Prospex Eng Regulatory News (PXEN)

Prospex Energy PLC / Index: AIM / Epic: PXEN / Sector: Oil and Gas

26 May 2023

Prospex Energy PLC

('Prospex' or the 'Company')

Final Results for Year ended 31 December 2022

and

Annual General Meeting

Prospex Energy plc, the AIM quoted investment company, is pleased to announce its audited Final Results for the year ended 31 December 2022 and Notice of Annual General Meeting ("AGM") on 20 June 2023.

Corporate and Financial Highlights (as at 31 December 2022)

· Total Assets of £16,064,640 from £6,697,305 in 2021, an increase of 240% reflecting the after-tax effect of the revaluation of the Company's working interest in the Podere Gallina licence in Italy increasing to 37% from 17% which completed in April 2022.

· The combined value of these equity investments, current and non-current loans is £21,561,316 up from £8,726,484 in 2021 a 221% increase.

· Successfully completed a placing of £2,454,800 in February at 3.5p per share with no warrants.

· Raised debt/equity hybrid financing of £2,370,000 in aggregate from the issue of convertible loan notes convertible at 4.25p per share and 5.5p per share to existing and new investors, with participation of all the directors of the Company.

· Hybrid financing enabled Prospex to fund fully its 37% share in the Selva field development to the point of first gas then scheduled early in the second quarter of 2023.

· Cash and cash equivalents at the year-end of £1,482,762 (2021: £220,060).

Operational Highlights

· Selva Field

o  During the year development work started at the Selva field in the Po Valley region of northern Italy, operated by Po Valley Energy (ASX:PVE) ("Po Valley" or "the operator").

o  In January 2022, Po Valley, started and fully funded the installation of the background seismic monitoring network to be operational ahead of the 12 months required by the regulators.

o  In June 2022, the penultimate approval for the production concession at the Podere Gallina licence was granted by the Emilia Romagna Regional Council. This local government approval was a prerequisite for Italy's MITE to grant the Final Production Concession at Selva Malvezzi.

o  On 29 July 2022, full production concession approval was granted by the MITE. In August 2022, contracts were awarded, and construction commenced of the automated gas plant facilities, the installation of a 1,000 metre four-inch pipeline and the connection to the national gas grid network operated by SNAM.

o  In September 2022, Po Valley completed the land acquisition required to connect the pipeline from the suspended well at Selva Malvezzi to the SNAM gas grid and purchased the required 1km of 4-inch steel pipe.

o  In November 2022, final approvals were received to commence field development works at the Selva Gas Field and gas plant construction and pipeline installation started.

· El Romeral

o  Operations continued at El Romeral in Andalucía, southern Spain through the Company's investment in Tarba Energía, the operator.

o  Gross monthly revenue from electricity generation at the El Romeral power plant peaked at over €500,000 in March 2022.

o  In March 2022, Tarba completed the El Romeral plant automation project which started in December 2021 allowing 24/7 production operations.

o  On 28 April 2022, Tarba completed the repayment of its outstanding loans plus interest to the two co-owners Prospex Energy and Warrego Energy.

o  In June 2022, Tarba commenced the first of two solar installation projects at El Romeral, 'Project Apollo' the installation of solar panels on the power station roof. The second solar project 'Project Helios' which involves the installation of a 4.9MW solar farm adjacent to the power plant was recommended for an investment decision and front-end engineering and design ('FEED') studies commenced.

o  By August 2022 the El Romeral asset was generating healthy revenues with daily electricity spot prices averaging more than €180/MWhr in the quarter to 30 June 2022.

o  In August 2022, the installation of 83 solar panels on the roof of the power plant was completed. Project Apollo has an estimated return on investment of 3 - 4 years.

o  By December 2022, the reinterpretation of the reprocessed 2D seismic lines across the El Romeral Production Concessions started in May 2022, was nearing completion with the aim of optimising the top 5 drilling targets for the permitting application process as requested by MITECO, the Spanish regulator.

Post period highlights

· In February 2023, a joint Gas Sales agreement was signed to offtake and sell gas from the Selva field in Italy.

· In May 2023, the gas plant construction at Selva was completed and is ready for commissioning. The connections to the gas grid operated by SNAM are complete, enabling the delivery of gas to the Italian gas grid. With the SNAM connection and transmission arrangements finalised, Po Valley Operations has initiated the process of recovering €757,000 performance bond funds (100% basis - €280,090 net to Prospex), previously deposited with SNAM.

· In April 2023, the Company strengthened the board of directors with the appointment of Andrew Hay as a Non-Executive Director.

Notice of Annual General Meeting

The Company also gives notice that its AGM will be held at the offices of Shakespeare Martineau LLP, 6th Floor 60 Gracechurch Street, London, United Kingdom, EC3V 0HR at 11.00 a.m. on 20 June 2023. 

The Financial Results for the year ended 31 December 2022 together with the Notice of AGM will be available to download today from the Company's website and will also be posted to shareholders on or around 26 May 2023.

Commenting on the results, Mark Routh, Prospex's CEO, said: 

"I am pleased with these strong results that have laid the foundation for Prospex to progress to the next level, with increased gas production imminent from the Selva field in Italy. 2023 is set to be a truly transformational year for the Company. We are continuously looking for ways to improve our current investments and we have made advancements at our Spanish plant with Project Helios which would increase output from the plant by up to 60%. With the completion of the project expected to take less than 12 months, it is an exciting time in Prospex's history.

