Chairman's Report

for the year ended 31 December 2022

 

During 2022 there was increased activity not only from ongoing operations in Spain but also from the start of construction and development works on our asset in Italy.  Operations in the Company's investment portfolio were carried out with an exemplary safety performance by our operators, contractors and partners with no loss time incidents, health and safety or environmental issues.  The Company continues to monitor its HSE performance by promoting a high level of HSE awareness and rewarding good practices and culture with its partners, operators and subcontractors.

The 2022 financial and Corporate Highlights for Prospex Energy were underlined by progress on a number of fronts plus strong commodity prices leading to a very strong rise in the Company's share price - a rise of more than 300% in the year.  Subsequent to year end, commodity pricing has returned to lower levels with a consequent reduction in share price.

In April 2022, the Company increased its stake in the Selva Gas Field in the Po Valley in Italy to 37% following a successful fundraise of £2,454,800 from the issue of shares at 3.5p.  The fundraising was supported by existing institutional and retail investors, as well as the Directors of the Company.

The increase in the net book value of investments to £16,064,640 from £6,697,305 at the end of last year reflects the after-tax effect of the revaluation of the Company's 37% (2021 : 17%) working interest in the Podere Gallina licence in Italy.

We have applied the same valuation methodology which was used in the audited financial statements at the end of 2021, consistently applied it to the additional 20% working interest acquired in the current period and updated the underlying future gas pricing assumptions to the European forward contract gas prices applicable on 11 May 2023. 

The current forward contract prices for European natural gas at the date of preparation of these results remain above those at the end of 2021, upon which the valuations to-date have been based, but below those at the current reporting date of 31 December 2022.

Applying the more recent forward gas prices provides us with a more up-to-date estimate of future revenues, and a valuation which we consider fair and reasonable having taken into account all current market expectations.

In May 2022, the Company appointed VSA Capital Ltd as its Joint Corporate Broker and Joint Financial Adviser.

In July 2022, £1.87 million was raised from the issue of Convertible Loan Notes convertible at 4.25p per share to existing and new investors, with participation of all of the Directors of the Company.

In September 2022, a further £0.5 million was raised from the issue of Convertible Loan Notes convertible at 5.5p per share to existing investors.

This debt/equity hybrid financing of £2,370,000 in aggregate, meant that Prospex was able to state that it had sufficient cash in hand to fund fully its 37% share in the Selva field development to the point of first gas then scheduled early in the second quarter of 2023.

This funding by the Company via Convertible Loan Notes from our existing network of shareholders and supporters over the years plus a number of new subscribers was undertaken without issuing warrants, with no fees to brokers and at the prevailing market share price at the time or at a small premium.  A total of £4,824,800 was raised during the year via the issue of Convertible Loan Notes and new equity.  The interest and capital repayments on the Convertible Loan Notes have been conservatively scheduled to fall well within the expected post-tax, post-royalty cash flows from Selva, with the first capital repayments scheduled on 30 September 2023, unless previously converted.  Part of the remaining cash flow generated from the Italian asset will be earmarked for future drilling and seismic data acquisition on our existing permits in both Italy and Spain.

The conversion of historic 3p warrants between April and October 2022 generated further funds of £730,000 and the exercise of management options at 4p generated £70,640.

 

Chairman's Report

for the year ended 31 December 2022

 

Operational Highlights:

Selva Field in Italy (37% working interest)

In January 2022, Po Valley Energy, the operator of the Selva field in the Po Valley in Italy, starts and fully funds the installation of the background seismic monitoring network to be operational ahead of the 12 months required by the regulators.

In February 2022, the equity fund-raise of £2,454,800 at 3.5p per share allowed the Company to complete the acquisition of the additional 20% of the Selva Field in Italy which was agreed in August 2021 in a sale and purchase agreement with UOG. 

In April 2022, the acquisition of the extra 20% of the Selva Gas Field completed, with the Ministry of Ecological Transition ("MITE") in Rome approving Prospex's acquisition of UOG Italia Srl which owns 20% of the joint venture in the licence.  Together with the existing stake in the joint venture held through PXOG Marshall, this brought the Company's stake in the project to 37%.

The acquisition of 100% of UOG Italia increased the Company's holding in the asset from 17% to 37% and therefore increased Prospex's share of Selva's independently verified 2P gas reserves by 2.7 Bcf, from 2.3 Bcf to 5.0 Bcf^[1].

In June 2022, the penultimate approval for the production concession at the Podere Gallina licence was granted by the Emilia Romagna Regional Council.  This local government approval was a prerequisite for Italy's MITE to grant the Final Production Concession at Selva Malvezzi.

On 29 July 2022, full production concession approval was finally granted by the MITE for the Selva Gas Field.  This led to the awarding of contracts and first payments made to the contractors for the construction of the automated gas plant facilities, the installation of a 1,000 metre four-inch pipeline and the connection to the national gas grid network operated by SNAM.  Full production concession approval was also the trigger for Prospex to pay its 37% share of the €757,000 SNAM Bond (€280,090 net to Prospex) necessary to procure the connection to the national gas grid with SNAM.  The €757,000 had been advanced to SNAM by the operator Po Valley Energy on behalf of the Joint Venture in February 2022.

