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Providence Resources PLC: THE INVESTMENT CASE

Providence Resources investors look forward to exploration catalysts

The Irish oil company has told investors that it is on track to kick off the Druid exploration well in June.
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INVESTMENT OVERVIEW: PVR The Big Picture
Everyone is looking forward to drilling.

Investors have got about six months to look forward to a major potential value catalyst for Providence Resources PLC (LON:PVR).

The Irish oil company has told investors that it is on track to kick off the Druid exploration well in June.

Druid prospect is one of two big exploration targets located within Frontier Exploration Licence (FEL) 2/14, in the Atlantic Margin off Ireland’s west coast.

FEL 2/14 lies in 2,250 metres of water in the southern Porcupine Basin some 220 kilometres off the coast.

Providence has contracted Stena International’s IceMAX drill-ship for the programme, with one firm well and an option to add a second well.

While they’re so far untested both Druid and Drombeg are, on paper, estimated to be very large with the former modelled at 3.1bn barrels of mean oil resources and the latter estimated to have 1.9bn barrels.

The drilling programme is supported by a US$70mln capital raise last year.

Given Providence has an 80% stake in FEL 2/14 and there’s been a great deal of industry interest in Ireland’s Atlantic margin, there may be scope for the company to share exploration costs through a farm-out.

Barryroe: Deal or no deal?

Exploration catalysts off the west coast maybe the focal point through 2016, but, for many investors the on hold Barryroe oil project in Ireland’s Celtic Sea is still what matters.

For the uninitiated, Barryroe is a potentially large offshore oil field that is proven but requires substantial capital investment to take forward through the development phase and into production.

The funding requirement is too much for Providence, and partner Lansdowne Oil & Gas (LON:LOGP), to carry by themselves. Consequently, the pair have sought partnerships with larger oil firms over recent years and whilst they have seemingly come close no deal has yet to cross the finish line.

For three frustrating years the narrative from Providence Resource and O’Reilly has been consistent and a bit repetitive: the Irish company is encouraged by its ongoing farm-out process for the Barryroe oil field, and a deal is coming.

The ‘encouraging’ story has been told before. And at 16.44p today, versus nearly 700p back in 2012, the Providence Resources share price tells its own tale.

But at a City event in a few months back, chief executive Tony O’Reilly provided a rare insight into what’s been happening. He explained why he has been genuinely encouraged by negotiations, and gave the reasons he believes a deal is taking so long to get done.

Significantly, he believes the summer’s funding deal has brought potential partners back to back to the negotiating table.

“Essentially counterparties were waiting for us to go bust so they could deal with the administrator but thanks to our shareholders that obviously didn’t happen,” O’Reilly said.

“Barryroe is our main asset and I’m happy to say we have a number of companies in our farm-out process – some who have re-engaged with us since we completed our recent restructuring this summer.”

A deal that breaks the funding impasse, or even green lights, Barryroe would be a major breakthrough for Providence Resources and its share price.

Providence Resources is ‘sensibly’ worth 170% more

The shares should be worth around 35p each according to broker Davy Securities.

Analyst Job Langbroek says this valuation – some 170% above the current share price – is a sensible level after what he described as an eventful year for the company.

Langbroek added that Providence’s upside potential is substantial (on an un-risked basis the analyst’s assessment of the entire exploration portfolio amounts to 166p per share) albeit he believes that new partnerships will bring dilution.

“It may help to think of the Providence share price as a compilation of call options on its inventory of prospects in the Irish offshore,” Langbroek said in a note.

“Given the upside potential if successful, especially the higher risk large volume plays along the Western Atlantic margin, the option premium looks cheap.”

Langbroek says the company’s upcoming drilling programme, in 2017, can be the mechanism for Providence’s valuation to be verified.

Importantly the analyst notes that a recent funding and reduced costs adds to the opportunity.

“The very large reduction in oil industry service costs over the past two years creates a high value window of opportunity for those oil and gas companies that have capital available and are willing to spend.

“This observation very much applies to Providence because, following its equity funding earlier this year, it has circa $35m available to allocate to exploration expenditure offshore Ireland.

“In fact, the funds in place at present – in tandem with the very low drilling costs – mean that it can now undertake exploration activity along the Irish Western margin.

“Such activity would have been impossible, if not unthinkable, up to relatively recently.”

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