"Looking ahead, I expect to be reporting on the organic growth of the Company's assets with several future planned wells proceeding through the permitting process. We are continually monitoring other prospects for any potential opportunities to expand the business but will remain technically rigorous in our selection of growth opportunities that we believe will only benefit the Company.

"Prospex is in a strong operational position with an experienced team who remain committed to increase shareholder value."

* * ENDS * *

For further information visit www.prospex.energy or contact the following:

Notes

About Selva:

The Podere Gallina Licence is in the Po Valley region of northern Italy. The licence contains the currently shut‑in Selva gas-field as well as exciting exploration and development opportunities. The Podere Maiar-1 well at Selva was completed in December 2017 and successfully found a commercial gas accumulation up-dip of the previous wells on the Selva field. The Company has a 37% working interest in the Podere Gallina licence held via Prospex's two wholly owned subsidiaries, PXOG Marshall Ltd (17% of the Licence) and UOG Italia Srl (20% of the Licence).

The Podere Gallina Licence holds independently verified 2P gross reserves of 13.4 Bcf (5.0 Bcf net to Prospex at 37% WI) in Selva, gross Contingent 2C Resources of 14.1 Bcf (5.2 Bcf net) and a further 88.2 Bcf of gross Best Estimate Prospective Resources (un-risked) (32.6 Bcf net).[1]

An independent Competent Person's Report of the Podere Gallina Licence was prepared by CGG Services (UK) Limited in January 2019 on behalf of the joint venture.[1] It attributed a total of 379 MMscm (13.4 Bcf) gross 2P reserves for the Selva redevelopment project.

References:

[1] Source: "Competent Person's Report Podere Gallina Licence, Italy" prepared by CGG Services (UK) Limited in July 2022 [https://bit.ly/3JASCc2]

About El Romeral and Tarba

The El Romeral gas and power project in Spain, with gas production wells supplying gas to an 8.1MW power plant near Carmona in Southern Spain is owned and operated by Tarba. It is currently operating at about 30% of its full capacity because Tarba is waiting on permits to drill further infill wells on the concessions to increase production. Tarba is already categorised as a hybrid energy provider with the successful installation of photovoltaic panels on the roof of the plant in August 2022. Prospex owns a 49.9% working interest in the El Romeral project via Tarba. The remaining 50.1% working interest is owned by Warrego Energy Limited. Warrego Energy is now wholly owned by Hancock Energy (PB) Pty Ltd. in Perth Western Australia. Tarba sells electricity generated from the plant on the spot market in Spain. The El Romeral licences comprise three contiguous production concessions.

Glossary:

scm Standard cubic metres

MMscm Million standard cubic metres

Bcf Billion standard cubic feet

MMscfd million standard cubic feet per day

MWh Mega Watt hour

Qualified Person Signoff

In accordance with the AIM notice for Mining and Oil and Gas Companies, the Company discloses that Mark Routh, the CEO and a director of Prospex Energy plc has reviewed the technical information contained herein. Mark Routh has an MSc in Petroleum Engineering and has been a member of the Society of Petroleum Engineers since 1985. He has over 40 years operating experience in the upstream oil and gas industry. Mark Routh consents to the inclusion of the information in the form and context in which it appears.

Chairman's Report

for the year ended 31 December 2022

During 2022 there was increased activity not only from ongoing operations in Spain but also from the start of construction and development works on our asset in Italy. Operations in the Company's investment portfolio were carried out with an exemplary safety performance by our operators, contractors and partners with no loss time incidents, health and safety or environmental issues. The Company continues to monitor its HSE performance by promoting a high level of HSE awareness and rewarding good practices and culture with its partners, operators and subcontractors.

The 2022 financial and Corporate Highlights for Prospex Energy were underlined by progress on a number of fronts plus strong commodity prices leading to a very strong rise in the Company's share price - a rise of more than 300% in the year. Subsequent to year end, commodity pricing has returned to lower levels with a consequent reduction in share price.

In April 2022, the Company increased its stake in the Selva Gas Field in the Po Valley in Italy to 37% following a successful fundraise of £2,454,800 from the issue of shares at 3.5p. The fundraising was supported by existing institutional and retail investors, as well as the Directors of the Company.

The increase in the net book value of investments to £16,064,640 from £6,697,305 at the end of last year reflects the after-tax effect of the revaluation of the Company's 37% (2021 : 17%) working interest in the Podere Gallina licence in Italy.

We have applied the same valuation methodology which was used in the audited financial statements at the end of 2021, consistently applied it to the additional 20% working interest acquired in the current period and updated the underlying future gas pricing assumptions to the European forward contract gas prices applicable on 11 May 2023. 

The current forward contract prices for European natural gas at the date of preparation of these results remain above those at the end of 2021, upon which the valuations to-date have been based, but below those at the current reporting date of 31 December 2022.

Applying the more recent forward gas prices provides us with a more up-to-date estimate of future revenues, and a valuation which we consider fair and reasonable having taken into account all current market expectations.

In May 2022, the Company appointed VSA Capital Ltd as its Joint Corporate Broker and Joint Financial Adviser.

In July 2022, £1.87 million was raised from the issue of Convertible Loan Notes convertible at 4.25p per share to existing and new investors, with participation of all of the Directors of the Company.

In September 2022, a further £0.5 million was raised from the issue of Convertible Loan Notes convertible at 5.5p per share to existing investors.

This debt/equity hybrid financing of £2,370,000 in aggregate, meant that Prospex was able to state that it had sufficient cash in hand to fund fully its 37% share in the Selva field development to the point of first gas then scheduled early in the second quarter of 2023.

