Prospex Energy (LSE:PXEN) — 2020 Results and Portfolio Insight

0:05 Good afternoon, ladies and gentlemen, and welcome to the PROSPEX ENERGY twenty twenty Results Portfolio Insight Investor Presentation. Throughout this presentation, investors will be in listen only mode, and there's currently a poll on your screen. And if you would give that your kind attention, we would be most grateful. Questions are encouraged and could be submitted at any time using the Q and A tab situated on the right hand corner of your screen. Please just simply type in your question and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. These will be available on your investor meet company dashboard, and again, we'll send you an email to notify you when they're ready for your review. I'd also like to remind you that this presentation is being recorded. I'd now like to hand over to Edward Dawson, CEO from PROSPEX ENERGY. Good afternoon to you.

0:54 Good afternoon. Thank you, Mark. Thank you for everyone who's taken the the time today to dial in on a lovely British summer day. This is the second time we we've used this platform, and we hope it's informative to those on the call. We will run through a variant of our use usual company presentation, and we hope to give insight to prospective shareholders,

1:27 further insight to current shareholders. And we also have Carlos Venturini on the line. So we're going to look at some of the assets in the in the technical detail as well.

1:48 PROSPEX is a is a main investment company focusing on gas assets in Europe. We've looked at a huge number of potential transactions over the years, but focusing on a clean energy portfolio, which has clearly still got plenty of run room as a transition fuel of Europe. We have probably two assets, one in Italy and one in Spain. The idea is that both the assets have significant follow on opportunity from the sales, and we're looking also at nonorganic growth of projects of a similar nature that make strategic sense to to to bolt on or increase stakes in.

2:39 As a team, we are highly experienced. We've acted in public and private arenas. My last two companies were sold to industry on on the back of high quality technical work done by the team.

2:58 We've had a period following drilling success in in 2018 in Italy, and then the acquisition of the El Guam oil project of waiting, for the portfolio to mature. You know, I'm pleased to say, you know, we have a clean site now to positive cash flow in, 2022. That will come from primarily from Italy. As I've mentioned, two primary primary projects We've it's just supply the foundations for, you know, a strong growth strategy in Europe.

3:49 Wish to spend a bit of time on the financial highlights of 2020, which we announced a couple of weeks ago. We have our AGM coming up, and I want to give some insight to people on that. We ended financial year with net assets of 5,700,000, which provide significant assets back into our current share price. As an investment company, we have to value our assets for for the accounts at full year and the half year. And the fair value of the investments is 5,400,000. That is made up of equity investments in the direct, and controlled subsidiaries.

4:38 We don't consolidate our accounts and, loans to those companies. Currently, we have Spain marked at a cost. We feel that is a prudent approach. Also, we like the El Romero asset and the asset at this stage, they're still at cost. Italy provides significant value in the majority of the value of the balance sheet. We use a methodology set out in CPL, which uses a composite forward curve. It's in fact based on Dutch gas prices with a premium to to represent the historic nature of Italian gas prices being slightly higher than than Dutch, but there's a futures market in Dutch gas prices.

5:40 We had a a small down valuation in the 2020 financials. This was primarily, you know, again, at silver, and, you know, gas prices had fallen quite a bit during the year with with COVID. There was some recovery. I'm pleased to say that those gas prices actually so far in 2021 have gone up 50%. And this will actually for those who like to crank numbers, this will lead to a significant devaluation at the half year. People can look at the CPR, and they can see that gas prices are are sort of 10% higher than than so they've, gas prices, historically, you know, have come off 2019, had a low 2020, and recovered in 2021.

6:37 Also looking at I think the other key number for AIM listed company is admin expenses. There was 11% reduction in 2020. That does not include

6:56 does include a 100,000 or circa 100,000 of noncash items. So, actually, a a bigger fall from 2019 to 2020 than the headline numbers suggest. Also, people look at it and say, well, actually, that's still quite high. There's only a small group of you. The way we're we're we're structured, we actually recover a significant number of those costs from set set subtenants of an office, partners, or even a little bit of third party consultancy. Also, administrative expenses captures new ventures expenditure.

