The prospects look good for Prospex Energy
“…The Prospex’s share price has shot up from 1.43p at the beginning of June to more than 3.5p at the time of writing, reflecting a surge in European gas prices which reached a 13-year high last week of 36.90 per megawatt hour…”
Prospex Energy Plc (AIM:PXEN), renamed earlier this year from Prospex Oil and Gas Plc, continues to make quiet progress towards its objective of building a portfolio of revenue generating natural gas plants in Spain and Italy. We suggested looking at the company in our Christmas Oil and Gas stocks to follow article. “…With a share price hovering around 1.90p Prospex is developing a set of assets that bear close scrutiny for those looking for a relatively unheralded value stock…”
Led by Chief Executive Officer & Managing Director Edward Dawson, who formerly managed Peppercoast Petroleum plc and Black Star Petroleum plc, and Non-Executive Chairman Bill Smith, director of Orca Exploration Group (TSXV), Mosaic Capital Corporation (TSXV), PFB Corporation (TSX), and other listed and private companies, Prospex seeks low capex investment gas opportunities that offer potential for transformation through new technologies and processes.
Podere Gallina, Italy
The company has a 17pc interest in the Podere Gallina project in Italy’s Po Valley Basin, a proven hydrocarbon system where more than 5,000 wells have been drilled. The field has 13.4 Bcf P50 reserves, gross contingent resources of 14.1 Bcf (2C), and gross prospective resources of 88.2 Bcf (best estimate).
The project partners’ current focus is bringing Podere Gallina’s Selva Malvezzi natural gas field online next year, in pursuit of an initial daily rate of up to 150,000 cubic metres (5.3 mmscf/d). A fully automated gas plant will be installed at the site of the Podere Maiar well site, which successfully tested in 2018. Prospex is in discussion with potential non-equity funders to meet its €580,000 share of the cost of bringing Selva into production.
The project passed a significant landmark in April when full environmental approval was secured from regulators, paving the way for the grant of a full production licence from the country’s Economic Development Ministry. Preliminary development is currently underway at the site with a view to targeting first production in mid-2022. The plant will be connected to the Italian National Grid by a one-kilometre-long pipeline.
Should Selva begin to produce successfully Podere Gallina offers several follow-up opportunities, including two historic gas producing North Flank and South Flank reservoirs, which geophysical services consultancy CGG Services (UK) Limited estimates have a 60pc to 70pc likelihood of holding gross contingent resources (2C) of 14.1 Bcf. The permit also holds the East Selva, Fondo Perino, Cembalina, and Riccardina prospects, which are estimated to hold aggregate gross prospective resources (best estimate) of 91.5 Bcf.
El Romeral, Spain
Prospex’s other major interest is its 49.9pc stake in the El Romeral integrated natural gas production and power station project in southern Spain. The project encompasses three producing wells with gross 2P reserves of 0.30 Bcf, multiple additional prospects, and an 8.1 MW power station with a contract in place to supply General Electric.
All three wells are late life, currently restricting the power plant to operate at a fifth of its capacity. But the project offers 11 further prospects with a collective 90 Bcf of gross un-risked prospective resources, and two development locations with gross contingent resources of 5 Bcf.
Prospex estimates bringing just one new well online would be sufficient to allow the plant to produce at its maximum capacity of around 60,000 MWh gross per annum, a rate that, assuming Spain’s historic average electricity price of €70 per MWh, would deliver indicative project level pre-tax annual revenues and profit before tax of €4.2m and €2.4m respectively, opening the prospect of a revenue stream on a par with that from Selva. The project partners have begun the application process for the drilling of multiple wells at El Romeral with a view to commencing operations next year.
Prospex also holds a 15pc interest, with an option to increase to 49.9pc, at Tesorillo, a large gas project in southern Spain with estimated gross unrisked prospective resources of 830 Bcf, and two existing petroleum exploration licences. Several historic discoveries have been recorded at the field, and a number of potential new targets have been identified through interpretation of legacy 2D seismic data.
Europe’s robust gas market
Prospex’s share price has shot up from 1.43p at the beginning of June to more than 3.5p at the time of writing, reflecting a surge in European gas prices which reached a 13-year high last week of 36.90 per megawatt hour, surpassing the previous peak set in 2008. Prices in the UK have soared to 91p a therm. Demand rose through the long winter experienced throughout much of Europe, and has continued to accelerate as economic activity picks up and vaccination programmes are rolled out.
