Po Valley Energy (ASX: PVE) is an Australian oil and gas junior that has established a long term focus on Italian assets. This has led to the accumulation of a very attractive portfolio of producing and near term production assets.
The Company currently owns and operates two gas treatment plants at Castello and Sillaro with considerable development and exploration upside potential that is fuelled by Italian gas prices that exceed $11.00 per thousand cubic feet (Mcf). This provides an extremely high netback when compared with U.S. and Australian producers that must remain profitable at under US$3.00 per Mcf.
Share Price: $0.11
Issued Shares: 122.4 million
Market Cap: $13.4 million
Cash: $1.8 million
EV: $10.65 million
With a gas production base, a strong locally based management team and a pipeline of exploration and development prospects, Po Valley Energy is ideally placed to capitalise on high Italian gas prices.
Near term production increases are likely from the Bezzecca gas field, which will produce through the existing Castello surface gas plant.
This and the restoration of full production from the Sillaro field are expected to take production above the 0.85 billion cubic feet recorded in 2012 and substantially increase its revenue.
Po Valley recorded net cash flow of €4.34 million (A$6 million) in 2012 on revenue of €8.2 million. Revenue for the March quarter was €1.6 million. Cash at bank at the end of the quarter amounted to €1.32 million.
The Company has also secured a €20 million reserve based lending (NYSEARCA:RBL) facility with Nedbank Group, replacing its previous debt facility with Lloyds Bank that had a drawn balance of €4 million.
This positions the Company to fund the next stage of its growth, which include two production concession final grants, the development of its first offshore permit as well as other projects in its development and exploration pipeline.
With its current 2P Reserves of 12.3 billion cubic feet of gas (bcf), or about 2.1 million barrels of oil equivalent (boe), Po Valley is clearly undervalued at its current EV/2P Reserves of just $5.07 per boe or $15.21/boe at a 33.33% discount.
This improves further to $4.32/boe ($12.96/boe) once the 2C Contingent Resources of 2.1 bcf from the Sant'Alberto gas field is included.
To top it off, Po Valley has finalised a new gas offtake agreement with Shell Italia that is benchmarked to prices in Italy.
BOARD OF DIRECTORS
Graham Bradley serves as Chairman, and is a senior attorney who was a Managing Partner of Blake Dawson Waldron, and was a senior partner at McKinsey & Company. He was also Chief Executive Officer of Perpetual Limited, and is currently chairman of Stockland Corporation Limited, HSBC Bank Australia Limited, Anglo American Australia Limited and a director of Singapore Telecommunications Limited.
Giovanni Catalano is Po Valley's managing director and CEO and was most recently the chief executive officer of Mediterranean Oil & Gas plc in UK and Italy. He has almost 30 years experience in the upstream oil and gas industry and has served with Woodside Energy, AGIP and LASMO International.
Michael Masterman is Non-Executive Director / Deputy Chairman and co-founder of Po Valley. He currently serves in an executive role with Western Australian iron ore producer Fortescue Metals Group (ASX: FMG) and previously worked in a global capacity for McKinsey & Company. He has extensive experience in advising CEOs and boards of both large public and small developing companies across a wide range of industries.
Gregory Short is a Non-Executive Director who worked with Exxon in exploration, development and production geosciences and management for 33 years in Australia, Malaysia, USA, Europe and Angola. He is also a Non Executive director of ASX listed MEO Australia and Pryme Oil and Gas Limited.
Kevin Eley is a Non-Executive Director, who is a Chartered Accountant and was the former CEO of HGL Limited for 29 years. He has experience in management and investment covering manufacturing, mining, retail and financial services that included the development of early stage companies and their public governance.
ITALIAN BASED TECHNICAL AND MANAGEMENT PERSONNEL
In addition to Giovanni Catalano the Italian based team is composed by:
Pierluigi Vecchia, Program Manager and a senior geologist, joined the Company in 1997, and formerly consulted for E&P operators in Italy and abroad.
Giorgio Bertuzzi, Exploration and New Projects Manager, 31 years experience with ENI and AGIP. He was Exploration Manager in northern Italy, Prefeasibility Studies Manager, in Italy, and Exploration, Planning and Control in Western and Eastern Africa.
Diego Balistreri, Production and Development Manager, with over 33 years of experience in various technical roles for reservoir, production, development management with oil and gas majors including ENI and Elf both in Italy and abroad.
