Ascent Resources a Small Company Worth Analysing

Small companies have the devil of a job to capture the attention of investors and sometimes it seems that the only ones that do so either have a story that is very easy to grasp or one that is so difficult that nobody even bothers to try to comprehend it.

Remember the dot-com boom? Nobody had a clue what a D-RAM was or what was meant by middleware or a graphics card. We thought that a terabyte was one of those scaly creatures in the reptile house of London zoo and that a motherboard was something on which to chop the vegetables.

But none of this stopped us all from piling into technology stocks. Something that sounded so clever, we thought, must make lots of money so why bother trying to understand the terminology?

If a company has a simple story to tell we do not need to analyse it. And if the story is too complicated we don’t even bother to try. So there is nothing that a small company fund manager or investor likes less than a company that he knows he should and could understand, if only he made a bit of an effort. A company that comes into this category is Ascent Resources, which joined AIM in 2004 to build an oil and gas business.

Ascent does not have one project. It does not operate in one country. Fund managers can neither treat it as a company that they know everything about or one that defies analysis. If they are going to invest in Ascent’s shares they need to devote some time to following each of the twenty projects in which Ascent is participating. Can they be bothered? The answer, at present, seems to be that they cannot, and the share price has slithered all the way down from 20p a year ago to just 4.5p today.

About half of this fall happened on the day that Ascent announced that a well drilled to the south-east of Rome had encountered rather a lot of water and not very much oil. This was undoubtedly a disappointment, but as chief executive Jeremy Eng told me when I met him this week, exploration is a chancy business and this setback affected just 5% of Ascent’s portfolio of interests.

Now he is hoping that the stock market might overact in equal proportion to some good news, and we could hear some before the end of the year.

The good news

Ascent is close to selling its off-shore Netherlands interests where it should be able to demonstrate that it has added value. And Eng reckons that there is a fifty/fifty chance of striking gas in the Po Valley of Italy, where a well is being drilled by partner Otto Energy of Australia. Eng believes that it could encounter gas with a value of at least euro500m.

That would surely transform the share price of a company that is now valued at just £15m, but rather than treat his company as a punt on one lucky strike Eng would prefer the City to really understand Ascent’s strategy that has hardly changed since I first met him three years ago. The strategy is quite unusual amongst junior exploration companies, and yet it makes good sense.

The first principle is that Ascent wants to avoid political risk. In fact most small resource companies say the same, but it does not stop them from running off to Africa, central America, Russia, China and wherever else is governed by dodgy politicians and a flimsy law book.

But Ascent means what it says and it has stuck to Europe where today it has projects in Italy, Switzerland, Hungary, Slovenia and, for the time being anyway, the Netherlands.

Ascent prefers on-shore to off-shore projects, it prefers gas with its secure long-term contracts and relatively stable price over oil and it want to produce in countries that are presently dependent upon imported energy.

Ascent wants to take a sufficiently large stake in projects that it can bring in partners without losing overall control, and by having a portfolio of projects ranging from exploration through to development and production, it should be able to keep its team of specialists fully occupied.

This conservative strategy makes sound business sense, and there is no shortage of opportunities across Europe. There are still plenty of regions that are unexplored. There are possibilities for deploying new exploration techniques, for instance the reinterpretation of old seismic data or horizontal drilling.

And there are chances to revisit old areas previously prospected but considered uneconomical when energy prices were much lower. As an example Eng mentioned one of Ascent’s development projects in Slovenia, where oil was first found by the Germans during the Second World War.

Ascent has now brought two fields into production, but still it is making losses and having drilled one successful well and six that have failed its hit rate is no better than the industry average.

So despite all its industrious activity and active management of its portfolio, it is yet to convincingly demonstrate the ability to make money for its shareholders. But if it can make a major strike – and immediate hopes are centred on its Gazzata project in the Po Valley, then all those lazy fund managers will no doubt sit up and take it much more seriously.

Regards,

Tom Bulford
for The Penny Sleuth

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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Ascent Resources a Small Company Worth Analysing

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