7:42 These costs are important and, you know, a key bit of new venture work. The El Romero project is is now sitting in, but it was a project that was sourced by the PROSPEX team. And, ultimately, it was found a home in Taba. And when we go, our partners contributed to those costs after the deal was done. So often, you know, they're really investment costs that should be capitalized. I can understand that argument, but accounting taxes don't allow us to do that.

8:27 And and, again, we can already see that costs in 2021 will be lower than 2020. So I hope that provides some insight, to the financials. I'm now gonna hand over Carlos to talk through the Italian and Spanish assets. Okay. Well, good afternoon, everyone. Hope you're all listening. I'm going to run quickly through Italy first. For those that haven't seen the asset in the past, it is located between Milan and the Adriatic Coast in Northern Italy in a traditionally very well known and prolific gas basin called the Poh Basin, where so far they have been drilled more than 5,000 wells since the forties.

9:23 We initially took interest in the block in October 2017, acquiring 17% working interest. The rest has been hold by other partners and the operator PVE is with 62. And the area was studied before. We had some seismic data, additional GNG, geology and geophysics maturation of the PROSPEX ENERGY done. And eventually, well was drilled for the Mayara 1 directional in December 2017.

10:02 And it was confirmed as a gas discovery in January 2019 in same kind of reservoir sands that were producing historically in the whole region. So we are contained with the fact that they're around the discovery. They are additional in prospectivity. The The net today in terms of reserves and resources for the whole proven and probable reserves, the two p are 13.4 BCF. Net to prospect is 2.3. There is an additional bigger number for contingent resources and even prospective resources, of course. So the production is according to what we've been, you know, working together with the operator. And the operator in the first place is expected by 2022.

11:03 In this slide, very quickly, we can say that the steps to get into production have most of them been completed from number one to six in the list. We are at between number four and possibly number five now.

11:23 It's an intergovernment agreement once the environmental impact assessment has been approved, like, in step three by the state authority. There is another further step up by the regional authority that says its own environmental survey. They need to agree, and this is what they are conducting now. After that, the concession final production concession will be granted, and further work will be implemented on the ground to install the production facilities, which is very reduced in terms of time and possibly also cost. It has been observed quite a strong flow rate. If you remember in the first slide here on the top right hand, this is one of the flow test evidences with the with the special burner that has been adapted to the test of the well.

12:22 Both the two reservoirs that are traditionally producing there. In this case, we're tested at more than 150,000 standard kilometers per day. The plant could be or will be designed to handle this 150 to be cautious with the production and not to overrun. And the budget is based on conservative number of a 100,000 standard cubic meters a day. And I'd let this to to Ed now and talk about the what it means in terms of money. Yeah. Thanks, Carlos. You're welcome. Production for us in in in is key.

13:10 A 100,000 cubic meters a day net to us on an on an annualized basis is around just over one point about €1,400,000. And in the in the first couple of years, we'll pay very little tax because of the historic expenditure, and the operating cost is relatively low. CPR prices, 20¢ per standard cubic meter of gas. As I say, that's about 1,400,000 net to us. If we use today's current prices and we're actually produced at capacity, we would go to eventually €2,400,000.

13:59 So highly cash generative to us. And in terms of getting on production, we continue to talk to a number of debt providers. We firmly believe that we can put this thing on production on we're using debt financing. Why do I say this? Well, the capital cost is repaid in circa seven months. And, actually, in terms of surety to a a lender, yeah, it's a very short time frame. And, actually, the quantum of gas required to be depleted for the reservoir is, again, certainly less than 5% of the reserves. So really, really

14:48 at the very conservative end of of of projects. There's no huge upfront capital cost. It's not offshore, and it's a mature, known reservoir. I'll hand you back to Carlos to speak through some assets in Spain.