This funding by the Company via Convertible Loan Notes from our existing network of shareholders and supporters over the years plus a number of new subscribers was undertaken without issuing warrants, with no fees to brokers and at the prevailing market share price at the time or at a small premium. A total of £4,824,800 was raised during the year via the issue of Convertible Loan Notes and new equity. The interest and capital repayments on the Convertible Loan Notes have been conservatively scheduled to fall well within the expected post-tax, post-royalty cash flows from Selva, with the first capital repayments scheduled on 30 September 2023, unless previously converted. Part of the remaining cash flow generated from the Italian asset will be earmarked for future drilling and seismic data acquisition on our existing permits in both Italy and Spain.

The conversion of historic 3p warrants between April and October 2022 generated further funds of £730,000 and the exercise of management options at 4p generated £70,640.

Chairman's Report

for the year ended 31 December 2022

Operational Highlights:

Selva Field in Italy (37% working interest)

In January 2022, Po Valley Energy, the operator of the Selva field in the Po Valley in Italy, starts and fully funds the installation of the background seismic monitoring network to be operational ahead of the 12 months required by the regulators.

In February 2022, the equity fund-raise of £2,454,800 at 3.5p per share allowed the Company to complete the acquisition of the additional 20% of the Selva Field in Italy which was agreed in August 2021 in a sale and purchase agreement with UOG. 

In April 2022, the acquisition of the extra 20% of the Selva Gas Field completed, with the Ministry of Ecological Transition ("MITE") in Rome approving Prospex's acquisition of UOG Italia Srl which owns 20% of the joint venture in the licence. Together with the existing stake in the joint venture held through PXOG Marshall, this brought the Company's stake in the project to 37%.

The acquisition of 100% of UOG Italia increased the Company's holding in the asset from 17% to 37% and therefore increased Prospex's share of Selva's independently verified 2P gas reserves by 2.7 Bcf, from 2.3 Bcf to 5.0 Bcf[1].

In June 2022, the penultimate approval for the production concession at the Podere Gallina licence was granted by the Emilia Romagna Regional Council. This local government approval was a prerequisite for Italy's MITE to grant the Final Production Concession at Selva Malvezzi.

On 29 July 2022, full production concession approval was finally granted by the MITE for the Selva Gas Field. This led to the awarding of contracts and first payments made to the contractors for the construction of the automated gas plant facilities, the installation of a 1,000 metre four-inch pipeline and the connection to the national gas grid network operated by SNAM. Full production concession approval was also the trigger for Prospex to pay its 37% share of the €757,000 SNAM Bond (€280,090 net to Prospex) necessary to procure the connection to the national gas grid with SNAM. The €757,000 had been advanced to SNAM by the operator Po Valley Energy on behalf of the Joint Venture in February 2022.

On 8 August 2022, Po Valley Energy the operator signed a construction contract with TESI Srl ('TESI') an Italian engineering firm, to install the gas plant and pipeline to connect the suspended Podere Maiar-1 well at Selva to Italy's gas grid. The contract secured development costs and timing with construction costs €130,000 (£110,000) less than previously forecast. Post period end, construction has completed and first gas is expected in Q2 of 2023.

Following the successful completion of funding through Convertible Loan Notes, in September 2022, Prospex could now state that it was fully funded to first gas at the Selva Field.

Also in September 2022, Po Valley the operator of Selva, completed the land acquisition required to connect the pipeline from the suspended well at Selva Malvezzi to the SNAM gas grid and purchased the required 1km of 4-inch steel pipe.

In November 2022, final approvals were received to commence field development works at the Selva Gas Field and gas plant construction and pipeline installation started.

In December 2022, gas purchase and off-take agreements for the sale of gas from the Selva field were nearing completion for the joint sale of the total gas production from the asset.

Post period end: A Gas Sales agreement was signed in February 2023 and in May 2023 the gas plant construction was completed and is ready for commissioning. The connections to the gas grid operated by SNAM are complete, enabling the delivery of gas to the Italian gas grid. With the SNAM connection and transmission arrangements finalised, Po Valley Operations has initiated the process of recovering €757,000 performance bond funds (100% basis - €280,090 net to Prospex), previously deposited with SNAM.

[1] Source: "Competent Person's Report Podere Gallina Licence, Italy" prepared by CGG Services (UK) Limited in July 2022 https://bit.ly/3JASCc2

Chairman's Report

for the year ended 31 December 2022

El Romeral in Spain (49.9% interest)

The El Romeral gas and power project in Spain, with gas production wells supplying gas to an 8.1MW power plant near Carmona in Southern Spain is owned and operated by Tarba Energía Srl the operating company. It is currently operating at about 30% of its full capacity because Tarba is waiting on permits to drill further infill wells on the concessions to increase production. Prospex owns a 49.9% working interest in the El Romeral project via Tarba. The remaining 50.1% working interest is owned by Warrego Energy Limited. Tarba sells electricity generated from the plant on the spot market in Spain. The El Romeral licences comprise three contiguous production concessions.

In March 2022, Tarba completed the El Romeral plant automation project which started in December 2021 allowing the live testing of 24/7 production operations. A detailed reservoir modelling project was completed which confirmed that continuous production operation was not only feasible but also optimised ultimate gas recovery.

Gross monthly revenue from electricity generation at the El Romeral power plant peaked at over €500,000 in March 2022.

By April 2022, the El Romeral power plant was generating electricity 24 hours a day and 7 days per week and electricity sales were at record levels.

