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Hartshead Resources (ASX:HHR) is substantially undervalued: Interview with MD Chris Lewis

May 3, 2023

Hartshead Resources, HHR


Hartshead Resources (ASX: HHR)

We spoke to Chris Lewis, Managing Director of Hartshead Resources (ASX: HHR), about the recent sale of 60% of five blocks on the UK Continental Shelf to RockRose Energy, which will allow phased development of four gas fields.

As Lewis says in our interview, the RockRose deal is transformative and effectively worth more than 20 cents per share in terms of the total gross consideration of about A$196m. At the moment, however, Hartshead stock is less than 4 cents per share.

Full transcription below.

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Stuart: Hello and welcome to “Stocks Down Under.” My name is Stuart Roberts, and I’m one of the co-founders of our service. And joining me all the way from Brighton in the UK on Friday the 28th of April, 2023, is Mr. Chris Lewis, who’s the managing director of Hartshead Resources ASX HHR. Chris, very early in the morning your time, good morning.

Chris: Good morning. Oh, I think good evening for you, Stuart. Good to see you.

Stuart: Yes. So, Chris, I like to joke you are half-Australian. You’re a pom and originally from Scotland, but you spent a lot of time in Perth back in the days when you were a geophysics consultant. So, you know the way we crazy Aussies think, right?

Chris: That’s right. Yeah, I was in Perth from 95 to 2002, so I had a good 7-year stint there and got to understand a bit the Australian psyche, I think.

Stuart: Right. Over the years, you’ve had about five listed companies in the exploration production phase that you’ve managed to bootstrap and deliver some reasonable value for shareholders. Before we press the button, you were talking about Centric in the Rift Valley of Kenya, where you took the stock on TSX from 7 cents to 64 cents.

Chris: Yeah, absolutely. I’m not gonna take all the credit for that, I was part of a team. I was the VP of exploration. The CEO is a chap called Alec Robinson. We got involved in a small TSX-listed company that didn’t have a lot going on. We managed to get a hold of a really attractive expiration block in the tertiary rift in Kenya. Just when that was really taking off, when Tullow had had all the discoveries in Uganda, and this was sort of a lookalike tertiary rift section in Kenya. We got awarded that. We worked it up, we then farmed it out to Tullow Oil and Gas, who I’m sure your listeners have heard of. And then ultimately we sold the company to Africa Oil. And this all happened within a space of about 14 months. When we got involved and got the blocks, the stock was at 8 cents, I think, 7 or 8 cents, and we sold to Africa Oil for around about 64 cents. So, it was a really good quick, and value creative story. I think the shareholders will be very happy with it.

Stuart: I got you to share that story because we’ve got something potentially that can beat Centric in Hartshead Resources. You closed this afternoon on ASX at 3.30 cents a share. You’ve just taken a suite of gas fields in the Southern Gas Basin in the UK, and you’ve brought in a partner on that transaction where the enterprise value for the outsourcing is effectively 22 cents a share. So, we’ve got a seven or eight-bagger on that transaction if the investors pick up and take notice. Talk to us first of all about the Southern Gas Basin, and then we’ll talk about this recent, seriously value-creating transaction you’ve just done.

Chris: Yeah, sure. So, the Southern Gas Basin, it’s a really well-known gas basin in the UK North Sea. It’s in the southern section of the North Sea. The gas production started in the late 60s, so there’s been gas production in the Southern Gas Basin for several decades now. Multiple TCFs of gas have been produced from the same reservoirs. We are going to be producing from our gas fields. Supermajors have been in there. BP used to be in there. ConocoPhillips used to be in there. Some supermajors are still in there, so Shell and Exxon still have production operations in the Southern Gas Basin. Lots of infrastructure, really well-known subsurface, and surface. So, a really mature basin where a nimble small company like Hartshead can get in, pick up a really valuable acreage for us that’s got modest discovered gas fields, where we can come in and look at development concepts where we leverage the infrastructure that’s nearby, that’s owned by other people, which means we keep our capital costs down, and we can create real value out of discovered molecules that we know are there. So yeah, it’s a really good place for a little company to go in, and start developing valuable gas resources.

