By Dr. Michael Green
Cash is the lifeblood of AIM companies. Many investors see the value of their holdings whittled away (sometimes to nothing) as companies continue to tap the market looking for fresh funds to fuel far-fetched and ill-conceived growth plans. Truth is that the seabed of the market is littered with the carcasses of such basket cases – we won’t name any names!
Against such a backdrop, Ascent Resources is starting to well truly stand out by a country mile as it looks to fast becoming obvious that the company has no further cash requirements on the horizon. Under the new board, progress has been fairly swift and now dilution is starting to look like a thing of the past. Many who have followed Align know that we believe dilution is a dirty word – it sucks the lifeblood out of companies and successively decimates new entry registrants. For the avoidance of any doubt, we believe that Ascent has no further immediate cash fundraising requirements, in particular given the @ £950k of now in the money warrants at 5p that seem highly likely to be exercised. Below we thoroughly explain our thinking.
Ascent is the onshore Caribbean, Hispanic American and European focussed energy and natural resources company. Ascent has been in Slovenia for more than a decade and has a 75% interest in Slovenia’s only oil concession which has been producing since the 1950s. In all Ascent has invested over €50 million in this project.
In recent weeks, the company has received a net €650,000 as the first payment from its JV partner concerning 2020-21 revenues from the PG10 and PG11 wells. At some stage this month it is expected that the balance €857,000 will be received as the second payment for the revenues from the first half of 2022.
Also, the company has a mediation date in September 2022 with its JV partner over differing understandings of their JV contract concerning the share of hydrocarbon revenue from the other wells (apart from PG10 and PG11) in the concession. It is thought this could generate an additional 7-figure revenue for the company. If that wasn’t enough, Ascent has also put a proposition to its JV partner to resolve the JV’s dispute with its service provider.
Future gas receipts
Revenue recognition is a highly meaningful milestone for the company given what it has been up against below and above the surface in Slovenia. Moving ahead, let’s assume the PG10 and PG 11 wells go on producing in the region of 100,000 scm per month at a gas equivalent price of €2 per MWh – which represents a 15% discount to the current spot price of €2.30. On this basis, Ascent could be expected to receive €200,000 per month from these two wells until end Nov 2023 when the concessions come to an end. Plus, the mediation event next month could result in additional monthly revenues going forward. All at a time when the gas price is encouraging. The signs are that the company’s engagement with its JV partner will allow Ascent to enjoy access to these revenues for the remainder of the life of the licence. All added up, these settlement amounts and future gas receipts do provide a really clear picture of cash backing that is on the horizon from discussions in Slovenia with their partners and that, excluding the real potential “big ticket” settlement with the Slovenian Govt that has a Euro500m stamp on it, represents a meaningful proportion of the current market cap.
Settlement with the Slovenian Government
Two new wells (PG10 and PG11) were drilled and stimulated successfully with good flow rates in 2011. These wells were then suspended pending the commercial gas sale agreement (GSA) which was secured in 2017 and gas then exported to Croatia. When the wells were turned back on, production was substantially lower, likely due to the fractures having closed during the long duration of these negotiations. Reservoirs of this type do need stimulating every 2-5 years.
The JV partners applied for the permits to restimulate the wells as they had in 2011 and thirty times over the prior 50-year history of the field but they have not been forthcoming. There has been a populous campaign against Ascent which has gained pace and seems to have resulted in stimulation to produce hydrocarbons being outlawed in the country. Action looks to have been targeted on Ascent as a foreign investor and now the company is seeking compensation, redress and significant monetary damages concerning the effective appropriation of its investment (loss of the full value of the investment).
Most recently, Ascent announced the formal submission for arbitration against the Republic of Slovenia, which includes an updated preliminary damages assessment in excess of €500 million. The Slovenian government now has to properly deal with Ascent which in May 2022 appointed Enyo Law LLP and is fully funded to pursue the company’s Energy Charter Treaty (ECT) and UK-Slovenia Bilateral Investment Treaty (BIT) arbitration claim against the country.