On 28 April 2022, Tarba completed the repayment of its outstanding loans plus interest to the two co-owners Prospex Energy and Warrego Energy. The loans repaid of €289,577, plus accrued interest of €19,092.97, equalled a total of €308,669.97. Prospex's share of this is €153,698.64. The repayment of loans held in the El Romeral asset totalled €589,577, plus accrued interest of €19,092.97.

In May 2022, the reprocessing of 250km of 2D seismic lines was instigated to improve the subsurface imaging across the three El Romeral Production Concessions.

In June 2022, Tarba commenced the first of two solar installation projects at El Romeral, 'Project Apollo' the installation of solar panels on the power station roof. The second solar project 'Project Helios' which involves the installation of a 4.9MW solar farm adjacent to the power plant was recommended for an investment decision and front-end engineering and design ('FEED') studies commenced.

In June 2022, the Spanish government announced that it would invoke a gas price cap for companies selling gas for electricity generation of €48.8/MWhr. As a result, Spanish daily electricity prices were expected to average €150/MWhr for the next 12 months. Average prices remained or exceeded this level until year end.

August 2022 saw the El Romeral asset continuing to generate healthy revenues with daily electricity spot prices averaging more than €180/MWhr in the quarter to 30 June 2022.

August 2022 also saw the completion of the installation of 83 solar panels on the roof of the power plant. Project Apollo has an estimated return on investment of 3 - 4 years.

By December 2022, the reinterpretation of the reprocessed 2D seismic lines across the El Romeral Production Concessions was nearing completion with the aim of optimising the top 5 drilling targets for the permitting application process as requested by MITECO, the Spanish regulator.

By the year end, Prospex's JV partner in its assets in Spain, through Tarba, Warrego Energy is subject to a takeover bid in Australia.

Post period end, Hancock Energy (PB) Pty Ltd completed the acquisition of 100% of the shares of Warrego Energy Ltd, which was then de-listed from the ASX exchange in Sydney, Australia.

Chairman's Report

for the year ended 31 December 2022

Financial Review

For the year ended 31 December 2022, the Company is reporting Total Assets of £23,062,739 (2021: £8,984,437), the value of which largely comprises the Company's investment in PXOG Marshall Ltd, the vehicle for the Company's Italian assets. The 156.7% increase is dominated by a revaluation reflecting measured recognition of positive changes in the forward curve of European gas prices at 31 December 2022 and includes revaluations of the Company's investments ('the Investments') as well as repayments and advances on loans receivable from those investments. Unrealised gains arising on revaluation of Investments at fair value amounted to £9,367,435 (2021: £3,076,415).

As at 31 December 2022, the fair value of the Company's investments stood at £16,064,160 (2021: £6,697,305). The combined value of these equity investments, current and non-current loans is £21,561,316 (2021: £8,726,484).

This increase in the net book value of investments to £16,064,640 from £6,697,305 at the end of last year reflects the after-tax effect of the revaluation of the Company's working interest in the Podere Gallina licence in Italy. In April 2022, the Company increased its stake in the Selva Gas Field in the Po Valley in Italy to 37% following the acquisition of a further 20% working interest in the licence from UOG.

The asset was also re-valued using the same valuation methodology which was used in the audited financial statements at the end of 2021 but utilising the underlying future gas pricing assumptions to the TTF European forward contract gas prices applicable on 11 May 2023. The current forward contract prices for European natural gas at the date of preparation of these results remain above those at the end of 2021, upon which the valuations to-date have been based, but below those at the current reporting date of 31 December 2022.

The Company continues to have significant asset backing relative to its market capitalisation.

Administrative expenses for the full year totalled £975,725, a 9.4% increase from 2021's £891,676.

As at 31 December 2022, the Company held cash and cash equivalents of £1,482,762 (2021: £220,060). 

Business Development

The financial year ended 2022 saw unprecedented volatility in both gas and electricity prices on account of several dramatic events on the world stage. The Company, through its Tarba investment, enjoyed record income from power generation in the month of March 2022, but the combination of regulation, attempts at price capping and the macro effects of the energy market supply and demand forces have seen prices reducing and volatility normalising. In evaluating business development opportunities, the Prospex Board applied a conservative approach to forward energy pricing during the year. Several data rooms were attended and assessed and discussions on many acquisitions progressed to various degrees, but none was finalised during the year, with the exception of the 20% acquisition from UOG of the Selva Joint Venture detailed above, which was signed in August 2021 and finalised in April 2022. The Company continues to focus on onshore natural gas and power assets in Western Europe. The Company's leadership considers that this geographical and product focus is an essential ingredient to setting Company strategy and defining the boundaries within which we operate. Natural gas has been widely recognised as the transition fuel as Europe progresses to rely upon less carbon intensive energy sources. In 2022, the Company actively pursued investments in renewable energy sources with two solar photovoltaic projects at the El Romeral asset in Spain. This has already moved Prospex Energy to be categorised as an integrated energy company with a business model of utilising the traditional natural gas assets to expand into the renewable energy space.

Chairman's Report

for the year ended 31 December 2022

Outlook

The outlook for Prospex remains one of consolidation and growth. With the Selva asset generating cash flows from Q2-2023, the Company expects to deliver organic growth in its two main assets in Spain and Italy. Subsurface technical work and reprocessing of the 2D seismic lines is underway on the Selva Malvezzi production concession in order to optimise the final well locations for the next three wells to be drilled, Selva North, Selva South and East Selva. In Spain on the Romeral production concessions, the environmental impact assessment process has been initiated in order to be granted the permits to drill five new wells which can be connected to Tarba's local pipeline network so that the El Romeral power plant can re-establish 100% of its installed generation capacity. Currently running at just 30% capacity with just one of the three engines generating electricity at a time, it only needs two of the three proposed wells to be connected to the power plant for the power station to have sufficient gas to run all three engines and achieve the nameplate output capacity of 8.1MW.