But the spike also reflects Europe’s energy dependence on Russia, which supplies some 40pc of the EU’s natural gas. Pipeline exports of natural gas from Russia’s state-backed monopoly Gazprom to continental Europe have dropped roughly one-fifth this year, suggesting that the energy giant may be holding back supplies to capitalise on higher prices, and to place pressure on regulators to grant approval for the contentious Nord Stream 2 pipeline running from the Baltic to Germany.
As we discussed in our in-depth feature on the oil and gas industry last month European and global demand for gas looks set to hold steady over the next 10 to 20 years. Analysts Wood Mackenzie note that global gas production has risen by a quarter over the past decade, a worldwide trend driven, as so much else in today’s international economy, by surging Asian demand, which is forecast to grow by an average of almost 3pc a year over the next two decades necessitating $2tn investment in 200 bn boe of new gas capacity.
The primary driver of demand for gas will be the imperative of keeping the global economy running through energy transition. Coal still provides some 40pc of the world’s electricity, and two-thirds of China’s. Although natural gas is a fossil fuel that simply cannot be described as clean energy, despite what its most partisan supporters might say, it is considerably cleaner than coal, making it a necessary bridging fuel while renewable energy production ramps up, in Europe as well as Asia. A major report published by the Natural Gas Programme of the Oxford Institute for Energy Studies predicts that demand in the 35 countries of the European region will persist for the next decade, rising from 564 Bcm in 2020 to 618 Bcm in 2030.
In the upbeat of assessment of Prospex Non-Executive Chairman Bill Smith in the company’s most recent annual report, ‘natural gas is by far the cleanest hydrocarbon in terms of carbon emissions when combusted … the EIA has estimated that in terms of CO2 emitted per unit of energy output, natural gas emits 117 pounds of CO2 per million British thermal units of energy compared to 228.6 pounds from coal, 161.3 pounds from diesel fuel and heating oil, and 157.2 pounds from gasoline.’
That said, gas producers are not assured a smooth ride. Regulatory pressure continues to increase, and investors are imposing tougher conditions for access to capital. There is particular sensitivity about the industry’s historic carelessness regarding the leaking of methane, which a new UN report argues must be cut by half during the next decade to avoid the worst effects of climate change, a step that would be the ‘most powerful lever’ to slow global warming in the near term. Methane, a greenhouse gas that is more potent than carbon dioxide, is responsible for about 40pc of planetary warming, having 80 times the warming effect of carbon dioxide over a 20-year time horizon. Fossil fuel production accounts for about 35pc of human-caused methane emissions, including leaks from natural gas facilities.
Producers will be under ever more severe pressure to cut out liquefaction, venting, flaring and fugitive emissions if they wish to retain their licence to operate. The EU continues to tighten the regulatory environment applicable to producers like Prospex. In 2019 Italy introduced a two-year moratorium on exploration with a view to introducing more stringent regulations. And in Spain a new Climate Change and Energy Transition Law that introduced a moratorium on new exploration licences and further tightens restrictions on the granting of exploitation permits.
Prospex’s annual report stated that ‘Our interests in exploitation permits at this time seem largely unaffected, whether any further changes to the right to explore are made remains to be seen. Legislative pragmatists do recognise the need for transition, and we hope that, once countries set their road maps to carbon neutrality, we will be able to explore and exploit as per the permitting framework.’
The prospects for Prospex
The report’s summary of the company’s financial position makes it clear that it has little margin for error in executing its current programme. Prospex reported a net loss after taxation from continuing operations of £1,806,492 (2019: £1,300,669) for the year to 31 December 2020, although it is supported by total assets of £5,748,211, and two fundraises of £720,000 and £750,000 in February 2020 and March 2021 respectively have furnished it with resources for its acquisition of the 49.9pc stake in El Romeral and its current programmes in Spain and Italy. The company brought in another £215,000 by divesting a 50pc interest in an unpromising Romanian venture.
Prospex continues to put the building blocks in place for becoming a cash generative gas and power producer able to contribute to keeping Europe’s lights on through the energy transition. Selva is well on the road to production in mid-2022, and a roadmap is in place for a multi-well drilling programme at El Romeral next year. The company estimates the two ventures have the potential to produce over 7,800,000 scm (standard cubic metres) of gas net to Prospex over the course of a year, generating revenues that will in turn be reinvested in the multiple follow-up opportunities identified at both licences.
Prospective investors should be aware that the company’s future plans may be affected by further sharpening of the regulatory environment in which it operates. But we repeat the recommendation we offered in our small cap oil and gas roundup that Prospex offers a well thought through programme designed to work with the grain of Europe’s future energy needs.