Sara Edmonson is the Chief Financial Officer and has been with Po Valley since July 2010. Sara previously worked both in Italy and internationally for Ernst & Young Transaction Advisory Services.
SHAREHOLDING AND FUNDING
The last Annual Report listed major shareholders that included Michael Masterman who owns 32.84 million shares for a 21.4% interest, Hunter Hall Investment Management Pty Ltd with 21.37 million shares for a 17.4% interest; and Beronia Investments Pty Ltd with 7.11 million shares for a 5.8% interest.
ITALIAN OIL AND GAS MARKET
Italy has a population of 60 million and is the third largest gas market in Europe. The country is highly dependent on imports for 90% of gas and 85% of oil needs. Remaining best estimates for total unrisked resources across the country are 4.3 trillion cubic feet of gas and 1.8 billion barrels of oil.
A well developed local infrastructure includes an extensive nation gas grid which makes connection low cost and effortless, but is challenged by bureaucratic delays in bringing hydrocarbons to the market. To off set this factor gas prices are based off import pricing that is currently trading around A$11.00 per Mcf, and a very favourable tax and royalty regime of between 34% and 38% that is less taxing than Australia, New Zealand or the U.S.A.
PRODUCTION AND DEVELOPMENT ASSETS
Po Valley has crucial cash flow from its producing Castello and Sillaro gas fields in northern Italy, giving it a level of certainty that is not found in exploration companies.
Sillaro recorded average production of 1.7 million cubic feet per day (MMcfd) of gas in the March 2013 quarter while Castello produced 0.6 million cubic feet per day. Sillaro has remaining Proved and Probable (2P) Reserves of 6.5 billion cubic feet of gas while Castello has 1.6 bcf of 2P Reserves.
Production at Sillaro has recently increased to about 2.25 million cubic feet per day after a recently installed condensate separator allowed the Company to resume gas flow from the PL2 C1+C2 level.
Po Valley plans to ramp this up to 2.6 MMcfd, increasing overall production for the third quarter up to 2.77 MMcfd.
Gas flow from this level had previously been shut-in due to condensate production.
Further production increases are expected once the Company brings the Bezzecca gas field in northern Italy near Milan and close to the existing Castello plant.
Production will be sourced from the Pliocene and Miocene formations which are located at a depth of 2,000 metres. Bezzecca will also be the Company's third producing field.
Po Valley has already secured a preliminary production concession from the Italian Ministry of Economic Development, allowing it add 4.2 bcf of 2P gas.
The final award of the production licence is subject to the results of the related Environmental Impact Assessment (NYSEMKT:EIA), which has already been completed and lodged with the Lombardy Region.
Once the production licence has been granted, the Company will initiate activity on the field development plan, which primarily includes the construction of a 2 inch pipeline 7 kilometre in length needed to connect Bezzecca with the existing Castello surface gas plant from which it will be produced through.
Bezzecca was discovered in 2009 with the Bezzecca-1 well flowing gas at a combined rate of 3.9 million cubic feet per day during testing.
Besides Bezzecca, the development plan for the Sant'Alberto gas field, which is located near Bologna, is currently under review by the Ministry of Economic Development.
An updated 1 + 1 well development plan was lodged during the first quarter of 2012 and the Ministry is currently evaluating the latest documentation. The full licence award will be subject to final environmental approval.
Sant'Alberto contains the Santa Maddalena-1 well, which had produced gas at a rate of 1.8 MMcfd during testing. The field has best estimate (2C) Contingent Resources of 2.1 bcf of gas.
Production at Sant'Alberto is anticipated to get underway in late 2014.
EXPLORATION PIPELINE - GAS
Po Valley has a large gas exploration portfolio that offers substantial potential to further boost its Reserves and production.
The most immediate is the Gradizza-1 exploration well in the La Prospera block, which targets the Quaternary sands at a depth of 1,000 metres that have Prospective 2C gas Resources of 9 bcf.
Po Valley has received drilling approval from the Italian Government and has already ordered long lead items and recently completed civil works for the well, which is expected to spud by the end of July 2013.
The Company has also further reduced its exploration costs with the execution of a farm-in agreement that allows Delaware-based AleAnna Resources to earn 10% interest in La Prospera in return for a promote in the drilling of Gradizza-1.
In addition, to Po Valley has agreed to farm-out a 15% working interest to Petrorep, leaving it with a 75% operating interest in the permit.