Once the El Romeral concession wells are permitted, the Spanish regulator has undertaken to address the issue of the suspended Tesorillo permit. The owners of Tarba are ready to initiate the permitting process for the appraisal well to be drilled on the permit once the licence has been converted into an exploitation concession.

The year ahead promises to see major progress. I look forward to providing further updates as developments occur.

The significant impacts of COVID were still with us at the beginning of 2022 and long-term effects continue. Our management, staff, contractors and partners were steadfast in moving the Company ahead throughout this challenging period and deserve our thanks. After the year end, Dr Richard Mays, one of the founding directors of the Company, retired from the Board after years of providing strong and insightful leadership. Andrew Hay agreed to join the Board and has proved an excellent addition. I would like to take this opportunity to thank our investors whose support has enabled the Company to achieve a level of success and to our current and past directors, the Board and management team for their continued hard work, commitment and support.

Bill Smith

Non-Executive Chairman

24 May 2023

Prospex Energy Plc

Statement of Profit or Loss and Other Comprehensive Income

for the year ended 31 December 2022

Prospex Energy Plc (Registered number: 03896382)

Statement of Financial Position

31 December 2022

The financial statements were approved by the Board of Directors and authorised for issue on 24 May 2023 and were signed on its behalf by:

Mark Routh

Director

Prospex Energy Plc

Statement of Changes in Equity

for the year ended 31 December 2022

Share capital - The nominal value of the issued share capital

Share premium account - Amounts received in excess of the nominal value of the issued share capital less costs associated with the issue of shares

Merger reserve - The difference between the nominal value of the share capital issued by the Company and the fair value of the subsidiary at the date of acquisition

Capital redemption reserve - The amounts transferred following the redemption or purchase of the Company's own shares

Retained earnings - Accumulated comprehensive income for the year and prior periods

Fair value reserve - the cumulative fair value changes of the company's fixed asset investment, net of deferred tax

Prospex Energy Plc

Statement of Cash Flows

for the year ended 31 December 2022

Prospex Energy Plc

Notes to the Statement of Cash Flows

for the year ended 31 December 2022

1. RECONCILIATION OF LOSS BEFORE INCOME TAX TO CASH GENERATED FROM OPERATIONS

2. CASH AND CASH EQUIVALENTS

The amounts disclosed on the Statement of Cash Flows in respect of cash and cash equivalents are in respect of these Statement of Financial Position amounts:

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

1. STATUTORY INFORMATION

Prospex Energy Plc is a public limited company, is registered in England and Wales and is quoted on the AIM Market of the London Stock Exchange Plc. The Company's registered number and registered office address can be found on the Company Information page.

The presentation currency of the financial statements is the Pound Sterling (£).

2. ACCOUNTING POLICIES

Basis of preparation

The Company's financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 as they apply to the financial statements of the Company for the year ended 31 December 2022 and as applied in accordance with the provisions of the Companies Act 2006.

The Company financial statements have been prepared under the historical cost convention or fair value where appropriate.

Preparation of consolidated financial statements

The Company is an investment entity and, as such, does not consolidate the investment entities it controls. The Company's interests in subsidiaries are recognised at fair value through profit and loss.

Going concern

The Company has reported an operating loss for the 2022 year of £1,163,142. In 2023 it is expected that the Company will have increased receipts resulting from first gas sales at its investment in Italy. These receipts will initially be received as loan repayments together with interest charged, reimbursing the Company for capital advances made in prior years which were applied to acquisition, exploration and development costs. As a result, it is expected that the Company will again record an operating loss during 2023, but an increase in cash inflows and balance sheet strength.

The Directors have prepared detailed financial forecasts and cash flows looking beyond 12 months from the date of the approval of these financial statements. In developing these forecasts, the Directors have made assumptions based upon their view of the current and future economic conditions that are expected to prevail over the forecast period. The Directors estimate that the cash held by the Company together with known receivables and anticipated income from its Italian asset will be sufficient to support the current level of activities beyond 2023. Furthermore, the Company's asset in Spain is fully self-funding at current operating levels and is expected to have sufficient cash resources and income to fund existing operations beyond the end of 2023.

The Board expects to raise additional funding only as and when required to cover any shortfall between the Group's own cash resources and its development and expansion of activities. Should regulatory approval be received which allows for an expansion of current operations, or appropriate new investment opportunities arise which meet the Company's objectives and criteria, then the Directors will explore all potential sources of funding available to meet such shortfall. Based on the Company's track-record, assets and prospects, the Directors have a reasonable expectation that they will be able to secure such further funding should the need arise.

The Directors have therefore prepared the financial statements on a going concern basis. 

Property, plant and equipment

Depreciation is provided at the following annual rates in order to write off the cost less estimated residual value of each asset over its estimated useful life.

Financial instruments

Financial assets and financial liabilities are recognised on the balance sheet when the Company becomes a party to the contractual provisions of the instrument.

Loans and receivables

These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The principal financial assets of the Company are loans and receivables, which arise principally through the provision of goods and services to customers (e.g. trade receivables) but also incorporate other types of contractual monetary asset. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets.