On 8 August 2022, Po Valley Energy the operator signed a construction contract with TESI Srl ('TESI') an Italian engineering firm, to install the gas plant and pipeline to connect the suspended Podere Maiar-1 well at Selva to Italy's gas grid.  The contract secured development costs and timing with construction costs €130,000 (£110,000) less than previously forecast.  Post period end, construction has completed and first gas is expected in Q2 of 2023.

Following the successful completion of funding through Convertible Loan Notes, in September 2022, Prospex could now state that it was fully funded to first gas at the Selva Field.

Also in September 2022, Po Valley the operator of Selva, completed the land acquisition required to connect the pipeline from the suspended well at Selva Malvezzi to the SNAM gas grid and purchased the required 1km of 4-inch steel pipe.

In November 2022, final approvals were received to commence field development works at the Selva Gas Field and gas plant construction and pipeline installation started.

In December 2022, gas purchase and off-take agreements for the sale of gas from the Selva field were nearing completion for the joint sale of the total gas production from the asset.

Post period end:  A Gas Sales agreement was signed in February 2023 and in May 2023 the gas plant construction was completed and is ready for commissioning.  The connections to the gas grid operated by SNAM are complete, enabling the delivery of gas to the Italian gas grid.  With the SNAM connection and transmission arrangements finalised, Po Valley Operations has initiated the process of recovering €757,000 performance bond funds (100% basis - €280,090 net to Prospex), previously deposited with SNAM.

^[1] Source: "Competent Person's Report Podere Gallina Licence, Italy" prepared by CGG Services (UK) Limited in July 2022 https://bit.ly/3JASCc2

 

Chairman's Report

for the year ended 31 December 2022

 

El Romeral in Spain (49.9% interest)

The El Romeral gas and power project in Spain, with gas production wells supplying gas to an 8.1MW power plant near Carmona in Southern Spain is owned and operated by Tarba Energía Srl the operating company.  It is currently operating at about 30% of its full capacity because Tarba is waiting on permits to drill further infill wells on the concessions to increase production.  Prospex owns a 49.9% working interest in the El Romeral project via Tarba.  The remaining 50.1% working interest is owned by Warrego Energy Limited.  Tarba sells electricity generated from the plant on the spot market in Spain.  The El Romeral licences comprise three contiguous production concessions.

In March 2022, Tarba completed the El Romeral plant automation project which started in December 2021 allowing the live testing of 24/7 production operations.  A detailed reservoir modelling project was completed which confirmed that continuous production operation was not only feasible but also optimised ultimate gas recovery.

Gross monthly revenue from electricity generation at the El Romeral power plant peaked at over €500,000 in March 2022.

By April 2022, the El Romeral power plant was generating electricity 24 hours a day and 7 days per week and electricity sales were at record levels.

On 28 April 2022, Tarba completed the repayment of its outstanding loans plus interest to the two co-owners Prospex Energy and Warrego Energy.  The loans repaid of €289,577, plus accrued interest of €19,092.97, equalled a total of €308,669.97.  Prospex's share of this is €153,698.64.  The repayment of loans held in the El Romeral asset totalled €589,577, plus accrued interest of €19,092.97.

In May 2022, the reprocessing of 250km of 2D seismic lines was instigated to improve the subsurface imaging across the three El Romeral Production Concessions.

In June 2022, Tarba commenced the first of two solar installation projects at El Romeral, 'Project Apollo' the installation of solar panels on the power station roof.  The second solar project 'Project Helios' which involves the installation of a 4.9MW solar farm adjacent to the power plant was recommended for an investment decision and front-end engineering and design ('FEED') studies commenced.

In June 2022, the Spanish government announced that it would invoke a gas price cap for companies selling gas for electricity generation of €48.8/MWhr.  As a result, Spanish daily electricity prices were expected to average €150/MWhr for the next 12 months.  Average prices remained or exceeded this level until year end.

August 2022 saw the El Romeral asset continuing to generate healthy revenues with daily electricity spot prices averaging more than €180/MWhr in the quarter to 30 June 2022.

August 2022 also saw the completion of the installation of 83 solar panels on the roof of the power plant.  Project Apollo has an estimated return on investment of 3 - 4 years.

By December 2022, the reinterpretation of the reprocessed 2D seismic lines across the El Romeral Production Concessions was nearing completion with the aim of optimising the top 5 drilling targets for the permitting application process as requested by MITECO, the Spanish regulator.

By the year end, Prospex's JV partner in its assets in Spain, through Tarba, Warrego Energy is subject to a takeover bid in Australia.

Post period end, Hancock Energy (PB) Pty Ltd completed the acquisition of 100% of the shares of Warrego Energy Ltd, which was then de-listed from the ASX exchange in Sydney, Australia.