Stuart: Right. Four fields in that basin, and you and I met about September, October 22, in Perth, and you talked about looking for a development partner for those assets at that time. Now, those discussions I understand have been ongoing since about June 2022. Here it is April 2023, you just bagged the Elephant, RockRose is coming in. Now, people in the UK, yeah, oil and gasoline will know RockRose was a listed company till 2020 when it was acquired by a significant private Italian company. That company’s now doubling down on building at its North Sea acreage, compliments the fields that they’re taking 60% off from you.

Chris: That’s right, that’s right. I mean, there’s a clear growth strategy from the ultimate parent of RockRose, company called Viaro. We’ve seen in the last three or four years them complete a number of transactions. So, initially, they bought RockRose and RockRose listed. They took RockRose private, and since then they bought the production portfolio from scratch to Southern Electric.

Stuart: That transaction was a steal by the way. It was done in July 2020 when some of us, not you or I, thought the world was coming to an end when it came to oil and gas, right?

Chris: Yeah, absolutely. I mean, you know, hats off to Viaro. You know, I think they’re seeing where the value is, and they’re coming in and picking up assets from people who clearly don’t want them anymore, and they’re doing some really good deals. I mean, the SSE deal was another steal. They bought that when I think they put their offer in when gas prices were on the floor, and they completed it when gas prices were two or three pounds a therm. I think the deal probably paid for itself within 12 months. So, they’re very savvy in terms of targeting the right assets, and coming in and building their oil and gas portfolio in the UK.

Stuart: On the other end, they are actually paying a decent amount of money to get involved in your Southern Gas Basin assets. We’re talking 196 million for the phase one development of these fields. Talk to us about how that’ll play itself out.

Chris: Yeah, absolutely.

Stuart: That’s 196 million of ours. I think 128 million US is the figure you’ve quoted.

Chris: Yeah, yeah. RockRose coming in and effectively acquiring 60% of the license, and fundamentally the value is driven by our phase one development, which is 300 BCF of gas. And they are effectively paying that 196 million Aussie for the 60%. It’s broken up into chunks. When we complete the deal, we get a payment of about 12 million, and then when we take FID, we get a carry. So, RockRose deploy their capital on our behalf for the first $96 million of capital requirement for our phase one development. We also get a cash payment from them of around about 46 million AUD. And all of that is effectively the consideration they’re paying us, but it’s getting deployed towards the capital to get our phase one development done. And then there’s a split of the super deduction on the energy profits levy. We structured the deal to make sure we shared the benefit of that with RockRose. And when you put all of those different elements of the deal together, that’s where you get to the $196 million of consideration for the 60%.

Stuart: Yeah. Now, the super profits levy that you’re talking about is interesting. Everyone’s concerned that the UK government just wants to slug little companies like you because oil and gas prices jumped heavily after the shooting started in Ukraine in February of last year. The upside of that is the governments realized they actually want more domestic production, so they’re pretty much, they’re offering huge tax deductions for all the CapEx involved in new projects. And you get to benefit from that now that you’ve got the partner who is gonna contribute to that CapEx.

Chris: Exactly that, exactly that. You know, the super deduction is 91.60 cents in the dollar. So, if you are producing in the UK, and you are a taxpayer paying the empty profits levy, and you deploy your capital into new oil and gas developments, let’s say you’ve got 100 million of CapEx requirement when you factor in the super deduction that only costs you $8.6 million. So, it’s a real incentive for people to redeploy their capital in new oil and gas developments rather than take those profits out of the UK or, you know, do something else with them. It’s a real driver to get investment in domestic oil and gas. And it’s obviously benefited us enormously bringing RockRose into the transaction.