The Company's loans and receivables are recognised and carried at the lower of their original amount less an allowance for any doubtful amounts. An allowance is made when collection of the full amount is no longer considered possible.

The Company's loans and receivables comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

2. ACCOUNTING POLICIES - continued

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities.

Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability.

Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.

Equity comprises the following:

- Share capital represents the nominal value of equity shares;

- Share premium represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue;

- Profit and loss reserve represents retained deficit;

- The capital redemption reserve arises on redemption of shares in previous years and own share reserve;

- Merger reserve represents the difference between the nominal value of the share capital issued by the Company and the fair value of the subsidiary at the date of acquisition;

- Fair value reserve represents the cumulative fair value changes of the company's fixed asset investment, net of deferred tax.

Leases

Leases are recognised as finance leases. The lease liability is initially recognised at the present value of the lease payments which have not yet been made and subsequently measured under the amortised cost method. The initial cost of the right-of-use asset comprises the amount of the initial measurement of the lease liability, lease payments made prior to the lease commencement date, initial direct costs and the estimated costs of removing or dismantling the underlying asset per the conditions of the contract.

Where ownership of the right-of-use asset transfers to the lessee at the end of the lease term, the right-of-use asset is depreciated over the asset's remaining useful life. If ownership of the right-of-use asset does not transfer to the lessee at the end of the lease term, depreciation is charged over the shorter of the useful life of the right-of-use asset and the lease term.

Taxation

Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules, using tax rates enacted or substantially enacted by the statement of financial position date.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax is determined using tax rates that have been enacted or substantially enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realised, or the deferred tax liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets are only recognised to the extent that it is probable that future taxable profit will be available against which the asset can be utilised.

Cash and cash equivalents

Cash and cash equivalents include cash at bank and in hand and short-term deposits with an original maturity of three months or less.

Trade and other payables

Trade and other payables are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method.

Foreign currency translation

Items included in the Financial Statements are measured using the currency of the primary economic environment in which the Company operates (the functional currency) which is UK sterling (£). The Financial Statements are accordingly presented in UK Sterling.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

2. ACCOUNTING POLICIES - continued

Foreign currency translation - continued

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or at an average rate for a period if the rates do not fluctuate significantly. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Profit or Loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Finance income and finance costs

Finance income is recognised when it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably. It is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable.

Borrowing costs are recognised as an expense in the period in which they are incurred.

Equity-settled share-based payment

The Company makes equity-settled share-based payments. The fair value of options granted is recognised as an expense, with a corresponding increase in equity. The fair value is measured at grant date and spread over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. The fair value of the options granted is measured based on the Black-Scholes framework, taking into account the terms and conditions upon which the instruments were granted. At each balance sheet date, the Company revises its estimate of the number of options that are expected to become exercisable. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity.

Government grants

Grants that compensate the Company for expenses incurred are recognised in profit or loss on a systematic basis in the periods in which the expenses are recognised.

Accounting standards issued but not yet effective and/or adopted

As at the date of approval of these financial statements, the following standards were in issue but not yet effective. These standards have not been adopted early by the Company as they are not expected to have a material impact on the Company's financial statements.

The International Financial Reporting Interpretations Committee has also issued interpretations which the Company does not consider will have a significant impact on the financial statements.

Revenue recognition

Revenue is measured at the fair value of consideration receivable, net of any discounts and VAT. It is recognised to the extent that the transfer of promised services to a customer has been satisfied and the revenue can be reliably measured.

Revenue from the rendering of services to the customer is considered to have been satisfied when the service has been undertaken.

Revenue which is not related to the principal activity of the Company is recognised in the Statement of Profit or Loss as other operating income. Such income includes consultancy fees and rent receivable.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

The preparation of the financial information in conformity with IFRS requires the use of certain critical accounting estimates that affect the reported amounts of assets and liabilities at the date of the financial information and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amounts, events or actions, actual results ultimately may differ from these estimates. The estimates and underlying assumptions are as follows:

Investment entities

The judgements, assumptions and estimates involved in the Company's accounting policies that are considered by the Board to be the most important to the portrayal of its financial condition are the fair valuation of the investment and the assessment regarding investment entities. The investment portfolio is held at fair value. The Directors review the valuations policies, process and application to individual investments.

Entities that meet the definition of an investment entity within IFRS 10 are required to account for most investments in controlled entities, as well as investments in associates and joint ventures, at fair value through profit and loss. The Board has concluded that the Company continues to meet the definition of an investment entity as its strategic objective of investing in portfolio investments for the purpose of generating returns in the form of investment income and capital appreciation remains unchanged

Fair value is the underlying principle and is defined as "the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date". Fair value is therefore an estimate and, as such, determining fair value requires the use of judgement. The quoted assets in our portfolio are valued at their closing bid price at the balance sheet date. The largest investment in the portfolio, however, is represented by an unquoted investment.

Impairment of assets

The Company's principal investments are in wholly owned unquoted subsidiaries which each have a minority interest in overseas entities with energy assets.

The Company is required to test, on an annual basis, whether its non-current assets have suffered any impairment. Determining whether these assets are impaired requires an estimation of the value in use of the cash-generating units to which the assets have been allocated. The value in use calculation requires the Directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate to calculate the present value. Subsequent changes to the cash generating unit allocation or to the timing of cash flows could impact on the carrying value of the respective assets.

