Is Ascent Resources about to climb to a new level?
“…a potential damages payment of such magnitude offers compelling upside to an investment proposition that can be built on other grounds: a robust cash flow from Slovenian operations which is likely to be further strengthened through the unfolding settlement with Geoenergo, and the prospect of a new cash generative and low cost metals business in South America and Africa…”
Ascent Resources (AIM:AST), an oil and gas exploration and production company focused on onshore European production and interests in South America and Africa, continues to work to disentangle contractual disputes that have checked the development of its Slovenian operations.
But with a set of producing wells benefiting from higher European gas prices, evolving ore processing and secondary mining recovery opportunities, the near term recovery of revenues due from AST’s joint venture partner, and the possibility of a settlement from a €500m-plus damages dispute with the Slovenian state for expropriation (the loss of full investment value due to law changes), a company moving into a brighter future can be discerned through the legal haze.
Led by Executive Chairman James Parsons, a former CEO of Sound Energy and currently Chairman of Corcel, Coro Energy and Echo Energy, and CEO Andrew Dennan, a former CFO at Coro, AST looks for opportunities to generate high capital growth returns through counter cyclical acquisitions. The company’s current operations focus is its 75pc interest in the Petišovci gas project in north-eastern Slovenia on the borders with Hungary and Croatia, a joint venture with Slovenian government controlled partner Geoenergo, which holds the remaining 25pc.
AST, which has invested more than €50m in the project since 2007, is funding Petišovci’s development in return for 90pc of the revenues until all costs are recovered. A 2009 3D seismic survey demonstrated that gas could be flowed from the project in commercial volumes from previously unproduced and undiscovered reservoirs, notably highly prospective deeper Middle and Lower Miocene layers. An independent volumetric assessment of the field undertaken in 2013 estimated P50 contingent gas resources in place of 456 bcf, and a 8.8 MMscf test result was recorded from the PG-10 well when it was drilled, stimulated and flow tested in 2011.
AST’s strategy to unlock the project’s full potential has two phases. The first has been executed: the export of untreated gas to Croatia from two wells, Pg-10 and Pg-11A. The second envisages levering increased production from the field’s tight rock reservoir through hydraulic re-stimulation. This would allow the re-entering and deepening of nine existing wells, and the construction of a processing plant to treat the gas for injection into the Slovenian national gas network, the channel most likely to secure the highest price.
But implementation of the second phase was stalled last April when the Slovenian government voted to amend the Republic’s mining law to impose a blanket ban on fracking for the purpose of producing hydrocarbons. The vote, which prevents AST from using mechanical stimulation in any future development work, followed a ruling by the Slovenian Environment Agency (ARSO) that an Environmental Impact Assessment (EIA) would be required to conduct hydraulic stimulation, even though, as AST puts it, ‘such an EIA was not required and never had been previously under Slovenian law, and ARSO’s conclusion was contrary to the conclusion of Slovenia’s own expert bodies.’
AST believes ARSO’s decision was ‘politically motivated’, ‘a populist campaign carried out by Slovenia against the Company and our investment’, statements made during the parliamentary debate on the ban leaving ‘no doubt that the Investors [AST] were being specifically targeted by it.’ Gas produced by the field ‘was very significantly reduced’, resulting in a significant loss of revenues, depriving AST of its right to produce gas in Slovenia and effectively destroying the value of the company’s investments in the country’s energy sector.
AST immediately served the Republic with a notice of dispute of breaches under the UK-Slovenia bilateral investment treaty and the Energy Charter Treaty, and entered into a binding damages agreement – essentially a ‘no win no fee’ style arrangement – with Enyo Law LLP, a specialist arbitration and litigation legal firm. Arbitration proceedings against the Republic began last August with a monetary damages claim of more than €500m, though AST notes that if the claim is successful ‘any amount actually received by the Company may be significantly lower’ and that the company ‘remains amenable to discussing settlement with the Republic of Slovenia following its review of the matter or otherwise pursuing this significant damages claim through to a binding result for the Company.’ The dispute is passing through the legal process: it was formally registered by the International Centre for Settlement of Investment Disputes last September, and a Tribunal was constituted last month, with the first procedural hearing due, and further updates ‘to be made as appropriate.’
Indeed, The National Assembly has passed legislative changes very recently to automatically extend mining rights that expire in 2023 and 2024 by 30 months. Good news for Ascent. In the letter to Minister Brežan, the office noted that the investor had estimated the damage in the application for arbitration at a minimum of €500 million. Ministry officials did not wish to discuss this with MPs so as not to jeopardise the arbitration procedure. Interesting.
But AST is making swifter progress towards resolving a second dispute, with its JV partner Geoenergo, in relation to revenue due from hydrocarbons produced from Petišovci’s wells, a complex case involving a total claim of more than €4m that also involves the partners’ operating service provider Petrol Geo.
