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Avanti Energy: Oven-ready gas project and a blue-chip partner

The company has a de-risked gas prospect, with significant untapped upside, supplying a market where demand is high and the prices paid for its product more than economic.

Not quite ready for the drill rig, but the company is moving closer.

With any project in the oil and gas sector you are always looking for third party validation.

In the case of Avanti Energy Inc (CVE:AVN) the big tick in the box is provided in the form of a marketing agreement with Shell Energy Europe, an offshoot of the Anglo-Dutch super-major.

But that’s not the only advantage Italy-focused, TSX-venture-listed Avanti holds over the rank-and-file juniors hoping to make it big.

It has a de-risked gas prospect, with significant un-tapped upside, supplying a market where demand is high and the prices paid for its product more than economic.

To get into the nitty-gritty, Avanti owns a third-share of the Colle Santo gas field. The Italian partners have 25% and a private syndicate of US investors holds 41.6%.

Discovered in 1966 by AGIP, the most recent work on Colle Santo was carried out by the now defunct Forest Oil, which invested US$24mln into the property’s development.

Two wells (MP-1 and MP-2) have been drilled, which helped uncover proven reserves of 72.3bn cubic feet of gas (BCF), or 24bn net to Avanti.

A seismic survey has identified what is believed to be a second gas reservoir with similar characteristics to the original.

Vallecupa, as this untested new prospect is called, is estimated to be host to a ‘prospective unrisked’ 55BCF.

“It has a lot of existing gas and a lot of potential to expand the resource,” says chief executive Karl Kottmeier of the Italy acreage.

So why didn’t Forest take this all the way? Well, the stumbling block appears to have been the site of a gas treatment plant.

The American firm wanted to put it close to the drill site, near the picturesque village of Bomba, in central Italy.

The locals objected and effectively road-blocked development.

Avanti, which is operator of Colle Santo, has taken note.

In its development plan it aims to run a 21km pipeline from Bomba to the Atessa Industrial Park, which is zoned for a facility of kind Avanti is planning.

“The original project ran into resistance because of a regional and local disagreement with the production plan,” says CEO Kottmeier.

“It [the new plan] is responsive to the requests of the local population who do not want to see a gas treatment plant in front of our town.”

Applications have been submitted to the industry and environment ministries in Italy ahead of Colle Santo’s formal sign-off.

However a production licence probably won’t be awarded before the Italian Prime Minister Matteo Renzi’s referendum on domestic reform, which takes place in December.

“Our application is unlikely to be affected either way, but a ‘yes’ vote will be overall more positive to foreign investment in Italy,” said Kottmeier.

It is also worth pointing out that two of the firm’s directors – chairman John McIntyre and senior vice president Mark Frascogna – are former Forest directors, who know the project well.

They bring significant and very specific oil and gas industry experience, while Kottmeier knows how to navigate the capital markets.

He has raised US$150mln for project development on three continents.

That expertise will come in more than handy when its time to start developing Colle Santo.

The capital investment required for the pipeline, treatment facility and two new wells (to complement the two shut-in wells) is put at US$80mln, or US$26.7mln net to Avanti.

While reserve-based lending facilities have become a little tougher to negotiate in these straightened times for the oil and gas industry, CEO Kottmeier has been heartened by the funding discussions he’s had thus far.

A streaming agreement where a gas company pays upfront for a portion of Colle Santo’s production could one option, analysts say.

At the same time the usual sources of project are open to good projects, they added.

Kottmeier, who has been in London gauging the opinion and interest of the investment community here, said he’s been pleasantly surprised with the reception he has received.

“We have had a number of interesting sources of funding have been made aware to us,” he said.

It is probably fair to say Avanti’s current market capitalisation of US$8mln really doesn’t capture the potential value of Colle Santo once it is permitted.

Badile, a well in the north of the country being drilled by UK-listed Sound Energy, carries a net present value of US$533mln.

Okay, Badile’s prospective resource is much larger at 178BSCF – and it is permitted. So you aren’t really comparing apples with apples.

However if you work through the numbers provided in Avanti’s most recent presentation it reveals the market is taking a very, very cautious view on the Colle Santo’s potential.

Kottmeier wouldn’t be drawn on the company’s stock market valuation. All he would say is: “This is a fantastic asset with a high chance of success. This is a completely de-risked gas field. It is ready to go.”

Quick facts: Avanti Energy Inc

Price: 1.2 CAD

Market: TSX-V
Market Cap: $25.26 m

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