Market neglects Prospex despite robust new gas assets- could firm be a ‘tiger on a leash’? (PXOG)

Prospex Oil and Gas (LSE:PXOG) has come a long way since January 2017, when shares fell by nearly 70pc on the news that the firm had abandoned its hotly-anticipated Polish well after failing to find any hydrocarbons. The company quickly bounced back with the acquisition of significant stakes in three large European projects in line with its strategy to focus on near-production investments. With Prospex’s shares still sitting at just 0.45p, we asked chief executive Edward Dawson what investors could be missing and why he views one of the company’s assets as a ‘tiger on a leash’.

Producing opportunity

Prospex’s first acquisition last year came in August when it bought a 50pc interest in the EIV-1 Suceava Exploration Concession. The block, operated by local firm Raffles Energy, is in a proven hydrocarbon basin in Romania and could contain aggregate gross recoverable resources of between 17-56Bcf. Notably, Suceava is home to the Bainet gas discovery, which has been assigned recoverable internal gross prospective resources of 1.5Bcf and is expected to produce from Q2 this year.

Suceava contains many low-cost and low-risk pipeline prospects beyond Bainet, including the Granicesti SE-1 discovery. Granicesti flowed at 1.2MMscfpd during a limited short test, and the partners plan to workover and recomplete the well after securing land access. Rather than being a game-changer, Dawson said production generated at Bainet should demonstrate concept for more significant future discoveries at Suceava like SE-1.

He told us: ‘We think there is some similar gas plays to Bainet on the block, so the hope here is that we start off small with Bainet and use the money to fund the next, larger well and things begin to snowball. Further south on the block we have identified larger prospects and leads with recoverable resources of between 5Bcf and 10Bcf, compared to 1.5Bcf at Bainet. However, they are not as easily monetizable, so time is needed.’

Po Valley permit

Following a £1.6m placing last October, Prospex bought a 17pc stake in the Podere Gallina Exploration Permit, Northern Italy, partnered with PVE and United Oil & Gas. Alongside multiple exploration opportunities, the permit contains the Selva gas field, which produced around 80Bcf before being shut in 1984.

In November last year, Prospex began testing Selva by drilling the Podere Maiar-1d appraisal/redevelopment well, targeting 2C resources of 17Bcf. In December, it confirmed the presence of two gas-bearing reservoirs in the field. Following this, the results of a flow test at the well carried out in January exceeded expectations by about 2.5X and led to the declaration of a commercial discovery.

The partners will now submit a production concession application to the Italian Ministry in H1 2018 and generate revised contingent resource and reserve estimates in Q2 2018 to reflect the better-than-expected flows. These estimates are yet to be released, but Dawson said the strong flow rates are likely to bring cashflow generation at Selva forward from years 7-9 to years 2-4, and increase the project’s net present value:

‘We don’t know from the flow test whether Selva is bigger or smaller than expected, but we do know the well itself is much more productive than historical wells that had influenced our pre-test expectations. The pressure is stronger than expected and a modern well drilled in 2017 will, intuitively, likely be more productive than the original ones drilled in the 1980s. I believe our current £5.2m market cap is more than double covered today by Selva’s NPV.’

Short-term cash flow ambitions from Podere Maiar aside, Prospex’s Italian project as a whole has been assigned a significant total upside of between 29.1-40.6Bcf. Exploration prospects on the permit include Fondo Perino and Cembalina, which have respective estimate recoverable prospective resources of 14Bcf and 3.3Bcf. But the one Dawson is most excited about is East Selva, which has a massive estimated recoverable potential resource of 35Bcf. Work has yet to get underway at the prospect, but the partners are currently looking to acquire 3D seismic to partially de-risk it.

Dawson told us: ‘There is very little seismic over East Selva, but the geologists will tell you it is very similar to  Selva, which could be very promising given the prospective resources on offer. I hope that this type of additional exploration opportunity can turn the Selva complex into something even better than already expected, and that upside will follow on across our entire Italian asset.’

Tiger on a leash

Prospex’s most exciting opportunity is probably the Tesorillo Project in Southern Spain. The company bought a 2.5pc stake in the project for just €48,750 last December and entered into an option to purchase an eventual interest of up to 49pc. Tesorillo covers 38,000 hectares in a proven hydrocarbon region of Spain and is 3.9km from a gas pipeline, providing easy access to the highly-priced European gas market.

