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Providence Resources set for value catalysts as Barryroe breakthrough has fired starting pistol on a busy period

Investors will have to wait a little longer for a much more substantial well programme in Ireland's Celtic Sea, but, the farm-out deal with a Chinese consortium is unequivocally good news for Providence and its shareholders.
oil and gas operations
The new Chinese partners are backing a three well programme, which should start next year

Providence Resources PLC (LON:PVR) last week achieved a long awaited and hotly anticipated breakthrough for the Barryroe project, off Ireland’s south coast.

A farm-out deal with a consortium of Chines companies puts Barryroe on-track to become Ireland’s first producing oil field - at its peak the field could eventually produce a hundred thousand barrels of crude per day.

The deal is undoubtedly positive, though it essentially only represents the firing of a starting pistol that will now set in motion a busy period, both operationally and bureaucratically.

Providence shares are up around 15% in the week since the deal was announced, and plainly there’s an awful lot of scope for the price to rise - for example, broker Mirabaud’s recently upgraded target price of 33p suggests some 200% upside.

The deal will see the Chinese consortium fund a new programme of drilling and provide non-recourse financing - put simply, the upshot is that Providence now has both the technical and the economic wherewithal to bring Barryroe to production.

In all, the new partners be supporting a programme of 3 firm wells, 3 side-tracks and well testing on the Barryroe oil field.

To begin with, Providence’s subsidiary EXOLA will remain the operator, meanwhile, the Chinese partners will provide significant technical assistance and resources for the operations - including the provision of a drilling unit and related operational services.

Later, following the completion of the farm-out work programme, APEC will take the reins as operator.

The larger campaign of drilling overrides Providence’s prior single well programme, which would’ve taken place later this year and would have required financing from Providence

Although precise timelines have yet to be finalised, Providence expects drilling will get underway during 2019. Similarly, the final budgets for the drill programme have yet to be finalised though Providence notes that its prior estimates put the cost of a single well and side track was around US$25mln. In reality, this  factor is now less significant for Providence shareholders  as the consortium are funding all through their participation and or non-recourse financing.

A closer look at the partnership

The Chinese consortium is led by APEC Energy Enterprise Limited, significantly it has a strategic partnership with China Oilfield Services Co Ltd (COSL) which is in turn majority owned by Chinese state firm CNOOC Group and financial support from China Jianyin Investment Limited (JIC), which is a Chinese state-owned (100% subsidiary of China Investment Corporation) integrated investment group established.

CNOOC also owns Nexen, which is actively advancing potential high impact exploration acreage off Ireland’s west coast - indeed, CNOOC has neighbouring acreage to Providence’s own Atlantic margin projects.

It is anticipated that, via COSL, the Chinese partners will provide equipment and services for the anticipated operations at Barryroe.

The APEC consortium will have a 50% stake in Barryroe, with Providence retaining 40% and Lansdowne Oil & Gas Plc (LON:LOGP) will have 10%.

APEC will pay its pro rata share of all the costs associated with the drilling programme, and it commits to the provision of a non-recourse loan to Providence and Lansdowne to finance their Barryroe costs.

The loans will be repaid from future production, and to expedite repayment the Chinese consortium will be due a higher share (80%) of Barryroe cashflow until the debt is repaid. The loan will carry interest at LIBOR plus 5%.

Details are yet to be confirmed, but should  one assume that the total programme cost would be  $100mln, the loan element would be $50mln, which with oil at $70/barrel would equate to  less than 1 miln barrels  (out of a 300mln  field that would still be 50% owned by  Providence and Landsowne.

Subsequently, the partner’s respective share of cashflow will revert to 50%, 40% and 10% - proportionate to their ownership stakes.

APEC additionally will receive share warrants which, upon the completion of the planned Barryroe drilling, will allow them to acquire 59.2mln Providence shares at 12p each. It would raise around £7.1mln or US$10mln of new capital for the company, and the warrants would have to be exercised within six months of the completion of drilling.

What comes next?

With the Farm Out Agreement now signed, some further ancillary documentation will need to be finalised before the proposed transaction completes. Similarly, the deal would also need clearance from the Irish authorities (specifically the Minister of State at the Department of Communications, Climate Action and Environment, which is standard) and elements related to the financing would need approval from China, as it would involve state funds.

In all, it is anticipated that the transaction will close later in the third quarter of 2018. Thereafter, the Barryroe operations will naturally be a focus and it will provide many potential share price catalysts for shareholders.

Investors will, in the meantime, be keen to see further commentary around the potential project timelines, including expectations for ‘first oil’ and the potential phased development of the field (which would be the natural progression should the appraisal drilling and testing prove successful).

Providence also continues to advance plans for its offshore West Coast exploration projects, and, perhaps significantly, it was noted that the explorer will evaluate further co-venturing possibilities with its new Chinese partners.

Investors will, upon completion of the farm-out, look for clarification of just how much existing capital will retained for its other exploration plans (before agreeing the deal the company had sufficient funds for its own to cover a small programme at Barryroe).

The company has an extensive catalogue of exploration prospects in Ireland’s Atlantic Margin.

It was the first in the basin, and it has since been joined in the region by several larger oil firms – including the likes of CNOOC via Nexen, Exxon, Statoil, and Total.

Advancing West Coast assets too

Just this week, Providence updated investors on its plans to drill a well on the Newgrange prospect which could be a lower cost (and therefore lower risk) test of a potentially large accumulation.

Newgrange is a shallower target compared with other Atlantic prospects, at a depth of around 500 metres, and as a result it can be drilled more quickly and a well could be drilled for a comparatively low cost.

Potentially, a well at Newgrange could be added to planned third-party drill campaigns on nearby licences, which would take place next year, and in that regard Providence, in this week’s stock market statement, said commercial negotiations were being advanced.

“As the Newgrange well duration is expected to be extremely short, given that the primary Cretaceous reservoir target is just c. 500 metres below the seabed, we are talking to other Operators regarding potential rig-share opportunities,” Providence technical director Dr John Sullivan said.

“In addition, the Newgrange partners are in dialogue with a number of third parties regarding a potential farm-out of equity in this low cost high potential exploration project."

Newgrange is just one of several projects that will likely come forward out of the portfolio now that the Barryroe project is moving forward. Events of the past months clearly give confidence that Providence is certainly now a company that does deals – the Barryroe transaction marks the fourth farm-out in the last year

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