Gamble of the week: UK gas producer

Alkane Energy, the UK's leading coal methane producer, owns licences to convert the noxious gas from abandoned mines in Yorkshire, the East Midlands and Wales into power using transportable generators. This is becoming more and more valuable. Its equipment sits on top of scarce energy stores that can be turned on or off as the country's electricity demand fluctuates throughout the day.

Alkane has already secured contracts with GDF Suez and National Grid, where it is effectively paid a retainer to do nothing other than wait for a spike in consumption or a loss of output. For every 8MW of installed wind power, it is estimated the grid needs about 1MW of standby facilities. The income from this is complemented by non-peak sales.

Prices could soon be edging north. According to Merrill Lynch, gas demand could soar next winter. And Britain is in danger of being cut off from imported liquefied natural gas (LNG): in 2011, this accounted for 25% of the country's usage, but due to rising demand, particularly from Asia, exacerbated by the shutdown of nuclear plants after the Fukushima disaster in Japan, these imports are now are being re-directed to the Far East.

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One longer-term challenge facing Alkane is that there are only a finite number of suitable locations where it can install its gas-to-electricity converters. The group is therefore branching out into other areas where its technology can be deployed. It has already established a biogas plant in Perth, Scotland, with TEG, and brought in an experienced partner (Aberdeen Drilling) to help it exploit its onshore gas resources.

Alkane Energy (AIM: ALK)

In February, the company announced the £5.73m acquisition of rival Greenpark. This deal triples the firm's gas standby capacity and bumps up its gas reserves. The transaction is set to complete in April, and will be funded by extending existing bank facilities and a £2.0m convertible loan. That will push proforma net debt to £11.8m, secured against tangible assets of around £28.7m (25p a share).

Daniel Stewart expects 2012 turnover and underlying earnings per share of £15.2m and 2.7p respectively, rising to £17.1m and 3.3p in 2013. I rate Alkane on a forward EBITDA multiple of seven, which, adjusted for debt, gives a fair value of 33p a share. Risks include electricity price volatility and its limited gas reserves, but the firm's board has already demonstrated it can unlock new income streams.