Stuart: Absolutely. You’ve got RockRose contributing, you get to benefit. You’ve managed to structure it, so that you get the maximum upside from this levy, from this incentive that the government’s [inaudible 00:09:13.250]. When you factor in the size of the asset, 300 BCF potentially, basically, and you’ve put this into your presentations, this transaction is worth 22 cents a share, and yet that’s 3.30 cents this afternoon. So, that’s potentially your seven or eight bagger from here.

Chris: That’s absolutely right. And look, the 300 BCF is 2P independently audited, so that’s our independent reserves auditor. The valuation of 380 million AUD for our retained 40%, that’s independently audited, that’s from our reserves auditor. All of that value there is independently derived, and all the other value that goes to that 22 cents a share is direct read through from the consideration RockRose are paying. So, that 22 cents a share is numbers that aren’t coming from us, they’re coming from the transaction and our auditor. And you wrap all that together, and you get 22 cents a share. So, I’m really optimistic as well. I think, you know, there’s a long way to go for this story on our share price.

Stuart: Yep. One of your Hartshead director colleagues, Nathan Lude buying heavily, you know, basically since his transaction went public. And as I like to say, this is 2P. We could get 3P in once we figure out what’s down there.

Chris: Oh, absolutely, absolutely. And let’s not forget we’ve got phase two and phase three. You know, phase 2, another 140 BCF to be developed. And then we’ve got phase 3, which is 344 BCF of expiration. And these expiration prospects in the success case get tied into our phase one infrastructure and monetized really quickly. And you bring all that together, and it’s about 800 BCF, nearly 800 BCF of gas in the license. So, yeah, a really significant resource volume there.

Stuart: Right. So, and 2023 is the years when it comes together. You are flagging that you’ll get your front-end engineering design done, probably around the middle of the year. Third quarter potentially, your project financing to bring all the magic together. And so, you’re confident enough to commit to that, obviously, anything can happen, but that’s what you feel you can achieve. So, pretty much from that point, we’re away building phase 1 of this project for the first 2 fields and beginning to unlock some of that 22 cents a share.

Chris: That’s absolutely it. I mean, we’re nearly through, front-end engineering design. We’re anticipating submitting our field development plan to the NSTA, hopefully, next month.

Stuart: NSTA being the regulator for…

Chris: Yeah, oil and gas regulator. And so, that’s that piece done, pretty much. And yeah, putting the debt package in place is very important, that’s what I’m really focused on at the moment, and working very hard on. Very confident we can get that over the line by third quarter. Very confident that once we do that, we can take a final investment decision on the development in the third quarter. And then, as you say, we’re into the realms of cutting steel and lame pipe. So, it starts to get really interesting. But, you know, yeah, I said we would get far much done by the end of the first quarter this year, and that’s exactly what we got done. You know, I said we’d submit our concept select last year, we did. I said we’d get 2P from a new reserves audit for last year, we did that. I’ve pretty much hit every milestone I’ve said we’re gonna hit so far, and I’m pretty confident we can hit the next ones as well.

Stuart: All right. Well, Chris Lewis, well done to you and your team to all that you’ve achieved. It’s a great opportunity, and in particular, the timing is perfect. We were talking a moment ago about domestic UK gas prices, and it’s a little bit tricky how you convert that from the way gas is priced in the UK compared to other markets, but it’s the equivalent of something like 18 or 19 AUD per giga joule. I’ll take that pricing any day of the week if I’m a gas producer.

Chris: Stuart, so will I. Absolutely. No, it’s a great market. We were talking about, you know, what underpins that, and the fact that, you know, the marginal molecule is LNG, and that puts a pretty significant floor on the gas prices in Europe and the UK. So, I think we’ll be selling into a really strong gas market when we get into production.

Stuart: All right. Well, Chris Lewis, keep up the good work, and good luck in terms of reaching those milestones on project debt financing. Thanks for talking to “Stocks Down Under.”

Chris: Great stuff. Thank you very much for the opportunity, Stuart. Cheers.