15:07 It somehow followed the path we were returning to following search of gas assets that meet particular conditions from the geological standpoint, which are they are relatively shallow and bordering Alpine chains in four deep situations, which is a basin in front of the chains. In this case, we are talking about Southern Spain. Everyone knows Granada and Sierra Nevada and all these mountain chain there. Well, just beside of that mountain chain to the north, there is a basin. It's called the Guadalquir Basin that ends up in the in the Atlantic. And then these spaces have been historically, since the fifties, explore for relatively shallow gas, very similar to Italy, but probably half of the depth. I'm talking about depth compressibles of 700 meters.

16:04 And then in the area we are discussing, which are three concessions called Rumeral one, Rumeral two and Rumeral three, were originally explored since '83 by Chevron and then together with Repsol until another local company bought them. It was in production. Three words were in production and they still are. And the area is basically traversed by the national gas grid, it's called ENERGY PXEN, and a smaller distribution pipes. So there is no need to infrastructure to add gas production in the in the permits. There is also a power station only used 78% of the its capacity just simply because we need to add more gas production from other wells that we are meant to to be drilling very soon, hopefully.

17:05 We have, actually, a bit more than 11, but very low risk prospects that will provide partly the flow necessary to top up the consumption of the and the of the power station and the production of electricity. And then the rest will be, channeled or monetized through the use of the ENERGY PIPE or gas gas line. The area has you see very faint lines crossing through, crisscrossing the area. These are seismic data that have been acquired in the past and being processed to AVO state, which is difficult type of analysis to detect gas from the seismic.

17:56 And we think, you know, we have a very good insight of the basin. It's below risk, and there's no further, of course, significant exploration effort to make than the drilling, which is part of the things that are going to be done next year. And this is just to portray what we are talking about. This is from sea level, so we need to add about 200 meters to this depth. So the reservoir typically is like lenses that are representing channels, actually, and they are at 650,700 meters depth. So relatively and there's no no water inflows, no production of sand, very simple, very novel reservoir for a very high porosity and good production. A well here could produce easily 20,000 to 50,000 meter cube a day.

18:56 You see significantly less that what is Italy, but in stable and in the long term basis. And finally, to give a further insight on the eastern side of the blocks, This is one of the prospect that is very mature to be ready and drilled. And this is the, let's say, the rendering of the seismic, which shows the futility that because of the velocity here, we're taking about 700 meters roughly. And this is how we're seeing. And this particular case has already the well part ready to drain. So we are proceeding with the permitting through Taraba in Spain. I see here. Yes.

19:48 Yeah. So just as Carlos highlighted, there are 11, prospects being identified on on on the high quality seismic that Carlos showed you. So there was plenty of, follow on drilling here. The plan is to get the the plant, back up to full utilization, and we believe that can be done very easily, effectively, depending on how how well the drilling goes. We believe that one, if not two wells, could get the plant back onto full production.

20:37 That for us equates to historic gas prices and electricity prices that equated to total revenue of 4,200,000, and, virtually, just under 2,000,000 after after tax. So a good chunk of change, again for the company. As Carl's intimated, we we could once the power station was back on to full capacity, we would look to sell gas in directly in into the grid. We are doing a number of things whilst waiting for for the permitting of these new wells.

21:28 There is an opportunity to increase the the time that the plant runs. We bought the plant from the Spanish utility called Mataji. They were effectively running it at sixteen hours a day, five days a week. So we've gone through an exercise of looking to increase that. We can do that through technology, updating the control systems, and increasing the staff. We also have been looking at the three wells that are producing there today. Can we safely, produce, and further quicken the depletion of reservoir?

22:19 So those are the studies that are ongoing. We've now run the plant on several occasions for forty plus hours in in in one go. They look positive. And as I say, we've been talking about upgrading the plant and further automate automation. A number of studies have been undertaken as well because at one stage, we they had five wells producing, only producing for three today. Can we, you know, get production up by possibly going into one of the other worlds? That is still being looked at by the top technical team, but we are getting positive noise from them. And we've looked to I'm sure the partnership would look to do something very soon.