The real strings in Tesorillo’s bow are the presence of the Almarchal-1 discovery well and the eye-watering 830Bcf of audited gross un-risked prospective resources and 2Tcf of potential upside that the whole licence area was independently assigned in 2015. Prospex has said the discovery offers ‘company-making potential’ and describes it as a much more significant variant of its existing discoveries.

Almarchal is thought to lie on a large, accidentally by-passed gas field and a well 15km to the east of the site has previously displayed similarly impressive gas shows. Work on further delineating Tesorillo’s resource will begin in H1 2018 with a test magnetic telluric survey when operators test known gas-bearing sandstone sequences, but Dawson is already describing the project as a potential ‘tiger on a leash’:

‘To put 830Bcf into context, when we ran the economics on our Polish project on an un-risked basis, an 80Bcf in Poland equated to between €50m and €100m. The notional economics of this discovery in Spain suggest ten times that. The minimum size discovery to make drilling worthwhile is probably only between 5-10Bcf.Today we own a 2.5pc stake, but you have to look at the fact that we could hold 50pc if we wanted to. We would do that by taking up the option when we are ready to go and drill. We have got a considerable amount of technical due diligence on the project, and the Spanish authorities are already responding well to it moving forward. In parallel to the MT survey, our next steps will be to get a well permitted by sending off an environmental impact assessment and coming up with a well design.’

Putting up with the past

Prospex has yet to publish its annual report for 2017, but its half-year report released in September revealed that, as of June 2017, the company had an enterprise value of around £870,000. Since then, Prospex has spent €750,000 (£650,000) on its stake in Suceava, €1.15m (£1m) on its position in Italy, and €48,750 (£41,000) in Spain.

These expenditures have been covered by several placings, with Prospex raising £650,000 to fund Suceava and £1.6m to support the Italian transaction and general working capital costs. What’s more, in January, the company raised £1.2m to fund its G&A and share of basic license commitments. This is a rough calculation, and it will be worth revisiting when Prospex releases its next results. However, with Prospex’s market cap currently sitting at just £5.2m and cash raises appearing to cover expenses since June, it seems the market could be placing very little value on the business’ portfolio of assets.

Of course, it is hard to pinpoint exactly when – or even if – the market will begin to acknowledge Prospex’s new portfolio of opportunities. Indeed, the firm’s shares have languished since the disappointment in Poland last January. But as news flow comes out from the three sites and work is done to firm up the strong prospective resources, it could be worth having a punt on retail investors beginning to sit up and listen. After all, the strategy, multiple acquisitions, well drills, and gas discoveries have already helped to pare some losses.

There are plenty of potential triggers for value upcoming, including the first production in Romania, the commencement of work in Spain in Q2, and further drilling activity and acquisitions. Dawson told us Prospex’s management team have often been frustrated by the company’s share price over the last six months, but are optimistic going forward:

‘We felt the flow test results in Italy would effectively take the handbrake off our shares, but the move was not as significant as hoped. Eventually, our upside will come when the market re-rates the core value of our portfolio, which, based on prospective resources, should be valued much higher. I think there are catalysts ahead. In Italy, we are expecting the operator to update the CPR, and that will be able to take the better-than-expected well flow-test results into account. What’s more, I don’t think the market has at all realised what we have done in Spain.’

Long game

Prospex hopes to become an operator in its own right, moving from an investment company into a fully-fledged E&P firm. It is well supported on this journey by an experienced management team with plenty of skin in the game. Dawson has had more than 15 years’ experience in the oil and gas sector and was previously MD of Peppercoast Petroleum and Black Star Petroleum. Meanwhile, non-executive chairman Bill Smith is a director of several listed and private companies including Orca Exploration Group, Mosaic Capital Corporation, and PFB Corporation.

As it stands, the company could be sitting on a vast resource base across its three assets – its potential in Spain alone could be very impressive if fully realised. Also, the firm is due to begin producing in Romania shortly and has full funding for its 2018 license commitments (with cash to spare, adds Dawson). Of course, there is some work to be done before Prospex’s prospective resources become tangible, and there could be setbacks along the way. But if the business can produce anywhere near what it has quoted, then its current market cap could end up looking very cheap. It may be worth having a punt now before several imminent project updates potentially trigger a rise in shares.

Author: Daniel Flynn

Disclosure: The author does not hold positions in any of the stocks mentioned above

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