By last month agreements had been secured to settle a portion of the revenue recognition claim against Geoenergo, and to conclude the dispute with Petrol Geo. Petrol Geo’s claims against the joint venture partners over disputed and rejected invoices from 2019 through to February 2023, totalling €2,083,491 (plus claimed interests and costs), were settled for €1,436,000, a discount of approximately 30pc to the face value. The partners also successfully renegotiated a reduction in Petrol Geo’s fixed operating fee, which at a fixed €44,000 per month was deemed unsustainable when gas prices were lower and production levels were lower. The renegotiated fee level increases the profitability of the remaining production ahead of the concession’s scheduled expiry date of 28 November 2023.
AST continues to pursue its arbitration claim against Geoenergo in relation to the parties’ respective interpretations of the field’s baseline production profile and the number of wells from which AST is entitled to receive revenues until it has earned back its investment of over €50m. Last August AST received a net payment of €650,560, relating to 2020 and 2021 gas sales proceeds from the PG-10 and PG-11A wells, and the parties agreed that the company is entitled to a €857,617 payment for 1H 2022 gas sales revenues. AST accrued a further amount owed to it of circa €370,000 for production through Q3, and last month Geoenergo agreed to pay €1,724,689 for non-payment of hydrocarbon revenues owed to AST from January 2022 to February 2023.
AST continues to seek compensation of at least €3m for its share of hydrocarbons produced above the baseline production profile for producing wells other than PG-10 and PG-11A in the concession area. The first tribunal hearing took place in March, with the final hearing expected in July.
While working to resolve the disputes AST’s ongoing operations at Petišovci have benefited from the strong European gas market. A December operations update stated production of 117,687 scm for October, sold to local industrial buyers through the low-pressure pipeline, and 97,154 scm for the first three weeks of November. Last month AST said that following the recent successful partial settlement of the dispute with Geoenergo the company will be funded to initiate PG-11A maintenance and operational works on receipt of the payments from the settlement agreement. In the meantime the company ‘is reviewing and updating the work program to reflect recent developments in country.’
Mining recovery opportunities
AST is pursuing initiatives beyond Slovenia, notably an ESG Metals Strategy focused on ‘ore processing and secondary mining recovery opportunities consistent with global ESG principles.’ The company expects that these opportunities will typically involve ‘the reclassification, through highly efficient recovery techniques, of surface stockpiled mining waste (previously viewed as a liability for mining companies) as a valuable asset for processing and reprocessing ahead of commercial sale to off-takers and other third-party buyers’, and/or ‘participating in the enfranchising of local artisanal … gold mining communities with access to new tolling operations to process and commercialise their ore.’
After evaluating potential transactions across Latin and Hispanic America AST identified Peru as its primary target geography, currently the world’s second largest copper and silver producer and Latin America’s largest gold, zinc, tin and lead producer. Benefiting from a long history of mining, a robust mining legal framework and a significant pool of local expertise, the company considers Peru to offer significant opportunities for attractive entry points in natural resources, notably onshore oil and gas developments and mining, particularly since the pandemic triggered international capital flight and significant capital constraints for small-scale operators. AST initially expects to focus its attention on affordable small-scale operations (up to 350 tonnes per day) with multiple local tax and permitting benefits.
In February the strategy’s focus widened to Africa with the announcement of a Strategic Collaboration Agreement with Beryl International (Pty) Ltd, a pan-African diversified investment company with a portfolio of medium and large capitalised companies across sectors such as logistics, rails and ports, financial services, mining and mineral resources, agriculture, and energy. The parties will work together to identify and seek funding for Latin American opportunities identified by AST and African prospects introduced by Beryl: Beryl’s expertise will be particularly useful in helping to identify opportunities in Africa with low geological risk and potential for profitability within the first year of operations. The agreement commits Beryl to undertaking a £1m placing to support its contribution to the collaboration.
AST’s interim results for the half year to 30 June 2022 stated a cash balance of £174,000 (H1 2021: £766,000 and FY21: £97,000), but that was before the company began receiving payment from Geoenergo for historic revenues from the PG-10 and PG-11A wells. AST expects to recognise historic production revenues as well as associated production costs in its next annual accounts. During the period the company raised £0.6m before costs through a January 2022 placing and a further £242,500 from a warrant exercise in April 2022. It has undertaken two further placings, for another £0.6m in December to help fund near term business development and the revenue claim against Geoenergo, and £0.4m last month to allow the company to continue to execute at full capacity across its various initiatives and support the conclusion of the Beryl strategic investment.
Given the legal uncertainties AST been negotiating over the past few months it’s hardly surprising that the company’s share price has been turbulent, spiking last summer as it progressed its case against the Republic before falling back to 3.5p at the time of writing, taking its market cap to £6.26m. As the company acknowledges, the €500m-plus claim is just that, a claim, with no guarantee of a favourable ruling or a particular settlement figure.
But a potential damages payment of such magnitude offers compelling upside to an investment proposition that can be built on other grounds: a robust cash flow from Slovenian operations which is likely to be further strengthened through the unfolding settlement with Geoenergo, and the prospect of a new cash generative and low cost metals business in South America and Africa. The case for AST hasn’t been as clear as the company might have liked over the past year, but is shifting into sharper focus as it continues to work free of the contractual knots in which it has been entangled, positioning it for the prospect of significant near and medium term cash receipts.