23:10 The also obviously, we have Tezzarillo project. This is further south on on the Southern Coast, just around from Gibraltar. It's, a very interesting project in terms of, of size. It was drilled in in the fifties. Gas came to surface. It's been through a number of operators' hands, including Repsol. Everyone's had a a strong technical interest in it. Of course, originally, there was no infrastructure or or no no gas market. We now have the Margaret pipeline coming across the block. However, it is very much a high risk asset, and the El Romero transaction and well well more permitting has taken up a lot of the time of of the team. So we think we are likely to drill further wells at one mile before here.

24:18 But it it's certainly a project of interest,

24:24 and we'll we'll see where it goes. For those who look at the company, they'll know our partner is, an Australian group, who have just had a a big drilling campaign in Australia and found some very large or a very large gas accumulation of of this order of magnitude. So it is of interest of all of all parties. We've this is a summary of, our reserves and resources. As you can see in terms of reserves, we have a a 2.5, BCF largely attributed to, Italy.

25:11 The net contingent resources come from it's come from Spain. We've also Selva, that's sort of that's in the the license is we have some contingent resources assigned to Selva North and Selva South. These these are exactly the same players what was already being discovered at at Selva. The political union license also has, you know, upside for us in terms of Selva East. It's it's a project that we really quite like. It's probably double the size of of Selva, and we you know, the partnership would that would be the next dual target there.

26:04 This this the next step of it is dominated by Tesarillo, but the it doesn't necessarily represent the the risk in terms of the Tesarillo. It is very large numbers, but I said high risk. At El Romero, we've got a lot of prospective resources, 45 BCF net to us, but the the CPR writers are very comfortable with what they see technically and have signed those as very low risk, which is a chance of success of over seventy five percent. So it's it's no guarantee, but in terms of our industry, they're they're very high numbers.

26:53 So outlook for the next year, the partnership is is in Spain has has started the permitting process with of the around MOL. Obviously, we had the the waited for an took it, unfortunately. It's longer than we possibly hoped. It was the approval of the transfer and, obviously, now the campaign. Electricity production, again, it is is worth highlighting. We've historically had a an underlying price of around €50 cents a a megawatt hour in in Spain.

27:46 That's effectively double that at the moment. We've we've spent most of the year in the eighties, nineties. It's gone over 100 this week. So this is really helping Tava in the short term. It it's generating, you know, plenty of cash. It means that, you know, we don't have to contribute to it. I don't expect PROSPEX to receive any of that cash back at the moment, but it it enables, you know, the permitting process that we've had. And and as said, they're looking at a number of well, possibly well intervention to, again, uplift production there. So, you know, that that looks good. Tezzarillo is is is not a priority moment in Spain.

28:36 And finally, Italy. Carlos is set out in some detail where we are in the permitting process. Poe Valley, the operator, has a good working relationship with the ministry. We were bogged down with environmental approvals. People will know that there was a change in government in in February, and that came through with a new environment ministry minister who was a technocrat within two weeks, signed the paperwork, and we moved to the next stage. So, ProValue have been pretty good on on on their timetables, and we're looking for another major step forward, in in in the next coming weeks, which will then get us onto, you know, cash flow positive in in in early twenty twenty two.

29:41 As as a company, you know, we currently do not have a a commitment to net carbon neutral. It's certainly something that we've discussed internally, and we we see roadway doing that. It's important, but certainly in in in is very conscious of it and is, again, looking at a number of projects such as the actual plant consumes electricity when it's it's not generating. You know, it has lights on and things like that. And so it's looking at a number of of projects to get that to to net neutral solar panels. There's lots of solar in that part of the world. It it it's even knows that it sounds like there's a very large local pig farm. Might need to do something with its waste. So the the that sort of element of of things, but as a group today, we don't actually produce much carbon. And we would look to offset it in in in due course when we're generating significant cash flow.

30:51 So production, it's key, and it's on furthermore, Selva will will change that. All our projects have multiple following up opportunities with Selva North, Selva South, and we've gone through the prospects of we've gone through the prospects in Alomar. So I'd like to, you know, thank people for their time today. We've clearly sitting on some very strong assets. I think it's important for the company that we achieve cash flow positive and strong cash flow. Silver gives us a very strong foundation to to the to the

31:43 company. That we think that will help to rerate the company. The portfolio is important. We're multi country, multi jurisdiction. And this is you know, we keep pointing out the plenty of opportunities in both licenses. We did not go into those on the basis of a here's a single thing, and that's it for us. We want to move on. So that's good. Climate change is important for The UK. It's important for the world. It's certainly important for Europe. We've seen that the European countries are are doing things in slightly their own pace.

