Ascent Resources (AIM:AST): Is Ascent on the way up?

While many oil and gas exploration companies are headed for the wild waters of the South Atlantic, offshore West Africa, or prospects in Kazakhstan and Siberia, Ascent Resources has focused on European prospects, and in particular on low cost onshore assets.

That makes it relatively low risk. Many of the fields in which it has interests are already known producers; they have a developed infrastructure, the countries they're based in are politically stable with strong legal structures, and there's a strong local market for oil and gas. Ascent has further reduced its risk by creating a diverse portfolio, in Italy, Slovenia, Hungary, and Switzerland (it does have a couple of assets in the Netherlands, but these are up for sale).

Even better, the company appears to have drastically reduced its cash burn in the last year, and expects to be cash flow positive next year [ref] EGM Presentation, December 2009: http://www.ascentresources.co.uk/investor_information/presentations.php# [/ref] . However, it's still prioritising resource growth ahead of production - so the asset value should increase, as long as it enjoys drilling success.

And as management points out, success hasn't been too bad. 3D seismic gave a 100% hit rate on the last 4 wells [ref] EGM Presentation, December 2009: http://www.ascentresources.co.uk/investor_information/presentations.php# [/ref] , though there have been technical difficulties with some of the wells.

Let's run through what the company has got in the way of assets.

First of all, it's got a producing Hungarian interest in the Peneszlek area (anyone investing in Eastern Europe soon wishes their computer keyboard had got an 'sz' key!). The PEN-105 well should be producing from February this year. Production testing had good results - the well flowed 78,000 cubic metres of gas per day, and is now shut in awaiting pipeline construction [ref] http://www.stockopedia.com/news/announcement/AST/091204ast000329.htm?title=Ascent%20Resources%20PLC%20Peneszlek%20Operations%20Update&date=1259884800 [/ref] . PEN-104A on the other hand has shown inconclusive results - it flowed a lot of water with a little gas, so further testing now needs to be done to work out whether it can be tweaked into being productive. There is certainly a substantial gas reservoir at Peneszlek, but what matters is working out how to get into it. There are some technical challenges, too - PEN-104 required highly deviated drilling, at 66 degrees, into the Miocence reservoir.

The company's Slovenian prospects are at a slightly earlier stage. Ascent has now farmed out  50% of its 80% participation to AspectEnergy International, which will share the costs of seismic acquisition and drilling.

Ascent has been working on the interpretation of 3D seismic for Petisovci, which it expects to be completed later this month. There is tight gas potential, plus shallow oil targets. Workovers and drilling are expected in early 2010, and since this is a previously producing field, the infrastructure is in place for quick development.

At Filovci, 3D seismic is being acquired. Again, there are previous oil and gas producing wells in the area, and Ascent is looking for shallow gas. Data processing should be complete by March 2010, and the first well could be drilled by the end of the year [ref] EGM Presentation, December 2009: http://www.ascentresources.co.uk/investor_information/presentations.php# [/ref] .

Any progress at Petisovci should have a particularly major impact on the company's asset value, as Ascent also has an interest with Hungarian oil giant MOL in the Lovaszi and Ujifalu oil and gas fields just over the border from the Slovenian field.

Ascent also has a few interests in Italy. It's had mixed fortunes here with its drilling; it was unsuccessful with Gazzata-1 on the Po prospect, and with Arrone-1, as well. (Gazzata-1 came in below budget and on time, which is testament to the company's wisdom in owning an interest in a drilling contractor - it has 22.5% of Perazzoli Drilling, which owns three rigs - but isn't really any consolation.)

Most recently, Ascent drilled the Fontana-1 appraisal well in the Latina valley, a shallow well at less than 700 metres depth. However, this has encountered mechanical problems and now needs to be redrilled - though as it was under budget, the new well should only increase the budget by 20% [ref] Fontana-1 Drilling update, December 2009: http://www.stockopedia.com/news/announcement/AST/091222ast000341.htm?title=Ascent%20Resources%20PLC%20Fontana-1%20Drilling%20Update&date=1261440000 [/ref] , or less than £100,000 additional expenditure. The Latina valley is a proven oil producing area [ref] Corporate Presentation, p 16: http://www.ascentresources.co.uk/investor_information/presentations.php# [/ref] , and Anagni-1 (drilled in 2008) confirmed good reservoir characteristics and oil presence.