Gradizza was identified from an interpretation of 68 kilometres of 2D seismic purchased from Eni. It has a 27% probability of success.
The Zini and Canolo prospects within the Cadelbosco exploration permit near Bologna targets the former ENI Correggio gas field that had produced 250 bcf of gas from 41 productive wells and considers residual potential.
Po Valley's three-well drilling program and related EIAs are currently under review by the Ministry and Region with spud expected before the end of this year.
Zini and Canolo have estimated 2C Contingent Resources of 7.4 bcf.
Geophysical and geological work carried out in 2012 has also allowed the Company to identify the new low risk Selva Stratigraphic prospect at the Podere Gallina licence where the Selva gas field produced 83 bcf from 15 wells over a 35 year period.
This prospect has estimated 2C Contingent Resources of 17 bcf.
A drilling location has been identified and the company plans to purchase further existing seismic and wells data for additional potential at East Selva.
There is also a high potential for gas discoveries within the AR94PY offshore permit, which is estimated to have a combined 2C contingent resource of 47.3 bcf.
AR94PY is located in the shallow waters of the Adriatic Sea and contains the Teodorico gas field - previously the Carola and Irma discoveries that were drilled and tested by Italy's Eni.
Preparation of a preliminary development plan is ongoing, with the aim to fast track the development of the field.
A new prospect named West Vitalba has also been identified in the Cascina Castello production concession, which is estimated to hold a 2C prospective resource of 2.4 bcf of gas.
Po Valley has also been awarded a new gas exploration licence Tozzona, in the Bologna and Ravenna provinces in northern Italy.
Notably, the 90 square kilometre Tozzona licence lies on the eastern border of Eni's gas production licence containing the Santerno gas field that has produced about 35 billion cubic feet of gas to date.
The main gas targets are Mio-Pliocene reservoirs within structural traps.
Initial work program for the six year licence includes the purchase of a semi-regional grid of 2D seismic lines from the former operator of the area, Eni.
EXPLORATION PIPELINE - OIL
Besides its gas development and exploration assets, Po Valley has a number of oil targets.
The Bagnolo in Piano prospect in the Cadelbosco licence and Ravizza in the adjacent Grattasasso licence target oil discoveries drilled between 1970 and1982.
Bagnolo in Piano is a deep lower Cretaceous fractured limestone play where three wells were drilled and flowed oil at rates of about 200 barrels per day.
Ravizza is a deep Oligo/Eocene fractured limestone play that was tested by the Ravizza-1 well which flowed 400bpd during testing.
CATALYSTS OVER THE NEXT 12 MONTHS
- Final production licence for Bezzecca
- Development and tie-in of Bezzecca to Castello
- Drilling of the Gradizza-1 well
- Progress on AR94PY development
- Receipt of Preliminary Production Concession for Sant'Alberto
- Start-up of construction of Sant'Alberto gas plant
Po Valley employs a highly competent management team that has built up a strong portfolio of production, development and exploration assets.
Existing production and development at Bezzecca and Sant'Alberto that are likely to lead to near term production increases are underwritten by high Italian gas prices that are several times higher than those in Australia and the United States.
Notably, the restoration of full production from the Sillaro field and the tie-in of Bezzecca is expected to take production above the 0.85 billion cubic feet recorded in 2012 and increase its revenue.
Po Valley recorded net cash flow of €4.34 million (A$6 million) in 2012 on revenue of €8.2 million. Revenue for the March quarter was €1.6 million (A$2.1 million). Cash at bank at the end of the quarter amounted to €1.32 million.
The Company has also secured a €20 million reserve based lending (RBL) facility with Nedbank Group, replacing its previous debt facility with Lloyds Bank that had a drawn balance of €4 million.
This positions the Company to fund the next stage of its growth, which include two final production concession grants, the development of its first offshore permit as well as other projects in its development and exploration pipeline.
With its current 2P Reserves of 12.2 billion cubic feet of gas, or about 2.1 million barrels of oil equivalent (boe), Po Valley is clearly undervalued at its current EV/2P Reserves of just $5.07 per boe or $15.21/boe at a 33.33% discount.
This improves further to $4.32/boe ($12.96/boe) once the 2C Contingent Resources of 2.1 bcf from the Sant'Alberto gas field is included.
Surety of gas prices is also ensured by the company's new gas offtake agreement with Shell Italia that is benchmarked to prices in Italy.
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