32:34 I would say Italy is ahead of of most of the countries. We've seen, obviously, some progress in Spain. And, certainly, in terms of of progress having, you know, gone through some of the things in Italy, we think that will mean there's less debate. They put a moratorium on expiration, and that's coming to an end. So that's good for the industry as a whole. It should be noted that, actually, our follow on opportunities are likely to be in the production permit area, so it wouldn't fall under exploration as as as well. We we do have we're gonna find a strong management team who's very good at dealing with industry industry partners.

33:26 We've got access to to a whole set of things. And in in in time, we we believe that the the value will add in the portfolio. So I'd like to, at this stage, thank you for listening. I think Mark is gonna open things up. Absolutely. Edward Carlos, thank you very much indeed for updating investors this afternoon. Ladies and gentlemen, please do continue to submit your questions using the Q and A tab situated on the right hand corner of your screen. I just want the company to take a few moments to review those questions submitted already. I'd like to remind you that the recording of this presentation, along with a copy of the slides and the published Q and A, be accessible via your Investor Meet company dashboard, and we'll send you an email when they're ready for your review. I'd also like to remind you that feedback is important to the company. And immediately after the presentation has ended, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations.

34:20 Edward Carlos, obviously, I could ask you just to open up the Q and A tab, it's on the right hand side. You'll see a number of questions has now started to populate themselves. Perhaps I could hand back to you. If I could ask you to read out the question and give a response where it's appropriate to do so, that'd be great, and I'll pick up from you at the end. So, Mark, you're have to give me a nudge of how to find it. I've Okay. So on the right hand side of your screen, can you see the q and a polls tab? If not, is there a blue button on the right hand side at the bottom? There is. Click on the blue button. Yeah. No. You that's perfect. And then the second one in says q and a. And then if you would be so kind, it's just to read out the question and give a response. That'd be fantastic. Thank you. Have you got those there, Edward? You can see them. Yes. Yeah. There's a lot to read through, so apologies.

35:14 So there you go. Okay. So we'll we'll we'll start start at the top. Do you see admin expenses reducing over time? Yes. And they've clearly reduced from 2,019 into '20, and we can see them again reducing in 2021. We have, you know, a core team of that we can look at projects in detail internally. And so that's always been key for us is to have a business development side of things.

36:06 Again, long term, we do have this ambition of of of being an operating company. And, again, that might alter the cost base slightly. But, again, at that stage, it's you know, we will have hopefully significant revenue, etcetera. I think you have great assets, but given the market cap, how do you look to build a company with existing balance sheet? The assets will allow for us to I I believe, will allow us to borrow against. So we can put in on development. Development itself will, I believe, lead to a a rerating and also give us significant, you know, cash flow for us to make discretionary expenditure, which we'll hope will be beneficial for the shareholders, whether that's be more well or etcetera, that type of thing.

37:13 I'm just reading the next question. Over the last year, the market additions have been perfect for deals to bring in cash generating assets to cover g and a. Why have no deals been made? If you look at the portfolio today, there is assets that are generating cash. They are generating El Romero. We we knew that that cash would be useful for Tarber whilst it goes through the permitting space. The other key asset, significant asset on the balance sheet is is silver.

38:02 That is will generate sort of cash of sort of cash that that you talk about. The decision was to get to cash flow positive without bringing in extra assets that actually do take significant time, do take time and cost in due diligence. And we need wanted to wait for Selva to produce the cash flow to do that. The PROSPEX has suffered badly for a number of years raising money to cover g and a. The a number of people have, obviously, you know, looked at, the company.

39:00 The company has not just been bad at g and a. We we clearly have spent money on getting into assets, and we spent money on wells. And that that's been important to us. Let me continue. So Just a few technical. David c, please summarize the drilling plan and time scales for for El Yeah. The the drilling plans for El Romero Romero.