The company has entered into a binding damages-based agreement which is a “no win no fee” funding deal with Enyo Law LLP to pursue these claims. This means that this case will not be a drain on the company’s cash. The way we see it is that all the Slovenian government’s dawdling tactics over the years were probably in the hope that a sabre-rattling microcap like Ascent couldn’t get such an action funded and would probably go pop in any case. Sadly for the Slovenian Govt that looks to be a major miscalculation.
Enyo Law is a specialist arbitration and litigation legal firm which filed both of the Notice of Disputes on behalf of the company and represented Ascent in last year’s pre-arbitration negotiations with the Republic of Slovenia. Enyo will be advancing the disbursements which are expected to be incurred in the pursuit of the claim and will only be paid out of a portion of the proceeds of the arbitration in the event of a successful damages award or execution of a binding settlement agreement.
Arbitration proceedings against Slovenia concern the significant damages suffered by the company’s Slovenian investment as a result of the country’s breaches of the protections established by the ECT and BIT. Amongst other things, these include the prohibition of expropriation, the guarantee that the investments would be accorded fair and equitable treatment and Slovenia’s guarantee that the management, maintenance, use, enjoyment, or disposal of the investments would not be impaired by arbitrary, unreasonable or discriminatory measures.
The size of its damages has increased for reasons that include the increased gas price and the consequences of the recent legislative changes in Slovenia and are now in excess of €500 million. However, the company has cautioned investors that even if they are successful, any amount actually received by Ascent may be significantly lower.
At this stage, we ought to point out that the Government of the Republic of Slovenia seems keen to settle such cases, in order to protect its investment-friendly reputation. Looking at publicly available information, Slovenia does not have a brilliant record in defending these treaties. We say this as there have been three investment treaty arbitrations against Slovenia in the public domain – Impresa Grassetto (in liquidation) Vs. RoS (2013); Interbrew Central European Holding Vs. RoS (2004) and Hrvatska Elektoroprivreda Vs. RoS (2015).
The first two settled (first was undisclosed quantum, second was awarded US$70.7 million through settlement). Slovenia lost the third and appeared to voluntarily pay the award to the successful claimant (US$34 million claimed, awarded settlement amount not disclosed). It looks like 3-0 against them so far.
We have just learnt that arbitration discussions have been suspended on another International Centre for Settlement of Investment Disputes (ICSID) claim against Slovenia that was filed in March 2022. This involves Addiko Bank. There could be a range of outcomes, but it may well suggest that settlement has been achieved in a remarkably short timetable of just 5 months.
Enyo Law will not only be taking the case on a risk basis – with a pay day only on a successful outcome. In addition, they will have cash on the hook, and they will be paying all the disbursements and these are front end loaded costs. Looking at similar sorts of cases, disbursements could total some US$2-3 million. Then there are the costs of expert witnesses, lawyers and council – which could well add up to something like US$5 million.
Slovenia has never seen a CT or BIT claim of this magnitude so there isn’t much guidance available. However other ECT Treaty claims include AIM listed Rockhopper currently suing the Italian Government for around US$325 million and the German Companies RWE and Uniper suing the Dutch Government for approximately US$2.6 billion.
Our base case
Our base case is that the company would at worst receive €50 million, which equates to Ascent’s investment in Solvenia. Our understanding of such “no win, no fee” deals is that costs are retched up as the case progresses and could amount to 25-30% of the award – which would result in the company netting some €36.25 million (£30.46 million). Based on the current 135.56 million shares in issue suggests 22.5p per share.
It is one thing winning a case like this and it is another thing getting paid. Well, listen up investors as the Slovenian government also tends to pay up as well. It is not really that hard to see why as no government wants to discourage potential international investors from setting up shop in its country. As far as collection of any award goes, Slovenia seems to have plenty of assets outside of the country which could be used for enforcement purposes.
Align Research initiated coverage on Ascent with a Conviction Buy stance and a target price of 18.34p in mid-September 2020 when the shares were trading at 3.25p. That target price was solely based on possible Petišovci scenarios where we looked at the two alternative scenarios of either litigation or development, with both outcomes being thoroughly risked – although there have been big changes over the intervening months. With the shares currently at 6.10p, it is apparent that the risk/reward profile has shifted materially in investor’s favour in recent months. Buy.
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