One to watch – Providence Resources

 

Providence Resources (PVR) has been in the thick of it for the last few years as the bearish commodity cycle hit the sector the hard. M&A dried up and gaining any kind of funding or farm out deal was nigh impossible. Luckily for shareholders, PVR survived 2016 with the help and support of institutional investors who stumped up close to $70m in a very dilutive equity raise. Surprisingly, the company still has a moderate amount of shares in issue at 598m having done a reorganisation of capital some years back. This is quite small for an out and out explorer and still leaves some mileage for future equity raises should that be needed. The company has a number of key licences in and around the Celtic Basin. But by far and without a doubt, the jewel in the crown is a licence called ‘Barryroe’.

Barryroe is located in the North Celtic Sea Basin, offshore southern Ireland and is adjacent to the PETRONAS operated Kinsale Head gas field. The Company acts as Operator with 80% interest and Lansdowne (LOGP) 20%. In March 2012, Barryroe flowed at rates of 3,500 BOPD from a 7-metre vertical section of reservoir. Post-well analysis, in conjunction with the new 3D seismic data set, led to a substantial upgrade in the field size to over 1 billion barrels in place (2C). Subsequent work on multiple development concepts, together with detailed engineering studies on recovery factors, led to estimated 2C recoverable resources of over 300 million barrels of oil from the two main tested reservoir intervals. PVR’s market cap in 2012 was just shy of £700m.

Today, their market cap is just £100m.

This is very much down to poor market sentiment which tends to lead to a rather pessimistic view of 2C resources and especially in the case of a smaller player with limited access to funding. Barryroe requires more testing before a development plan can be agreed and the company has been seeking a farm out deal with a view to drill one or two more wells on the licence. It’s a similar position to that seen on Hurricane Energy in 2016. Hurricane also had a sizable discovery in their Lancaster Licence but due to the poor market backdrop had failed in gaining a decent farm out deal. With around 650m shares in issue, the company decided to do a dilutive equity raise of approx 350m shares at 10p which brought in valuable funds to drill a new well on the asset. The market cap was around £65m at the time of the fund raiser. 4 months later, and after some significant success with the drill bit, the market cap jumped to £400m. A further equity raise of 200m shares was done, more drill success followed and now with 1.2bln shares in issue, the market cap is £650m. But here’s the payback… the company still holds a 100% of all their assets.

Improved market conditions have also helped deliver share price growth. The second half of 2016 was a transformation to the earlier doldrums seen in Feb 2016. Since the end of 2016, the sector has improved further with M&A action accelerating and deals getting done.

Like Hurricane, Providence Resources did a dilutive equity deal in 2016 (as mentioned above). But the funds raised were not intended to be used directly on Barryroe, but instead are being used (in part) to finance a drill on a huge prospect called Druid/Drombeg in the southern porcupine basin. (See RNS below).

Providence have yet to confirm the finer details and timings around the SPB drill but all appears on track for June 2017. More announcements over the next few weeks should confirm all the pieces are in place.

With a market cap just over £100m, the Druid drill looks in for free. Should they be successful, it’s more than possible that they could follow in the footsteps of Hurricane Energy. The companies current cash position and upcoming drill catalyst also improves the chances of a good farm out deal on Barryroe – that and an improving market backdrop.

Of course, if all goes well, they may not need to farm out at all, but there’s something to be said for being sensible. And the reality is Barryroe is so large that it deserves a major cashed-up player behind it. But all in good time.

In summary, Providence Resources is back on the centre stage and as June approaches, it would not surprise to see the market beginning to price in a bit of the better sector sentiment that has to date deserted PVR. News on a Barryroe farm out deal could come at any time. Any prospective partner will be acutely aware that PVR have a potentially transformational drill in around 16 weeks time.

Current share price 18p. Broker targets vary between 30p and 40p.

Based on the opportunity ahead (drill catalyst) and current market conditions improving for farm out deals (M&A) thesharehub Pre-TD target for PVR is 36p. Any major success and that number could easily double again. Also worthy of a note is Lansdowne Oil&Gas (LOGP). They currently hold 20% share in Barryroe licence and with a market cap of just £6.5m, any Barryroe deal could see their shareprice rerate significantly higher. It’s possible that any farm out deal or partner involved could just take Lansdowne out with a bid as the company has little else on its books now after recent licence relinquishments.

Usual caveats apply. Please read the risk warnings in the right-hand side column.

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23 Jan 2017 07:00:20
PROVIDENCE RES.
Licence Update
Frontier Exploration Licence 2/14
Southern Porcupine Basin

FEL 2/14 PROGRESSED TO THE SECOND PHASE OF THE LICENCE
PRIMARY WORK PROGRAMME ACTIVITY IS THE DRILLING OF THE DRUID PROSPECT

PLANNED SPUD DATE FOR THE DRUID WELL IS JUNE 2017
Dublin and London – January 23, 2017 – Providence Resources P.l.c. (PVR LN, PRP ID), the Irish based Oil and Gas Exploration Company, provides an update on the Frontier Exploration Licence (“FEL”) 2/14, which lies in c. 2,250 metre water depth in the southern Porcupine Basin and is located c. 220 kilometres off the south west coast of Ireland.  The licence is operated by Providence Resources P.l.c. (“Providence”, 80%) on behalf of its partner Sosina Exploration Limited (“Sosina”, 20%), who are collectively referred to the “JV Partners”.  FEL 2/14 contains the Paleocene “Druid” and the Lower Cretaceous “Drombeg” exploration prospects.

LICENCE UPDATE
The Minister of State for the Department of Communications, Climate Action and Environment has given his consent to the progression to the second phase of the licence, subject to the completion of the agreed work programme which includes the drilling of the 53/6-A exploration well on the Paleocene Druid prospect and the subsequent integration of the well data into a comprehensive assessment of the petroleum potential of the licence.

OPERATIONAL UPDATE
In November 2016, the Company signed a drilling contract for the provision of the Stena IceMAX drill-ship to drill an exploration well in FEL 2/14 during 2017. The drilling contract provides for one firm well, plus an additional option, which is electable at the discretion of the JV Partners for the drilling of a second follow-on well.  Other key service contracts are now being finalized for the drilling operations for the planned 53/6-A exploration well. Based on the latest project timeline and, subject to standard regulatory approvals and consents, the 53/6-A exploration well is currently planned to spud in June 2017.

Speaking today, Tony O’Reilly, Chief Executive of Providence said:

“We are pleased to have received this confirmation from the government on the licence progression as we continue to move forward with all the necessary works to enable the drilling of this high impact exploration well during summer 2017.”

3 Comments

HUB

I think your comment needs a little expansion!

Hurricane have derisked the Lancaster prospect by delivering more data from the 2016 drill/testing campaign. Barryroe is in a very similar position and requires more data and testing to be derisked and confirm a commercial development plan. Providence Resources are currently seeking a partner to farm out and pay for these works. Druid is an entirely different prospect and carries around 30% to 40% CoS. Hence, PVR are potentially treading in HUR’s footsteps but doing it a little in reverse as they are not focusing on their main asset but on the other portfolio targets first. Barryroe has similar potential to Lancaster although Lancaster is far more advanced after 2016 drills.

Reply
Phil

Hi Hub,

Good write up.

With regards to Barryroe, does the farm in have to happen before July 2017 given the below statement?

“In November 2015, a two year extension was secured for the first phase of SEL 1/11, to July 2017 as well as an extension of the term of the second phase to July 2019. The areal extent of SEL 1/11 was also increased by 118km² to accommodate mapped potential extensions of the Barryroe accumulation.”

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