope is that future production announcements will bolster the share price and I will be looking to add to my holding in due course.
Fergus Mackintosh holds shares in IOG. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
