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.