ADX Energy - Growing Austrian Oil & Gas Producer Offers Compelling Opportunity in the European Energy Space

• ADX Energy is an ASX-listed company focused on oil & gas production, exploration and development in Europe, primarily in Austria.
• They acquired assets and operations in Austria from RAG, gaining access to 3D seismic, infrastructure, and exploration acreage.
• Recent oil discovery at Anshof field in Upper Austria, currently producing 140-150 bopd with plans to increase to 1000 bopd in 12 months.
• Promising gas & condensate discovery at Welchau in the foothills of the Alps with mean prospective resource of 807 BCF.
• Raised A$13.5M from institutional investors to fund drilling and growth plans. Shares have been volatile but fundamentals improving.

ADX Energy (ASX:ADX) is an oil and gas exploration and production company focused on European opportunities. With a market cap around A$40 million, the junior has flown under the radar of many investors. However, recent exploration success and production growth in Austria are starting to get noticed. ADX offers exposure to the European energy sector and the ability to commercialise discoveries rapidly by leveraging existing infrastructure.

Operations Focused on Austria

While ADX previously had assets in Tunisia, Italy and Romania, the company has shifted its focus to Austria over the past few years. In 2020, ADX acquired production assets and exploration acreage from RAG Austria AG (RAG), one of the leading oil and gas companies in Central Europe.

ADX gained a small oil field in the Vienna Basin through this strategic deal, producing around 250 bopd, a team of experienced technical staff, access agreements to critical infrastructure, and exploration licenses covering 35,000 km2. This acreage came with an extensive 3D seismic database, which would have cost over €100 million to acquire. As CEO Ian Tchacos explained:

"RAG preferred us because they were getting out of their exploration portfolio in Austria, which is about 35,000 square km around many oil and gas fields - some of them depleted, some of them still producing. So we were the benefactors of this because we got access to 35,000 square km of 3D seismic. And that got us going in operations in Upper Austria."

Using this high-quality subsurface data, ADX high-graded the exploration acreage and applied for licenses covering 1,000 km² in the most prospective areas. The company has already made an important oil discovery in the Molasse basin at the Anshof prospect.

Interview with Executive Chairman Ian Tchacos

Anshof Oil Discovery Provides Near-Term Growth

In January 2022, ADX drilled the Anshof-1 well in Upper Austria and discovered a light, sweet oil accumulation. The discovery was brought into production by October at an initial rate of 140-150 bopd using temporary facilities.

With permanent production facilities installed, ADX plans to increase output to around 1,000 bopd over the next 12 months. Two more appraisal wells are planned, with the first expected to spud in October. Each well is estimated to contain around 1 million barrels of recoverable oil and cost around €4 million to drill and complete. At current oil prices, a 1 million barrel discovery would have an NPV around €20-40 million, assuming cash operating costs of $21/bbl.

ADX has brought in a partner to fund the next phase of drilling at Anshof. Xstate Resources (ASX:XST) is farming in for a 30% interest by paying 60% of the cost of the next two wells. ADX will remain as the operator with a 70% stake.

Welchau Gas/Condensate Discovery Offers Big Upside

ADX's most exciting prospect is Welchau, a giant gas-condensate prospect in the foothills of the Alps. In March 2024, the Welchau-1 exploration well encountered strong hydrocarbon shows across a 450-meter gross column. The well was suspended for testing after flowing gas and condensate to the surface.

Welchau has a mean prospective resource of 807 BCF (580 BCF of gas and 38 mmbbl of condensate). The mean NPV is estimated at €940 million (A$1.4 billion). With a market cap of just A$40 million, ADX is trading at a massive discount to the potential value of Welchau.

Testing of Welchau-1 is expected in late 2024 or early 2025. The well has been cased to a depth of 1,750 meters, with potential for another 1,000 meters of hydrocarbon-bearing reservoir below. As Tchacos elaborated:

"Looking forward, what we want to do - and the most environmentally sensitive thing we do in oil and gas - is testing wells. So once you get to a point where you just don't have to test, and you're just looking at things like building pipelines and that sort of stuff, obviously it's much easier for people to accept that."

If the testing is successful and Welchau is proven commercial, ADX plans to drill additional wells from the same pad and fast-track development. Management believes leveraging existing pipeline infrastructure could bring a new field within 12-18 months.

Access to Infrastructure Enables Rapid Commercialization

One key advantage of operating in Austria is access to extensive oil and gas infrastructure, including pipelines, processing facilities, and storage. ADX can process and transport its oil and gas production at highly competitive rates through various agreements inherited from RAG.

Oil from Anshof is trucked to a railhead just 10 km away, shipped by rail to a refinery near Vienna, and sold at a slight discount to Brent. Solution gas from ADX's fields in the Vienna Basin is sold at a price linked to the Dutch TTF gas benchmark.

