Looking for an ambitious energy Company? Think Prospex Energy
“…Several significant holdings in Prospex have been taken – and strengthened – through October and November, signalling optimism in the company’s prospects as gas prices continue to rise…”
Despite an eventful year in which the company has had to navigate new climate change legislation, permitting delays, the effects of the global semiconductor supply crisis, and corporate politics, surging natural gas prices have helped Prospex Energy Plc (AIM:PXEN) progress a carefully curated portfolio of natural gas projects.
Prospex is working to build upon a set of revenue generating natural gas plants in Spain and Italy. The company’s current strategy is to grow by identifying promising low capex investment gas opportunities ripe for technological upgrade, but in the longer term it see’s itself as ‘an energy company, not an oil company’ seeking to expand ‘through further gas-to-power projects and in time, blue hydrogen and other initiatives.’
El Romeral and Tesorillo
This March Prospex took a 49.9pc stake in the El Romeral integrated natural gas production and power station project in southern Spain. Operated by Tarba Energia, the project encompasses three producing wells with gross 2P reserves of 0.30Bcf, multiple additional prospects, an 8.1MW power station, and a contract in place to supply General Electric. All three wells are late life, restricting operations to a fifth of the plant’s capacity. But the project has 11 further prospects offering a cumulative 90Bcf of gross un-risked prospective resources, and two development locations with gross contingent resources of 5Bcf.
Prospex estimates that bringing just one new well online would be sufficient to allow the plant to produce at its maximum capacity of around 60,000MWh gross per annum, which at 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. The company continues to work to optimise the plant’s generation capacity: two of the three generators are operational, and work is planned to recommission the third generator in preparation for the increased gas production expected from planned well interventions.
Prospex also holds a 15pc interest – with a 49.9pc option – in Tesorillo, a large gas project in southern Spain with estimated gross unrisked prospective resources of 830Bcf, and two existing petroleum exploration licences. The field features several historic discoveries, and potential new targets have been identified through interpretation of legacy 2D seismic data.
Podere Gallina
Prospex also 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, operated by Po Valley Energy Limited, has 13.4Bcf P50 reserves, gross contingent resources of 14.1Bcf (2C), and gross prospective resources of 88.2Bcf (best estimate).
The partners’ current focus is bringing the project’s Selva Malvezzi natural gas field online, which, integrated with a fully automated gas plant, has the potential to produce at an initial daily rate of up to 150,000 cubic metres. 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 for connection to Italy’s national gas grid, paving the way for the grant of a full production licence from the country’s Economic Development Ministry.
Should the Selva field begin producing successfully Podere Gallina offers several follow-up opportunities, including two historic gas producing North Flank and South Flank reservoirs, which may host gross contingent resources (2C) of 14.1Bcf. The permit also includes the East Selva, Fondo Perino, Cembalina, and Riccardina prospects, estimated to hold aggregate gross prospective resources of 91.5Bcf. Prospex has signed a conditional sale and purchase agreement to increase its holding in Podere Gallina to 37pc. The deal, which the company expects to deliver ‘via a balance of both equity and debt finance’, would increase the company’s share in Selva’s 2P gas reserves to 5Bcf, and add 2.7Bcf of 2P gas reserves to its portfolio.
An eventful 2021
Prospex has had to navigate several challenges this year, both on the ground in Spain and Italy, and in the corporate arena. In May the Spanish government passed a Climate Change and Energy Transition Act ruling against the granting of new hydrocarbon permits or licences in the country. The law complicates the efforts of Prospex’s joint venture partner, Tarba Energía, to upgrade an exploration permit for the Tesorillo gas project into an exploitation concession. After the legislation was passed, however, Tarba received legal advice confirming that applications made on the basis of permits that existed prior to the Act coming into force – like that for Tesorillo – retain their validity under the new law. Prospex and Tarba believe that Spain’s ongoing gas supply issues, which have forced the country to import LNG from the US at both financial and environmental cost, will tell in their favour.
Prospex reported another setback in October, when a workover at Rio Corbones-1 – the first candidate well at El Romeral the company is trying to bring back to production – was unsuccessful. The intervention had, however, cost little more than €80,000, and the work had provided ‘valuable data regarding the status of the wells and the reservoirs’ which will be used ‘to optimise the infill well drilling campaign planned when permitting is in place in 2H 2022’.
There was somewhat better news earlier this month, when the company reported that its plant optimisation project at El Romeral had been completed successfully. Global semiconductor supply issues had delayed delivery of digital technology designed to facilitate further automation of the plant’s operations, but the new systems are now in place ensuring the plant can now be operated continuously, opening the way for ‘an increase in power generation income of up to 65pc’.
Progress at Podere Gallina has also been bumpy. In October Prospex reported that the tie-in of the Selva field to Italy’s national gas grid would be delayed, pushing back the likelihood of first gas from mid-2022 to 1H 2023. Italian regulations leave Prospex dependent on national pipeline operator SNAM to manage the tie-in, which has pushed back implementation ‘in part, as a result of supply chain disruption due to COVID-19’. Po Valley Energy, Prospex’s joint venture partners, also advised that higher prices for steel and other critical field infrastructure materials will likely push up the project’s development capex to around €2.65m from €2.3m. The announcement did have a silver lining, however, regulators confirming that Selva’s production concession is likely to be granted in Q1 2022.
Prospex has also had to weather a measure of internal volatility this year. Board changes included the appointment of a new CEO, Mark Routh, a former CEO/Chairman of AIM listed Independent Oil & Gas plc, but in August a shareholder faction attempted to force further change through the requisitioning of a general meeting. After the resolutions were rejected Mr Routh wrote to shareholders to clarify Prospex’s strategy, stating that although the company will exercise due caution in acquiring new assets, which will target ‘appraisal and development assets not exploration’, the company does intend to expand its portfolio ‘with further gas-to-power projects and other suitable energy projects’. Prospex has re-engaged with its debt financiers ‘to provide appropriately leveraged financing that would limit the use of equity as far as possible and therefore result in less shareholder dilution.’
Indeed Prospex has reported strong financial progress this year as gas prices have surged.Its most recent set of interims, for the six months ended 30 June 2021, reported a net profit from operations of £129,356 against a loss of £1,027,875 for the previous period. The company recorded a 13.48pc increase in the net book value of its investments to £4,109,225, up from £3,620,890 in 2020, a revaluation of the company’s share in the Podere Gallina licence allowing it to note unrealised gains on its financial assets of £488,335, against a loss for H1 2020 of £664,949. At the end of the period the company held cash of £458,591, up from £170,866 as at 30 June 2020.
Continued strong demand for gas
High European gas prices seem locked in for some time to come. Since March, when the company acquired its interest in El Romeral, Spain’s wholesale electricity prices have more than trebled from an average of €50/MWh to €180/MWh. By September the plant was generating more than €184,000 per month, up from €60,000 in March. Prospex suggests that ‘[L]ocal indigenous onshore gas is the optimum energy source to fulfil the energy gap whilst the transition to renewables gains pace’. Current uncertainty regarding Russia’s attitude to Ukraine threatens to tighten supply further. More than a third of the EU’s gas supplies come from Russian exports, which remain well below their pre-pandemic level as tensions regarding the politically sensitive Nord Stream 2 pipeline persist. Germany’s suspension of the Nord Stream 2 process has prompted renewed concern about gas prices in Italy, where industry representatives are lobbying the government to tap the country’s strategic gas reserves.
Outlook
Though Prospex has faced its fair share of challenges this year the company’s share price has risen from less than 1.5p in May to 3.28p (at the time of writing), touching highs of 4.25p in September. Its stock is up more than 70pc in the past year, taking the company’s market cap to £5.7m. Several significant holdings in Prospex have been taken – and strengthened – through October and November, signalling optimism in the company’s prospects as gas prices continue to rise. El Romeral is still operating at only a fraction of its capacity, and continued operational upgrades and new well interventions, informed by this year’s work at Rio Corbones-1, are opening the prospect of further significant profits given the likelihood of continued high energy prices. The securing of a production licence at Tesorillo cannot be guaranteed in light of Spain’s new legislation, but the company seems to have good legal and economic grounds for believing it will be granted. Although the delay at Podere Gallina was a setback, Selva’s production concession is expected to be granted in Q1 next year.
Prospex’s is a company with producing assets serving a dynamic market, and with good prospects for bringing additional production capacity online over the next 18 months. Prospex Energy’s stock has risen this year in spite of difficulty: a smoother passage next year could see it rise significantly higher still.