And then there's a whole grab bag of smaller prospects, such as the Hermrigen gas field in Switzerland, an Elf 1982 discovery that is ripe for development. Ascent is looking for a partner who will underwrite the exploration cost in return for a 40% interest, and the most recent operations update suggests that a farmout agreement could be quite close -  several expressions of interest have been received.

What are the financials behind Ascent? Though it has revenues - £1.5m in 2008 - it's not profitable yet; it made a £4.6m operating loss in 2008, and invested a further £4.6m in exploration, a fairly chunky cash burn [ref] Annual report, year to 31 December 2008: http://www.ascentresources.co.uk/investor_information/Report_and_Accounts.php [/ref] . In the first half of 2009, though, it appears to have cut administrative costs and exploration, leading to a much decreased £757,000 loss from operations. With exploration expenditure down from £2.4m in H1 2008 to £879,000 [ref] Interim statement, 2009: http://www.ascentresources.co.uk/investor_information/Report_and_Accounts.php [/ref] it certainly looks as if an increase in production from Peneszlek together with a continuation of the cost reduction trend could get the company to cash positive in the medium term.

The company currently has £4m debt out of £9.5m total equity, which is not uncomfortable, but does represent a possible constraint on development. So far, Ascent seems to have been fairly canny at using farm-outs; for instance on the Nyirseg permits in Hungary, it had an initial 90% interest, farmed out 47.5% for 95% of the exploration drilling costs, and then sold 9.23% - while retaining a 45.27% producing interest [ref] Corporate presentation, 15 July 2009: ehttp://www.ascentresources.co.uk/investor_information/presentations.php#
[/ref] . Certainly the company appears to favour farm-outs rather than equity issues as its main financing route, though it has also raised £2.6m (in 2009) on a GEM equity line of credit, and in November 2009 it placed shares to raise £6m shortly after appointing Astaire as its new broker and nomad.

2010 looks like an interesting year for the company. The first half of the year will be spent de-risking the portfolio, and any success should create value for shareholders. A lot of the effort will go into processing 3D seismic - Petisovci and Filovci are in progress, and analysis on Lovaszi is also planned. It's particularly worth noting that CEO Jeremy Eng recently stated that these three areas have much greater potential than Peneszlek [ref] Operations Update, http://www.stockopedia.com/news/announcement/AST/091214ast001303.htm?title=Ascent%20Resources%20PLC%20Operations%20Update&date=1260748800 [/ref] , so success would have a big impact on the share price. There will also be two more wells at Peneszlek (PEN-101 and PEN-106). So that gives us an expectation of a fair amount of short and medium term newsflow.

Fox Davies has a 20p target price [ref] Proactive Investor, 6 November 2009: http://www.proactiveinvestors.co.uk/companies/news/9943/fd-capital-raises-ascent-resources-price-target-to-20p-from-11p-maintains-buy-rating-9943.html [/ref] , which included nothing for the more risky plays or the Dutch assets - the low probability of success means they wouldn't affect the estimate much even if they were left in.

Fox-Davies estimates net recoverable resources at 59MMboe, and includes all the Hungarian and Slovenian assets in this total, but only the most defined plays in Italy and Switzerland. The broker noted that so far, the share price had risen 50% from its lows - investor disappointment over the Gazzata failure is being forgotten as other prospects firm up. [ref] Fox-Davies research report, November 2009: http://www.fox-davies.com/media/89267/ascentupdate6nov2009.pdf [/ref] Since then, though, the share price has drifted back, and the current 6p level might offer value.

What I do find interesting in the Fox-Davies research is the chart showing how the NPV is derived. The risked value of resources appears to be fairly evenly split among a number of prospects - it's not completely reliant on any single field. That does seem to be a fairly handy risk profile.

But my worry about Ascent is that while there's a lot going on, most of it is pretty early stage, and results have been very mixed. And while the stock could perform very nicely, none of these fields look likely to transform Ascent's prospects in the way, say, success at Ebok could for Afren. I'm very, very picky about what I buy in the oil sector - and at the moment, Ascent just doesn't quite push my buttons.