This ability to quickly monetize discoveries is crucial for a small-cap explorer like ADX. Tchacos commented on the importance of locking in infrastructure access before drilling Anshof-1: "I think you know a lot of companies find themselves some good acreage, drill a successful well, and then can't commercialize."

Importantly, ADX has also secured a rig slot for the upcoming appraisal drilling at Anshof, avoiding potential delays due to the tight rig market in Europe.

Benefiting from Austrian Energy Security Concerns

ADX is well-positioned to benefit from Austria's growing concerns around energy security. The country still relies on Russia for 70% of its natural gas, which is imported via Ukraine. With this supply agreement set to expire in November, there is an urgent need for new domestic sources of oil and gas.

Management has noted strong support from Austrian authorities for ADX's activities, especially natural gas development. Approvals for drilling and pipeline construction have been expedited. Tchacos believes "people are very concerned about energy security" and sees a "source of new domestic gas in Austria as very important" for the country.

Recent A$13.5M Raise Funds Drilling Program

In May 2024, ADX raised A$13.5 million through a placement of new shares to institutional and sophisticated investors. Due to strong demand, the deal was upsized from an original target of A$5-6 million, with bids exceeding A$25 million.

Proceeds will be used to fund the company's share of appraisal drilling at Anshof and Welchau and new exploration drilling on the ADX-XST joint venture acreage. The raising also brought in two new cornerstone investors—one from Hong Kong taking a 5%+ stake and one from the U.S. taking 4-5%.

ADX Energy offers a rare combination of production growth and high-impact exploration in the European energy sector. With a market cap of just A$40 million, the company is trading at a significant discount to the potential value of its assets, especially the giant Welchau prospect. Shareholders will likely be rewarded as ADX delivers on its growth objectives over the next 12-18 months.

However, as a small-cap oil & gas stock, ADX carries a high level of risk and is only suitable for investors with a tolerance for volatility. Negative drilling results, operational setbacks, or an inability to secure funding could cause the stock to sell off heavily. Nonetheless, for investors who are bullish on the long-term fundamentals of oil and gas and looking for European exposure, ADX Energy is a compelling proposition.

The Investment Thesis for ADX Energy

• European pure-play oil & gas company with rapidly growing production and cash flow from assets in Austria
• Low-risk appraisal drilling at Anshof oil field to boost production to 1000+ bopd
• High-impact exploration exposure through 807 BCF Welchau gas-condensate prospect (Pmean €1.4B NPV)
• Proven ability to quickly commercialize discoveries by leveraging access to extensive infrastructure
• Strategic position in Austria benefiting from the urgent need for domestic energy supply
• Recent A$13.5M raise funds near-term growth and attracts new institutional investors
• EV of ~2x cash flow (at 1000 bopd) with huge upside if Welchau is successful

Actionable Advice

• Consider taking a position ahead of results from appraisal drilling at Anshof in Q4 2024
• Monitor newsflow around testing of Welchau discovery and commerciality assessment
• Use any pullback in shares around capital raising to build a position
• Understand risks including exploration/appraisal failure, delays, cost overruns, and regulatory issues

The Russia-Ukraine conflict has turbocharged the global energy crisis and exposed Europe's reliance on imported oil and gas. With supply chains disrupted, prices soaring, and storage levels depleted, security of supply has become the top priority for companies and policymakers.

In this context, ADX's Austrian assets look increasingly valuable. As CEO Ian Tchacos explained:

"Historically, gas would come from Russia into Austria and then be distributed into Italy, Slovakia, and Hungary. Now you're trying to get gas back in the other way. So if you can get a source of new domestic gas in Austria, that's very important."

Europe's urgent need for non-Russian energy supply has coincided with a period of chronic underinvestment in new oil and gas projects. Years of ESG pressure, decarbonization commitments, and expectations of peak demand have seen companies slash exploration budgets and streamline portfolios. The result is a scarcity of quality development opportunities, especially in onshore Europe.

ADX has been able to capitalize on this asset scarcity by acquiring a large (35,000 km²) and well-understood exploration portfolio from RAG. Using existing 3D seismic data, the company has high-graded the acreage and is now delivering impressive success rates (e.g. Anshof and Welchau).

As Tchacos put it: "What differentiates us from a lot of junior oil and gas companies is we generate opportunities ourselves."

Overall, ADX's strategy of acquiring and exploring assets in the heart of Europe looks well suited to the current macro environment. With the right geology, infrastructure, and supportive government policy, Austria could emerge as an unlikely hub for oil and gas investment in the coming years.

While ADX carries the inherent risks of any small-cap oil and gas company (exploration failure, operational issues, funding constraints), the potential rewards far outweigh these risks at the current valuation. As the company delivers on its operational milestones and the strategic value of its Austrian portfolio becomes better understood, ADX Energy should be a standout performer in the junior E&P space.