Is Prospex Energy about to be bought out?

At the start of this year, I made a prediction based on timelines of comparator companies that Prospex would start to get the licensing issues sorted by May 2024 — and argued that the stock would hit 10p during the month.

The good news is that while we are not yet at 10p, the stock is up around 60% year-to-date. Not 

too shabby. But I suspect there may be more to come.

Before I make the investment case, please be aware that this is small cap investing and while PXEN looks promising — anyone investing now is both at the mercy of the fickle beast that is the small cap market, and of investors who will take profits should the expected catalysts take too much time to materialize.

This is not risk-free, so please don’t complain if the trade backfires. The other thing is that I am not going to cover every little detail unlike more comprehensive articles — just what is making it an obvious target.

Let’s dive in.

Prospex Energy financials

First up, Prospex is debt free, cash generative and well positioned for growth. Previously it wasn’t, and this crushed sentiment for a time. All interest-bearing debt was paid off at the end of March. The warrants no longer exist. The barriers to growth are all gone.

In financial results, CEO Mark Routh noted the company was ‘self-sustaining on a business-as-usual basis.’ The debt holders converted their debt into equity and presumably most have held onto the shares given the recent rise.

The business in brief

Prospex as a company is actually really two businesses: Italy and Spain. 

Let’s do Italy first.

The major asset is Selva Malvezzi, an 81km2 production concession, in which PXEN owns a 37% interest. The remaining 63% is held by JV partner Po Valley Energy. And Chair of the JV, Kevin Bailey, has been hugely increasing his position in recent weeks.

For those thinking ‘if PXEN was going to be bought out, he would not be allowed to buy shares in the market with inside information,’ I have some bad news for you about how the AIM market is regulated.

Anyway, Selva had its production concession awarded in July 2022, the gas plant and all-important grid connection installed by May 2023, and it started producing gas last July. At present, it has permits to drill several more wells in the pipeline.

In today’s RNS, we got something of an update.

The operating well at Selva has performed ‘consistently during Q1/Q2 2024,’ reaching gross cumulative production of 7.63 MMscm net to Prospex and generating revenue of €2.6 million for Prospex by 26 May 2024.

As the gas is sold at a premium to market prices, the company is generating £6,100 a day in free cash flow — from this one well, equivalent to £2,226,500 a year. And because the hydrocarbon exploration and extraction restrictions imposed by Italy’s Plan for the Sustainable Energy Transition of Eligible Area have been lifted, East Selva can now be drilled from a better location without needing a risky and expensive deviated well.

The former PiTESAI legislation hugely restricted hydrocarbon exploration and extraction activities in Italy, and its repeal (thanks Russia) immediately improves further drilling opportunities at Selva Malvezzi. 

Whilst the annulment did create some uncertainty in the first half of 2024, the new conditions have created possibilities to fast-track the approvals for all of the discoveries and prospects in Selva Malvezzi, which will ultimately bring more wells into production more quickly than originally envisaged.

Routh notes that: 

‘In the first half of this year we have seen a significant change in the regulatory environment in Italy…We will continue to support the operator as it advances activities to facilitate the development drilling programmes at Selva Malvezzi with the target of converting the contingent resources at Selva North and Selva South and the prospective resources at East Selva and Riccardina into proved, developed and producing reserves in the near term.’

Let’s assume gas prices won’t shoot up again (and they might), what does four wells x £2,226,500 generate in free cash flow a year? What about five? Or more?

The company argues that we have ‘one of the most favourable government and regulatory environments in Italy ever seen, as the country aims to reduce its reliance on Russian natural gas and imports. ‘

Altogether, the Prospex notes that ‘these developments have caused the operator to reassess the optimal outcome for the Joint Venture in the next few years by capitalising on the window of opportunitycreated by the current Italian geopolitical environment and higher gas prices.’

Po Valley is now ‘actively pursuing more ambitious plans to submit applications to drill the larger East Selva and Riccardina prospects as well as Selva North and Selva South.’

Now Spain.

Prospex owns a 49.9% interest in the El Romeral gas to power plant — and 15% in the Tesorillo exploration permit. Both remaining percentages are owned by Warrego (a 100%-owned subsidiary of Hancock Energy, you should know who they are) and operated by Tarba Energia. 

It’s worth digging into management history at Warrego for bonus points.

At El Romeral, there’s an 8.1MW power station generating revenue at spot prices, with production from two gas wells — the plant operates continuously and is part powered by solar. 

And permitting is underway for a near-term 5-well drilling campaign.

The exploration permit covers 380km2 in Cadiz and is arguably low risk by exploration standards.

Historically, 7 wells have been drilled resulting in gas discoveries, five went on production from 2022 and two are proven but undeveloped. At present, there is production from two wells, and hugely importantly, there’s a 26-inch pipeline (ENAGAS) traversing three concessions.

In the very near future, 11 low risk prospects targeting 90 Bcf are in the ‘pipeline’ (pun intended). PXEN has submitted its EIA initiation document for drilling five wells and is expecting an update before the end of the year. Again, I expect this to be sooner rather than later.

The moment the drill permits drop, a rig is going to drill the five wells — and just two new wells producing 25,000 scm/d would take the current plant to 100% capacity. The company thinks it will take to at the latest Q3 2025 to complete the wells, pipelines and tiebacks — and then by the end of 2026 and possibly sooner, connect El Romeral to the Enagas pipeline.

There was a massive gas discovery back in 1957 simply awaiting a redrill.

The growth plan, but it’s not PXEN’s

Italy, by itself, right now, is expected to generate €2.6 million per year on 2019 gas prices in net post-tax, post-royalty cashflows. This jumps to €4 million+ based on forward real projections according to the current market pricing.

And those three additional wells are expected to be permitted in 2024, with drilling planned to come in 2024. Again, I think this will be soon.

Routh has form selling companies — he sold CH4 energy for £152 million — and it took him just four years.

Let’s look at the investment case — you have secured reserves in Europe where security of supply is critical. The potential for NPV uplift is huge. And in the recent corporate presentation the company noted that there are ‘multiple routes to significant shareholder value growth.’

PXEN shares were worth more than double their current price just over a year ago — and the company is arguably in a far better position on every possible metric (excluding the gas price).

But it is not going to develop the assets. The grid connections are too valuable; the further potential in both Spain and Italy much too large. Someone else is going to take it off their hands, whether in bits and pieces or all at once. 

I think a speculative bid at between 15p and 20p will come first; this may or may not be accepted by the board (or indeed shareholders). But permission to expand across both countries is coming, and the right companies will want to own the pie.

I like the Prospex.