 

 

Chairman's Report

for the year ended 31 December 2022

 

Financial Review

For the year ended 31 December 2022, the Company is reporting Total Assets of £23,062,739 (2021: £8,984,437), the value of which largely comprises the Company's investment in PXOG Marshall Ltd, the vehicle for the Company's Italian assets.  The 156.7% increase is dominated by a revaluation reflecting measured recognition of positive changes in the forward curve of European gas prices at 31 December 2022 and includes revaluations of the Company's investments ('the Investments') as well as repayments and advances on loans receivable from those investments.  Unrealised gains arising on revaluation of Investments at fair value amounted to £9,367,435 (2021: £3,076,415).

As at 31 December 2022, the fair value of the Company's investments stood at £16,064,160 (2021: £6,697,305).  The combined value of these equity investments, current and non-current loans is £21,561,316 (2021: £8,726,484).  

This increase in the net book value of investments to £16,064,640 from £6,697,305 at the end of last year reflects the after-tax effect of the revaluation of the Company's working interest in the Podere Gallina licence in Italy.  In April 2022, the Company increased its stake in the Selva Gas Field in the Po Valley in Italy to 37% following the acquisition of a further 20% working interest in the licence from UOG.

The asset was also re-valued using the same valuation methodology which was used in the audited financial statements at the end of 2021 but utilising the underlying future gas pricing assumptions to the TTF European forward contract gas prices applicable on 11 May 2023.  The current forward contract prices for European natural gas at the date of preparation of these results remain above those at the end of 2021, upon which the valuations to-date have been based, but below those at the current reporting date of 31 December 2022.

The Company continues to have significant asset backing relative to its market capitalisation.

Administrative expenses for the full year totalled £975,725, a 9.4% increase from 2021's £891,676.

As at 31 December 2022, the Company held cash and cash equivalents of £1,482,762 (2021: £220,060). 

Business Development

The financial year ended 2022 saw unprecedented volatility in both gas and electricity prices on account of several dramatic events on the world stage.  The Company, through its Tarba investment, enjoyed record income from power generation in the month of March 2022, but the combination of regulation, attempts at price capping and the macro effects of the energy market supply and demand forces have seen prices reducing and volatility normalising.  In evaluating business development opportunities, the Prospex Board applied a conservative approach to forward energy pricing during the year.  Several data rooms were attended and assessed and discussions on many acquisitions progressed to various degrees, but none was finalised during the year, with the exception of the 20% acquisition from UOG of the Selva Joint Venture detailed above, which was signed in August 2021 and finalised in April 2022.  The Company continues to focus on onshore natural gas and power assets in Western Europe.  The Company's leadership considers that this geographical and product focus is an essential ingredient to setting Company strategy and defining the boundaries within which we operate.  Natural gas has been widely recognised as the transition fuel as Europe progresses to rely upon less carbon intensive energy sources.  In 2022, the Company actively pursued investments in renewable energy sources with two solar photovoltaic projects at the El Romeral asset in Spain.  This has already moved Prospex Energy to be categorised as an integrated energy company with a business model of utilising the traditional natural gas assets to expand into the renewable energy space.

 

Chairman's Report

for the year ended 31 December 2022

 

Outlook

The outlook for Prospex remains one of consolidation and growth.  With the Selva asset generating cash flows from Q2-2023, the Company expects to deliver organic growth in its two main assets in Spain and Italy.  Subsurface technical work and reprocessing of the 2D seismic lines is underway on the Selva Malvezzi production concession in order to optimise the final well locations for the next three wells to be drilled, Selva North, Selva South and East Selva.  In Spain on the Romeral production concessions, the environmental impact assessment process has been initiated in order to be granted the permits to drill five new wells which can be connected to Tarba's local pipeline network so that the El Romeral power plant can re-establish 100% of its installed generation capacity.  Currently running at just 30% capacity with just one of the three engines generating electricity at a time, it only needs two of the three proposed wells to be connected to the power plant for the power station to have sufficient gas to run all three engines and achieve the nameplate output capacity of 8.1MW.

Once the El Romeral concession wells are permitted, the Spanish regulator has undertaken to address the issue of the suspended Tesorillo permit.  The owners of Tarba are ready to initiate the permitting process for the appraisal well to be drilled on the permit once the licence has been converted into an exploitation concession.

The year ahead promises to see major progress.  I look forward to providing further updates as developments occur.

The significant impacts of COVID were still with us at the beginning of 2022 and long-term effects continue.  Our management, staff, contractors and partners were steadfast in moving the Company ahead throughout this challenging period and deserve our thanks.  After the year end, Dr Richard Mays, one of the founding directors of the Company, retired from the Board after years of providing strong and insightful leadership.  Andrew Hay agreed to join the Board and has proved an excellent addition.  I would like to take this opportunity to thank our investors whose support has enabled the Company to achieve a level of success and to our current and past directors, the Board and management team for their continued hard work, commitment and support.

 

 

Bill Smith

Non-Executive Chairman

24 May 2023