39:58 Are being discussed with our partners. Is putting various proposals together. What it has done is looking to permit a number of of I think it's in the region of 12 different wells, and that that requires a whole process. I think that will take probably twelve, if not a bit longer, months to do that. But then there's a there's a significant cost reduction if you drill multiple wells back to back. But, again, with a clear date and and line to drilling and the low chance of a failure there because of the very low risk wells, we believe that, again, you know, that that's easily financeable at the time or even coming and funded from cash generation elsewhere in in in the portfolio.

41:02 Yeah. Again, El El Morale, there's a question about the the p one and yeah. There's a question about the p one, p two economics there. How how are we going to mitigate this? The the the economics are based on no further additional production. If you take the further additional production on the economics fundamentally change, we don't have early abandonment and such like. I'd also suggest that the current prices have significantly improved over and above what is there.

41:51 Interesting enough, when the CPI was originally done, you know, it envisaged production at tailing off. That's not happened. And, again, we'll produce more gas in a in a in a in a shorter time frame, again, improving the economics. The other report mentions a 16% gross overriding royalty. Can you provide more details to shareholders on this on this for the instance, the mechanism of it? Yeah. We can do. There are a number the original asset was sold to the utility with this overriding royalty on it.

42:42 It was an overriding royalty on the exploration element of the portfolio. It wasn't on the his wells that had been historically being drilled. As well, people may know that the Talbot bought the asset for €750,000. It was clearly the royalty was clearly there. It's been there for many years. We've we've looked at this that actually we the royalty in itself has been useful because we could clearly say to the vendor, well, there's a royalty here. We don't like the royalty. Therefore, the acquisition cost was negotiated on that basis. So that that's how we we we've looked at the royalty, and I hope that gives some clarity on it. But that's was priced in in into the transaction.

43:46 Which asset are you most excited about and why? If I'm if I asked to choose one asset, it it it's clearly it must be silver because silver is is a key asset for this. It we had very low cost entry into it, and it's gonna produce significant cash flow for the company. And, you know, with it came silver east, silver north, silver south. So I I think you have you have to focus on that. That becomes the rubric of crossing from cash consumption to cash generation.

44:45 Tom w, what's the implication of significant increase in shareholders of a small number of key investors? And have had they had discussions, with these investors as their future roles and objectives? It's quite clear that, obviously, from the tier ones that we we have a a number of ported large shareholders. There have been some correspondence with the those people mainly led by company's chairman as one of his dedicated roles to do that. Edward, I think you've pretty much covered most questions that have come through unless I've missed any of this. Is there anything else that is there for you to address?

45:36 And thank you firstly to all those investors that have taken the time to submit those questions. But Edward, if there are any others that perhaps need addressing, that's great. If not, if I could just ask you for a few closing remarks. And I know investor feedback is important, and we will shortly commence and redirect investors to provide you with their thoughts and expectations. Well well, thank you for people's time today. I think it's hopefully been a productive time for you for for people. Since our last presentation like this, obviously, we've had a number of of changes and important changes. That is we've taken control of the Alomero project.

46:21 Day to day operations are going well there, and we're much helped. You know, electricity price has gone up, but the the team there are looking to to fully well, not fully, but to utilize the plant more there. These do take some time. You know, there's processes and things that need to go through. But importantly, very much so, we we guided the next stage or the operator guided the next stage of permitting in the first quarter of twenty twenty one. That has happened. That has very much firmed up the timelines for getting that sale on production, and that's that's key. So, you know, we are moving forward, and I think that will be good for all shareholders.

47:16 And we've been pleased to do today. We were asked to do it, and hopefully, people see that we are listening and engaging. Thank you. Edward, Carlos, thank you once again so much for updating this This will only take a few moments to complete, but I'm sure will be greatly valued by the management team. On behalf of the management team of PROSPEX ENERGY, we'd like to thank you very much for attending today's presentation. That now concludes today's session, and good afternoon to you all. Thank you.