# Q&A with Ascent Resources Plc: First Gas in April, Selling Gas to INA & Loan Note Conversions (LON:AST)

- Link: https://www.directorstalkinterviews.com/ascent-resources-plc-qa-ceo-colin-hutchinson-selling-first-gas-april-lonast/412725910
- Published: 2017-03-21T11:50:31+00:00
- Author: Amilia Stone

**Ascent Resources Plc** (LON:AST) Chief Executive Officer Colin Hutchinson caught
up with DirectorsTalk for an exclusive interview to discuss the selling of their
first gas, the delay in selling gas to INA and the loan note conversions

 

**Q1: Now, I understand that Ascent Resources will be selling first gas in April,
can you tell me a bit more about that?**

**A1**: Yes, we announced that last Friday, we’re expecting the sale of gas to start
from PG-10 in early April. It’s something that the company’s been working for, for
almost ten years now, and we’re really excited it’s going to happen. I’ve had some
feedback from shareholders asking me a bit more detail about the arrangements for
this interim supply of gas because they were expecting, I think, us to be selling
to INA immediately.

So, initially we’re going to sell gas to a local industrial customer, our partner
in Slovenia, Geonergo, has some existing production from the field, there’s been
production in the field going back to the 1940’s so they’ve got a number of wells
and they supply customers in the local area with gas and there’s some well production
as well. So, what we’re going to do to get PG-10 up and running is to basically 
take over the supply from Geonergo and supply gas from PG-10 to their customers,
I can’t give details on exact volumes and revenues because there’s a degree of commercial
sensitivity there but what I can say is it’s a meaningful income, it’ll be real 
revenue, it’ll be real cash and it’s a real customer. So, we’re expecting that to
go on for at least 3 months, that might continue on once we start supplying INA 
as well depending on the volume of gas and depending on the pricing.

 

**Q2: So, why are you waiting to start selling gas to INA?**

**A2**: In order to sell gas to INA, we need to dehydrate it first, the plan had
been to recondition, refurbish the existing CPP plant which is owned by our partner,
Geoterm, and that would enable us to treat the gas to a sufficient standard to put
it into the export pipeline. The situation is a little bit more complicated because
we need to be conscious of the existing production that our partners put through
the CPP, we also need to be conscious of sticking within the existing permitting
framework and we also then have to satisfy INA’ gas requirements. So, it’s not quite
as simple as bang something off the shelf and there you go but we’ve done some work
and we had a plan to refurbish the existing CPP and that work was going to take 
around 6 months or so.

In the interim, what Ascent Resources was going to do was lease the equipment, there
was an Italian company we’d been talking to and they were going to lease the equipment
we were going to set up on the PG-10 well site and that would’ve allowed me to supply
INA close to the end of Q1 deadline that I’d been talking about. What happened was
that after the PG-10 recompletion, and whenever I started these discussions it was
moving towards a climax with these discussions with the leasing company, my consultants
came to me with an idea and said, we’ve got a better way of treating this gas to
send it to INA. Long story short, that way is quicker, we reckon it’ll be done in
about 3 months, it’s much cheaper and it gave me a dilemma then because I now had
the realistic possibility of having our equipment ready in 3 months but the minimum
term on the lease equipment was 6 months. The lease equipment is an expensive way
to do things, you have to pay to lease the equipment, there’s running costs so your
gross margin would be significantly lower. The gross margin using our own equipment
will be 80% plus, the gross margin going through leased equipment would be around
30%, maybe lower so there’s a significant advantage to doing it through our own 
equipment.

So, if you look at the numbers, the economics of selling to your local supplier 
for 3 months and then switching to our own equipment, we’re significantly more attractive
than leasing the equipment for 6 months and going direct to INA from day one. So,
although the revenue will be lower, the income will be greater over the 6-month 
period so that’s why we made the decision to delay the start date with INA for a
number of months until we’ve got our own equipment ready, rather than going down
the leasing route.

 

**Q3: As you said, there was an announcement on Friday afternoon for Ascent Resources,
it also mentioned loan note conversion, when were these issued?**

**A3**: The loan notes have been issued, initially the first tranch were issued 
in 2012 as part of a £5.5 million rescue package that Henderson underwrote, there
was an open offer to shareholders at the time, and loan notes and shares were issued,
Henderson ended up taking close to £5 million worth of those in loan notes. Really,
since that, for the few years after that, the money at the time was used to pay 
off existing debt and then restructure the company, which at the time had some assets
which were really liabilities so we had to restructure the company so we could focus
on Slovenia which was really the company-making asset.

Over the next number of years, as long-term shareholders will be aware, the company
had to go through this permitting process and go through a route to try and get 
a way through to first gas and during that period, Henderson largely supported the
company through the form of loan notes. We also issued another £2 million worth 
of loan notes to EnQuest a year of two ago, they were owed £3 million in cash from
the company for a deferred consideration on the Slovenian asset, which they used
to own part of and instead of paying the £3 million cash, they took £2 million in
loan notes.

So, the loan notes have been there for a number of years now, they’re convertible
at a penny, for a long time they’ve been out of the money but happily in the last
year or so, because of the performance of the company, they’ve been in the money.
The holders have been able to convert some of their loan notes and sell them to 
reduce their positions because at a certain point Henderson had a fairly significant
stake on a fairly diluted basis which wasn’t particularly comfortable for anyone.
So, now everything is at a much more sensible level, the loans have been able to
convert and the loan note holders really have had supported the company and had 
held an investment in the company for a number of years, an investment that looked
particularly risky at certain points so they’re entitled to a certain return on 
their investment. We’ve seen the balance in the loan notes drop from around £12 
million to less than £5 million now so we’ve seen a sizable proportion of those 
notes converted and wash through the market over the last 12 months or so.

I get comments from shareholders that we should go out and we should buy back some
of these loan notes, I understand where they’re coming from, they don’t like to 
see these conversion announcements because they see the issued share capital increasing.
What I would say to that is, I don’t it’s something you can do piecemeal, I think
if you’re going to repurchase the loan notes it’s an all or nothing, you do as close
to 100% as possible or you don’t do anything. I think if you repurchase as a token,
10% or 20% of the loan notes, all that happens is the rest of the loan note converts
straight away. So, I appreciate and understand shareholders’ sensitivities in this
respect and I think if the company had surplus cash and was able to repurchase all
the loan notes or refinance all the loan notes then that might be something that
would be attractive, we’d have to look in terms of what the return is to shareholders
for that. So, if we Ascent Resources had the cash, if we had the money to repurchase
them all and we were able to refinance them then it’s just straightforward decision
in what gives the best benefit to shareholders and that’s something we could consider
in the future but I don’t think piecemeal repurchase of the loan notes is something
that really works.

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