The calculation of value-in-use for energy assets under development or in production is most sensitive to the following assumptions:

- Commercial reserves

- production volumes;

- commodity prices;

- fixed and variable operating costs;

- capital expenditure; and

- discount rates.

A potential change in any of the above assumptions may cause the estimated recoverable value to be lower than the carrying value, resulting in an impairment loss. The assumptions which would have the greatest impact on the recoverable amounts of the fields are production volumes and commodity prices

Share based payments

The estimates of share-based payments requires that management selects an appropriate valuation model and make decisions on various inputs into the model including the volatility of its own share price, the probable life of the options before exercise and behavioural consideration of employees.

Deferred tax assets

Deferred taxation is provided for using the liability method. Deferred tax assets are recognised in respect of tax losses where the Directors believe that it is probable that future profits will be relieved by the benefit of tax losses brought forward. The Board considers the likely utilisation of such losses by reviewing budgets and medium-term plans for the Company. The Directors have decided that no deferred tax asset should be recognised at 31 December 2022. If the actual profits earned by the Company differs from the budgets and forecasts used then the value of such deferred tax assets may differ from that shown in these financial statements.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

4. REVENUE

Segmental reporting

The Company is an Investing Company. The results for this continuing operation, all of which were carried out in the UK, are disclosed in the Income Statement. The net assets as at 31 December 2022 as shown on the Statement of Financial Position all relate to the Investment activity.

5. OTHER OPERATING INCOME

6. EMPLOYEES AND DIRECTORS

The average number of employees during the year was as follows:

Under the Pensions Act 2008, every employer must put certain staff into a pension scheme and contribute to it. The Company auto-enrolled its eligible employees in a defined contribution scheme. The charge to the Statement of Profit or Loss represents the amounts paid to the scheme. At the year end, the amount due to the pension scheme was £nil (2021: £nil).

Details of Directors' remuneration can be found in note 24.

7. NET FINANCE COSTS

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

8. PROFIT BEFORE INCOME TAX

The profit before income tax is stated after charging:

9. INCOME TAX

Factors affecting the tax expense

The tax assessed for the year is higher than the standard rate of corporation tax in the UK. The difference is explained below:

There is no provision for UK Corporation Tax due to adjusted losses for tax purposes, subject to agreement with HM Revenue and Customs. The deferred tax asset, measured at the standard rate of 25%, of approximately £2.1m (2021: 25% - £1.9m) arising from the accumulated tax losses of approximately £8.4m (2021: £7.6m) carried forward has been used to reduce the deferred tax charge on the unrealised gain arising on the revaluation of investments. This will be subject to agreement with HMRC.

The main UK corporation tax rate has changed from 19% to 25% with effect from 1 April 2023. The deferred tax liability arising on the revaluation of the Company's fixed asset investments has been calculated using 25%, reduced by the availability of tax losses.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

10. EARNINGS PER SHARE

The exercisable share options and warrants are deemed to be dilutive in nature where their exercise price is less than the average share price for the period.

11. PROPERTY, PLANT AND EQUIPMENT

12. INVESTMENTS

Shares in group undertakings represent investments in PXOG Marshall Limited of £16,014,540 (2021: £6,647,205) and PXOG Muirhill Limited of £100 (2021: £100).

The Company's investments at the Statement of Financial Position date in the share capital of companies include the following:

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

12. INVESTMENTS - continued

PXOG Muirhill Limited holds its interests in the Tesorillo and El Romeral projects through its holdings of A and B shares respectively in Tarba Energia S.L. Consistent with the prior year, these investments are being held at the cost of investment in Prospex Energy Limited and in PXOG Muirhill Limited.

All of the subsidiaries are incorporated in the UK and registered in England & Wales.

Investments are recognised and de-recognised on the date when their purchase or sale is subject to a relevant contract and the associated risks and rewards have been transferred. The Company manages its investments with a view to profiting from the receipt of investment income and capital appreciation from changes in the fair value of investments.

All investments are initially recognised at the fair value of the consideration given and are subsequently measured at fair value through profit and loss.

Unquoted investments, including both equity and loans are designated at fair value through profit and loss and are subsequently carried in the statement of financial position at fair value. Fair value is determined in line with the fair value guidelines under IFRS.

In accordance with IFRS 10, the proportion of the investment portfolio held by the Company's unconsolidated subsidiaries is presented as part of the fair value of investment entity subsidiaries, along with the fair value of their other assets and liabilities.

The holding period of the Company's investment portfolio is on average greater than one year. For this reason, the portfolio is classified as non-current. It is not possible to identify with certainty investments that will be sold within one year.

Investments in investment entity subsidiaries are accounted for as financial instruments at fair value through profit and loss and are not consolidated in accordance with IFRS10.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

12. INVESTMENTS - continued

These entities hold the Company's interests in investments in portfolio companies. The fair value can increase or reduce from either cash flows to/from the investment entities or valuation movements in line with the Company's valuation policy.

The fair value of these entities is their net asset values.

The Directors determine that in the ordinary course of business, the net asset values of an investment entity subsidiary are considered to be the most appropriate to determine fair value. At each reporting period, they consider whether any additional fair value adjustments need to be made to the net asset values of the investment entity subsidiaries. These adjustments may be required to reflect market participants' considerations about fair value that may include, but are not limited to, liquidity and the portfolio effect of holding multiple investments within the investment entity subsidiary.

13. TRADE AND OTHER RECEIVABLES

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.

