PXEN shares have skyrocketed by 300% over the past year, but if hydrocarbon prices remain elevated further increases could follow.
It’s probably not controversial to state that Prospex Energy (LON: PXEN) investors have had a fairly exceptional year. Up 300% to 16p, PXEN has been a beneficiary of both rising oil and gas prices, and of exceptional management through 2022.
However, the same company has simply recovered to roughly the same share price point as it held five years ago. This begs the question: does Prospex have further to go, or will there be a pullback through 2023?
Prospex Energy: portfolio strategy
Prospex is in the process of developing a European oil and gas portfolio, investing in low capex opportunities that are already late-stage and drill-ready. Accordingly, all targets identified are acquired with the expectation of creating shareholder value within 12 months.
Further, PXEN has fairly stringent criteria when seeking out new investments: regions with working petroleum systems, favourable and stable fiscal regimes, scalability, the scope for new tech to unlock value, visible ‘line of sight’ catalysts for value re-rating, and clear opportunity for monetisation.
Sadly, these requirements do sound a little like a wish list — and any projects exactly matching these requirements will face stiff competition. However, PXEN’s focus on using new tech to unlock value from previously unprofitable or semi-spent operations can allow it a foothold in some promising claims.
And while it has taken the company time to get out of the quagmire, the sure but steady approach makes it less risky than many of its peers.
Prospex has interests in three key projects: two in Spain and a recent acquisition in Italy. Both Spanish assets are co-owned with Warrego Energy through intermediary company Tarba Energia.
Prospex owns a 49.9% interest in the Spain-based El Romeral gas power project, with partner Warrego Energy owning the remaining 50.1%. Production is ongoing from three wells: El Ciervo-1, Santa Clara-1 and Sevilla-3, together boasting gross 2P reserves of 0.3 Bcf.
The wider asset has been explored by Repsol, Chevron and other majors, and this historical information combined with significant well data has highlighted five possible commercial gas discoveries.
The project also includes the El Romeral gas-to-electricity power station, and 25km of local gas pipelines connecting the station to the Maghreb-Europe pipeline operated by ENAGAS. Annual revenues from selling gas to the Spanish electricity grid stand at a steady €4.2 million
Importantly, the power station has 78% spare capacity, which is critical as PXEN expects to develop multiple identified ‘very low-risk’ prospects within the project’s boundaries.
PXEN’s second Spanish project is Tesorillo, which has the potential to hold up to 830 billion cubic feet of gas, with upside in excess of 2 Tcf according to independent 2015 analysis from Netherland Sewell and Associates.
PXEN owns a 15% interest in Tesorillo with Warrego owning the remaining 85%. However, PXEN has the option to increase its interest to 49.9% upon payment of €1.725 million prior to the drilling of an appraisal well.
Confusingly, Tesorillo comprises two petroleum exploration permits: one also named Tesorillo and the other Ruedalabola. The project is conveniently located less than 4 km from the African Maghreb gas pipeline European landing point. Prospex is building a sizable oil and gas investment portfolio, focusing on high impact, onshore and shallow, offshore European opportunities located in working hydrocarbon systems.
It’s worth noting that Warrego has been approached with two buyout offers, with one from ASX-listed Strike Energy. If this went through, Strike would sell its stake in both projects within 12 months as it does not wish to operate outside of Australia.
This could work out as beneficial for PXEN if it can negotiate a discount on a full buy-out of the projects, which would be much simpler to conduct than opening an auction.
@ProspexEnergy 2022 at a glance #PXEN Gas plant construction work and pipeline installation work underway – onshore in the Po Valley region of northern Italy 🇮🇹 Podere Maiar remains on track for first gas in early Q2 2023 @Share_Talk The shares quadrupled in 2022 +335.48%💫 https://t.co/JCsBlQn37p pic.twitter.com/ORWV21m5ws
— Share_Talk ™ (@Share_Talk) January 5, 2023
Finally, PXEN owns a 37% interest in the Podere Gallina Exploration Permit in Italy after a successful £2,455,000 fundraise, with partners (and operator) Po Valley Energy holding the remainder. The permit exists within the historic Po Valley Basin, was previously successfully operated by ENI until 1984, and contains the 80.8 square kilometre Selva gas field.
On 23 November, PXEN announced it had received final approval to commence development activity at Selva. It has already begun works to prepare to tie-in the project to the SNAM gas grid network which is ideally located less than 1kn away, and is now actively constructing a gas plant onsite.
CEO Mark Routh enthuses that it ‘remains on schedule and on budget to achieve first gas early in the second quarter of 2023. Initial conversations with gas off-take partners for the sale of gas have commenced, which we have decided to sell jointly with the Operator Po Valley under a joint marketing agreement.’ The CEO argued that ‘next year will be a transformational year for Prospex as we become a producer of gas in Italy as well as in Spain.’
In H1 results, the company saw net profits explode to £5,120,408 from a paltry £129,356 in the same half in the prior year. Its net book value of investments more than doubled to £14,343,285, while it saw a £7,645,980 gain on revaluation of investments and loans.
And having raised £2,370,000 through the issue of two separate unsecured Convertible Loan Notes to existing and new investors, the company notes it is fully funded to development of first gas at Selva.
Again, this company has a market cap of just £45 million, even after its 300% gain of 2022.
Of course, whether BP or Shell, PXEN or ANGS, all oil and gas producers are hostages to energy prices. It’s easy to forger that Brent Crude went negative for the first time ever in April 2020, and the cyclical nature of hard commodities mean that the current high prices will not last forever.
But for context, most analysts agree that oil and gas prices will stay elevated in 2023. A December Reuters poll of 38 analysts believe the year will average out at $100.50/barrel, JP Morgan advocates for $90/barrel, and Goldman Sachs $125/barrel assuming China does not backtrack on reopening.
However, these estimates are predicated on China being able to unlock it economy at pace, the Ukraine war continuing, and the global recession remaining shallow. These three outcomes are far from guaranteed. Gas has fallen below pre-Ukraine war levels, and Brent Crude is surfing around $81 a barrel, just $11 above the 2021 average. And predicting where energy prices will go next is more of an art than a science.
The ongoing Chinese reopening is supporting higher prices through increased demand in the world’s manufacturing hub, while the Ukraine war is artificially restricting supply through two-way sanctions, both official and unofficial.
But consider this scenario: China goes back into lockdown, the Ukraine war concludes in mid-2023, and the global recession causes demand destruction, followed by an oil and gas glut similar to that which followed the 1979 Iranian Oil Crisis. PXEN shares would undoubtedly suffer without the financial shield afforded to the majors.
However, Prospex has benefitted hugely from increased prices in 2022 and the competent management team has used the windfall to acquire an additional high-quality asset and bring it near to production.
With overall output expected to increase, and hydrocarbon prices expected to remain elevated, further share price rises seem a likely outcome.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investment decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
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