Interim results for the period ended 30 June 2014

Ascent Resources plc / Epic: AST / Index: AIM / Sector: Oil and Gas

 

Ascent Resources plc

("Ascent" or "the Company")

 

Interim results for the period ended 30 June 2014

 

 

Ascent presents its unaudited results for the six months ended 30 June 2014

 

Introduction

 

During the period under review we report steady progress toward our goal of bringing the Petišovci project into production. As mentioned in the announcement on 8th September 2014, the key Integrated Pollution Prevention & Control ("IPPC") permit was submitted to the Slovenian Environmental Agency in June 2014. The Company has been informed that the decision making process normally lasts approximately six months.   

 

Your Board continues to work hard to replace the funds promised by Global Power Sources s.r.l ("GPS") and their partners, Salomon Werner HAB Privée Limited, formerly known as Salomon Partners WRS Werner Rothschild & CIE Limited ("WRS") which have as yet failed to materialise. There are a small number of discussions with potential funders ongoing although there can be no promise that these will result in funds being invested. However, Henderson has agreed to provide a further £2 million of funding which will repay the Darwin loan and should provide adequate funds to reach the granting of the IPPC.

 

Background

 

Following the disposal of our interests in assets in Hungary, the Netherlands, Switzerland and Italy, the Company's focus has been entirely on our Slovenian asset, Petišovci.

 

Slovenia is a country of some 2 million people and the estimates of the potential production from the Petišovci project once fully developed will significantly reduce the country's reliance on foreign gas imports.

 

Ascent has an effective 75% working interest in the project but a requirement to fund 100% of the costs of development.  Ascent's partners in the Petišovci project are Petrol; the leading energy supplier in Slovenia and Nafta Lendava, a Slovenian state-owned company engaged in hydrocarbon exploration, extraction, storage and associated services. The Petišovci gas field complex is situated in the east of Slovenia close to the Hungarian border.

 

Steps to production start-up

 

In order to begin commercial production of gas, Ascent, working with its partners in Slovenia will carry out the following works:

 

·      Construct a pipeline to connect the processing facility to the national grid.  This will measure just over 1,100 metres in length and is expected to take eight weeks to construct at an estimated cost of €0.4 million once the tenders have been compared and a supplier chosen. We have already obtained easement rights from over half of the landowners covering the route preferred by the company and the local authorities.

·      Install a new gas processing facility for dew point control and to reduce the CO2 content of the gas to meet national pipeline specifications. The proposed plant is expected to cost €7 million to fabricate and install. The entire process is expected to be completed in early 2016 with commencement of the procurement process due to start in early Q4 2014.

·      Upgrade the Lendava Measuring and Control Station and supply and install two measuring and control lines along with the associated equipment for gas purification and quality control, for onward transmission into the national grid. This facility is expected to cost around €1.5 million and take 14 months from signature of contracts. This is expected to be the final significant step before the commencement of production.

·      Remove temporary plugs from existing wells and construct flowlines of less than 500 metres to tie these in to the new gas processing facility.  The Pg-11A well requires a 30 metre flow line to link in to the existing gas gathering line.  In the case of the Pg10 well, approval has been received to build a 475 metre flow line to the new gas processing plant. The total cost to tie in both wells is expected to be around €1.5 million.

·      The company is in advanced discussions with a potential bank funder to provide a significant proportion of the capital funds required.

Progress in 2014

 

In the last six months the Company has made significant progress in submitting the key permits and successfully negotiating the contract for connection into the national grid.  However unexpected delays were caused by the proposed routing of a high voltage power line close to our proposed site and also as a result of the exceptionally high level of technical detail required by the Slovenian authorities in the permitting application, as further described below.

 

The most significant development in 2014 has been the submission of the Integrated Pollution Prevention & Control ("IPPC") permit in June 2014. The Company has been informed that the decision making process normally lasts approximately six months.  Once the IPPC permit has been issued, the Board, based on on-going discussions with interested banks, believes that suitable project finance should be available to fund construction of infrastructure and pipelines, as described above.  Ascent management's expectation is that, in line with stated government timelines, the IPPC permit will be put to public consultation early in Q1 2015 and is expected to take several weeks from that time.

 

In July 2014 we reached mutual agreement with Plinovodi d.o.o., on the contract for the upstream pipeline connection to the natural gas transmission system and associated metering system. This is being reviewed by the market regulator (the Energy Agency).

 

However, as mentioned above the decision by the state-owned electricity company to route a major high voltage power line close to the existing gas treatment plant created another hurdle for us to overcome.   Although conflicting professional opinions were expressed by various parties, it was considered prudent, for safety reasons, not to construct a new gas processing facility in close proximity to the proposed power line, especially as the plant will require expansion as more wells come on stream in Phase 2 of the field development.  The partners accordingly agreed to seek a new location for the gas processing plant, negotiations with various landowners were duly entered into and commercially satisfactory terms agreed. This process took approximately six months and we are pleased that final contracts for the purchase of the land are expected to be signed in Q4 2014.