In 2018 the Company provided an interest-free loan to PXOG Marshall Limited, a wholly owned subsidiary. The fair value of the financial element of the loan has been calculated by discounting the future cash flow of the loan, £1,056,391, at the market rate of 10%. The difference between the total loan and the fair value of the loan i.e. the non-financial element of the loan, has been accounted for as an addition to shares in group undertakings (note 12).

Since 1 January 2022, the above loan has been amalgamated with further loans provided to PXOG Marshall Limited, with interest charged at 10% per annum on the total balance. These loans are repayable on demand.

14. CURRENT ASSET INVESTMENTS

The investment in PXOG Massey Limited is held at £100, based on the SPA agreement which is pending completion of sale to H2Oil Limited. In August 2020, Prospex signed a sale and purchase agreement ('SPA') with H2Oil Limited ('H2Oil') regarding the sale of the entire issued share capital of PXOG Massey Limited ('Massey'). Under the terms of the SPA, the Company will receive up to £215,000 in cash in respect of historical debt owed to the Company by Massey and nominal consideration for shares in Massey of which 85% of the funds (£182,650) had been received by Prospex by 31 December 2020. As at the balance sheet date, although it is still expected, the final condition of the SPA had not been met.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

15. CASH AND CASH EQUIVALENTS

The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value. All of the Company's cash and cash equivalents are at floating rates of interest.

16. CALLED UP SHARE CAPITAL

Share issues

In February 2022, the Company raised £2,454,800 before expenses by way of a placing of 70,137,143 new ordinary shares of £0.001 each in the Company at a price of 3.50 pence per share (the "Placing"). The net proceeds of the Placing were primarily used to fund the acquisition of 20% of the Selva Field in Italy through its subsidiary PXOG Marshall Limited and as development costs of the Selva project.

In October 2022, £21,250 of the Convertible Loan Note 2022, were converted into 500,000 new ordinary shares of £0.001 each at a price of 4.25 pence per share

During the year, 1,920,000 new ordinary shares of £0.001 were issued at a price of 2.25 pence each on the exercise of warrants, raising £43,200 before expenses.

During the year, 24,325,955 new ordinary shares of £0.001 were issued at a price of 3.00 pence each on the exercise of warrants, raising £729,779 before expenses.

In September and October 2022, 4,654,131 new ordinary shares of £0.001 were issued at a price of 4.00 pence each on the exercise of share options, raising £186,165 before expenses.

Deferred shares rights

The deferred shares have no rights to vote, attend or speak at general meetings of the Company or to receive any dividend or other distribution and have limited rights to participate in any return of capital on a winding-up or liquidation of the Company.

17. TRADE AND OTHER PAYABLES

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

18. FINANCIAL LIABILITIES - BORROWINGS

Terms and debt repayment schedule:

Loan notes

2018 Loan note

The 2018 Notes pay 10% interest biannually. Repayments of capital started in December 2020 with final repayment due on 30 June 2022 (four equal payments). See below for details of capital rolled into 2021 Loan note.

Prospex Energy Plc

Notes to the Financial Statements - continued

for the year ended 31 December 2022

18. FINANCIAL LIABILITIES - BORROWINGS - continued

2020 Loan note

The 2020 Notes pay 10% interest per annum. The term of the 2020 Notes is 18 months with capital repayment of unconverted amounts due on 30 June 2022. The 2020 Notes granted the subscribers the right but not the obligation to convert the loan, on notice, into new ordinary shares in the Company each at 2.05 pence per share.

During 2021, the loan note subscribers converted their loans of £415,838 into 20,284,787 new ordinary shares of 0.1p per share at a price of 2.05p per share.

2021 Non-Convertible Loan note

In June 2021, holders of £321,681 of the 2018 loan note agreed to rollover their combined holdings into a new unsecured loan note ('the 2021 Loan Note'). The Company issued £321,681 of the 2021 Loan Note to existing holders of the 2018 Loan Note ('the Subscribers'), including several directors of the Company. 

Under the terms of 2018 Loan Note, holders were entitled to the outstanding capital returned in equal instalments in June 2021, December 2021 and June 2022. The terms of the 2021 Loan Note reflect those of the 2018 Loan Note except all the capital repayment dates have effectively been extended by 18 months to December 2022, June 2023 and December 2023, while the annualised interest rate is now 12% versus 10%. The 2021 Loan Note will pay 6% interest every six months, with the first payment due on 31 December 2021. The 2021 Loan Note is not convertible.

July 2022 Convertible Loan note

The July 2022 Convertible Loan Notes totalling £1.87 million pay interest at 12% per annum, on a quarterly basis. The first interest payment on 30 September 2022 was capitalised and added to the loan principal.

The July 2022 Convertible Loan Notes are convertible at 4.25p per ordinary share at any time at the election of the Noteholder. The Loan principal is to be repaid in three equal tranches - 30 September 2023, 31 December 2023 and 31 March 2024.

September 2022 Convertible Loan note

The September 2022 Convertible Loan Notes totalling £0.5 million pay interest at 15% per annum, on a quarterly basis. The first interest payment on 30 September 2022 was capitalised and added to the loan principal.

The September 2022 Convertible Loan Notes are convertible at 5.50p per ordinary share at any time at the election of the Noteholder. The Loan principal is to be repaid in three equal tranches - 30 September 2023, 31 December 2023 and 31 March 2024.

19 DEFERRED TAXATION

20. FINANCIAL INSTRUMENTS

The principal financial instruments used by the Company, from which financial instrument risk arises are as follows:

- Trade and other receivables

- Cash and cash equivalents

- Trade and other payables

A summary of the financial instruments held by category is provided below: