Thursday, September 28th 2023

Prospex Energy PLC

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Right time, right commodity for Prospex Energy


“…With Selva expected to commence production next year, and with the application process now underway for a multi-well drilling programme at El Romeral, the company is closing on opportunities to ramp up production to take advantage…”


Europe’s ongoing energy crisis is transforming the fortunes of Prospex Energy Plc (AIM:PXEN), a producer working to unlock the full potential of a portfolio of natural gas projects in Spain and Italy.

Optimising El Romeral and Tesorillo


Last year PXEN 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 currently encompasses an 8.1MW power station, three producing wells with gross 2P reserves of 0.30Bcf, and a contract to supply energy to General Electric. All three wells are late life, but several prospective wells offer a cumulative 90Bcf of gross un-risked prospective resources, and there are development locations with gross contingent resources of 5Bcf.

PXEN estimates that bringing just two new wells 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: current prices, of course, are much higher. 

The partners are in the process of seeking permits for the additional wells. In the meantime they have continued to optimise the plant’s generation capacity in anticipation of higher production: two of its three generators are operational, and work is planned to recommission the third generator. Last autumn the partners upgraded the plant’s technology to allow it to operate continuously, opening the way for a 65pc increase in its income generating capacity. 

The plant has run for 24 hours a day six days a week since mid-March, allowing the partners to take advantage of near record gas prices in the Spanish spot market. A project update published last month stated gross electricity sales revenue for the quarter ended 31 March 2022 of €1,046,485. The surge in income has allowed the partners to clear outstanding debts with shareholders. Operator Tarba now has cash in hand of more than €600,000 to invest in the plant’s gas to power generation capacity assuming the permits for the new wells are granted. The partners are now running the plant 24 hours a day, seven days a week, to take advantage of soaring demand.

PXEN also holds a 15pc interest – with an option to move to 49.9pc – in Tesorillo, another large gas project in southern Spain. With estimated gross unrisked prospective resources of 830Bcf the field has two existing petroleum exploration licences and (2D) seismic data indicates a cluster of new targets.

A shadow was cast on the partners’ plans to secure drilling and environmental approvals for the new operations at both fields by Spain’s 2020 Climate Change and Energy Transition Act, which ruled against the granting of new hydrocarbon permits or licences in the country. But Tarba has received legal advice indicating that applications made on the basis of permits that existed prior to the Act coming into force – including those for El Romeral and Tesorillo – will retain their validity under the new law. Spain’s urgent need for native gas supplies is also likely to weigh on regulators’ minds.

Bringing Selva Malvezzi online


PXEN also has a 37pc 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, would have the potential to produce at an initial daily rate of up to 150,000 cubic metres. PXEN 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 last year 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, expected later this year.

Should Selva be brought into production successfully Podere Gallina offers several follow-up opportunities, including two historic gas producing reservoirs estimated to host gross contingent resources (2C) of 14.1Bcf, and four other prospects with aggregate gross prospective resources of 91.5Bcf.

PXEN signalled its confidence in the project by increasing its holding in Podere Gallina this year by 20pc to 37pc, funded by a February placing that brought in £2.455m. The purchase increased the company’s stake in Selva’s independently verified 2P gas reserves from 2.3Bcf to 5.0Bcf, and opens the prospect of reaping the benefit of a sustained increase in gas prices. The field’s 2019 CPR estimated Selva would be economic at a gas price of €0.2/scm: the forward curve gas price from Q2 2023 is more than four times higher. PXEN forecasts net annual cash flows from its revised share in the licence of more than €8m per year for the first five years of the ten-year production profile.

Selva is scheduled to come into production by Q2 2023 through the reopening of a suspended well last drilled in December 2017. Assuming a full production licence is granted, and a 12-month seismic environmental monitoring programme begun in January 2021 is passed, a pipeline from the well head to Italy’s national gas grid will be installed.

Surging European gas prices


Surging gas prices have transformed PXEN’s revenues over the past 18 months. The company’s 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. And its annual results for the year ended 31 December 2021, published earlier this month, recorded a 56pc increase in total assets to £8,984,437 (2020: £5,748,211). As at 31 December 2021, prior to the February fundraise, the company held cash and cash equivalents of £220,060 (2020: £220,618).

PXEN’s window of opportunity to ramp up production to take advantage of higher energy prices seems likely to be open for some time to come. Like the rest of Europe Spain is scrambling to increase its native gas supplies, which have a much lower financial and environmental cost than imported LNG. European gas prices continue to soar, futures contracts linked to the European wholesale gas price benchmark spiking last week by about 13pc to €106 per megawatt hour, more four times higher than a year ago. Russia’s willingness to use energy as a weapon against the EU could hit European gas supply by 13bn cubic metres according to one new study. Russia supplied 40pc of the Union’s gas last year, about 155bcm. Europe is undertaking emergency surgery on its long-neglected gas infrastructure, including the strengthening its capacity to receive and distribute LNG from the US, and the addition compressors to existing pipelines to facilitate the flow of gas from west to east. All of that will take time, and must be balanced against the EU’s longer term aim to decarbonise. It may well prove impossible to replace all ‘Russian molecules’ with others, short of rationing gas for certain industries. Higher prices seem here to stay for some time to come.

So economic conditions seem favourable for PXEN, now and for the foreseeable future. With Selva expected to commence production next year, and with the application process now underway for a multi-well drilling programme at El Romeral, the company is closing on opportunities to ramp up production to take advantage. Discontent among a faction of shareholders that forced the requisitioning of a general meeting last summer (the resolutions were rejected) now seems to be receding as the company has secured ever stronger revenues. PXEN’s share price has risen 40pc over the past six months, from just over 3p to around 4p, spiking at more than 6p in January, prior to February’s placing. Further positive sales updates, and good news regarding its plans for El Romeral and Selva could push the price back up to and beyond those heights.