 

Further delays have been caused by the considerable uncertainty and conflicting legal advice on the applicability of new EU regulations regarding competitive tendering for all parts of the construction phase.  However certain rules on public procurement in Slovenia have recently been relaxed, which should lead to shorter lead times when issuing tenders for construction contracts.

 

Methanol plant

 

At the start of the period under review we expected the rapid re-commissioning of the adjacent but mothballed methanol plant, which was a potential outlet for our untreated gas.

 

The plant was acquired by an Austrian company that wishes to use our untreated gas in the production of methanol.  Discussions with them in relation to the terms of an offtake agreement to supply gas from our wells have reached an advanced stage.

 

The methanol plant continues to offer the potential for early revenue in advance of the construction of infrastructure required for the sale of gas into the national grid.  However the Austrian company's transaction with Nafta Lendava, the Slovenian seller of the methanol plant, includes various outstanding preconditions that need to be satisfied before it will start to re-commission the plant and until these conditions are satisfied, we are not able to sell our untreated gas to the methanol plant.  

 

Funding

                     

Background

 

Ascent requires funding until the Petišovci project becomes operational. 

 

GPS

 

In May 2014 we announced the conditional subscription for ordinary shares by GPS of an initial sum of £11.7 million at a price of 0.8p per share (the "Initial Subscription").   Also announced was an additional subscription by GPS of a further £3.3 million subject to the performance of the Petišovci project and the adjacent methanol plant before 31 December 2014.

 

The new shares to be issued as part of the Initial Subscription, together with the shares GPS already owned would have taken GPS's holding to some 47.9% of the enlarged share capital of Ascent and to some 53.1% of the enlarged total should the additional subscription have been made.

 

GPS planned to fund this investment principally through a back-to-back arrangement with WRS.

 

Eidos Partners s.r.l. ("Eidos Partners"), an independent advisory firm with offices in Milan and London, as financial adviser to GPS, confirmed in writing to the Ascent board the availability of the funds to make the Initial Subscription and that these funds would not be used for any other purpose but to complete the Initial Subscription.

 

Additionally, WRS separately confirmed in writing to Ascent that in the event GPS did not pay for the Initial Subscription by 30 June 2014, WRS would provide Ascent with collateral pending receipt of the Initial Subscription funds from GPS.

 

Current position

 

The obligations of GPS under the above agreement remain unmet and GPS is clearly in default.

 

It remains the position that we have received no adequate explanation as to why the funds identified to make the Initial Subscription have not been transferred to Ascent or why WRS has failed to honour its agreement with GPS.

 

Additionally, WRS has failed to fulfil a direct undertaking to Ascent to provide adequate security to Ascent in the event that GPS did not transfer the Initial Subscription monies by 30 June 2014.

 

Disappointingly, to date, Eidos Partners, have shown little interest in securing the payment that they confirmed would be made.

 

Current position

 

Since it became clear that completion of the GPS deal was not certain Ascent has been in discussions with several alternative providers of funds.  We have also continued working with GPS to make sure they fulfil their commitments.

 

To date none of these discussions have resulted in new funding for Ascent.  Accordingly on 8 September 2014, Ascent negotiated a variation to the 2014 Henderson Loan Note agreement, whereby a further £2 million was subscribed by Henderson at an effective conversion price of 0.2p per share.  A condition of the variation was that the total amount available under the 2014 Loan Note agreement has been reduced from £5 million to £4 million.

 

In the absence of additional funding this is expected to be sufficient to cover the period to the end of Q1 2015. Beyond that, additional funding would be required to continue with the Petišovci project and to repay the 2013 and 2014 Loan Notes.  The 2014 notes are due for redemption on 23 December 2014, while the 2013 notes are due on 31 January 2015.

 

New funding strategy

 

Until recently the financial strategy of the Group was to raise sufficient funding to cover the permitting, construction and commissioning phases of the Petišovci project.  Following repeated permitting delays it is clear that none of the banks identified for the construction phase will advance material funding until the permitting phase is completed. Therefore the revised financial strategy is now to fund the Company solely for permitting and to minimize all other costs.  Inevitably this will result in waiting for the long lead-time capital items when construction is set to commence.

 

Bank funding

 

We are in advanced discussions with a major international funding institution for a project loan for phase one of the project.  This is subject to their due diligence, which we understand is progressing well.

               

Longer-term outlook

 

The Slovenian economy has suffered from the recent European economic crisis and levels of foreign direct investment have been disappointing, with national gas consumption being entirely reliant on imported gas. The Petišovci project would be the largest gas field within Slovenia and at full production could supply the majority of the country's needs.  The field should be advantageous to the national energy strategy.

 

The Ascent board believes that Petišovci remains a project with significant potential.  Despite the issues referred to above, progress continues to be made, together with our partners in Slovenia, to bring the asset into production. 

 

Once the project is fully permitted and with workable project loans in place, Ascent is expected to move steadily towards production and income.  Management's estimate of the NPV10 of Ascent's share of the asset is in excess of €150m.  The Ascent board expects that the project will provide material cash flows to the Company from Q1 2016.

 

Yours faithfully

 

 

 

 

 

Clive Carver

Chairman