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Providence Resources disposal allows the company to concentrate on drilling campaign

Oil and gas explorer Providence Resources has taken a decisive step in rationalising the business with the sale of its assets in the Gulf of Mexico for up to US$22 million. It allows the company to focus on an ambitious drilling programme, and leaves it with just one producing field, Singleton in West Sussex.
Providence Resources disposal allows the company to concentrate on drilling campaign

Oil and gas explorer Providence Resources (LON:PVR) has taken a decisive step in rationalising the business with the sale of its assets in the Gulf of Mexico for up to US$22 million.

It allows the company to focus on an ambitious drilling programme, and leaves it with just one producing field, Singleton in West Sussex.

The news was generally welcomed by followers of the AIM and Dublin listed group, even though it will receive less than a third of the price it paid for the assets in 2008.

“We see the sale as a positive development for Providence,” Job Langbroek, analyst at Irish stockbroker Davy. 

“The price reflects the changing reality in the Gulf of Mexico offshore (the portfolio was originally acquired for $67.5 million in early 2008), where the onset of prodigious quantities of shale gas has severely impacted gas pricing compared to a number of years ago. 

“The assets also suffered damage from a number of major hurricanes, and the recent Maconda incident has significantly increased the regulatory environment. 

“Providence is in a process of deleveraging, at the end of which it will be a focused exploration group with a multi-well drilling programme of very significant value leverage. We think that this is a much more attractive proposition.”

The cash will be used to reduce the company’s $100 million debts, and specifically a loan facility it has with French bank BNP Paribas.

 Providence will receive an initial US$15 million from buyer Dynamic Offshore Resources. There are also production-related payments of up to US$7 million. 

Chief executive Tony O’Reilly said: “Whilst the production from the Gulf of Mexico has played an important role in the development of the company over the past three years, it is now less material going forward. 

“With our major multi-year, multi-basin drilling programme offshore Ireland starting, combined with our ongoing investment programme at Singleton, the investment focus for the company is now very clear.

“As such, the opportunity to realise cash from the Gulf of Mexico portfolio, and to deleverage the core business, made sense.”

Providence is fully funded to carry out a two-year, US$120 million programme (up to US$500 million gross) of drilling that could utterly transform the company’s prospects – and those of the Republic as an oil and gas producing nation.

It plans to drill up to ten wells (including sidetracks) in six separate basins and, if all goes to schedule, the programme will be largely complete by the end of 2012. 

The campaign kicks off with a double header this summer as the group begins the development of the Barryroe and Hook Head oil discoveries in the Celtic Sea.

Following shortly after Barryroe is a re-drill of Hook Head, which was first discovered in 1971. Here Providence owns 72.5 per cent and like at Barryroe, it is the operator of the field.

From these two development plays, the group will then move on to two exploration plays – Dalkey Island, off the coast of Dublin and Rathlin Island, off the north-eastern corner of Northern Ireland.

Moving into next year and the emphasis changes from east coast to the west, and Providence is heading very much further offshore in the pursuit of oil and gas.

Spanish Point is a gas condensate discovery located 125 miles offshore. “It was the first project that my dad’s predecessor company was involved with,” O’Reilly says.

It was found in 1981 when Ireland simply did not need gas in the quantities thought to be contained at Spanish Point and there was no infrastructure by which to exploit it – that has all now changed.

Providence estimates there are 200 million barrels of oil equivalent. It owns a 56 per cent stake, which will fall to 32 per cent when partner Chrysaor formally agrees to drill two wells there.

Although the actual drilling won’t happen until spring/summer 2012, privately-owned Chrysaor must exercise its option by March 14. 

Those who follow Providence closely will know that Dunquin is the big daddy of all its exploration projects, and it has an all-star roster. 

ExxonMobil is a 40 per cent shareholder and the operator, while ENI farmed in for a 40 per cent stake in 2009. SOSINA holds 4 per cent, leaving Providence with 16 per cent.

Previous industry intelligence suggest that recoverable estimates are near 1.8 billion BOE and that apparently is only ascribing volume to 20 per cent of the known area.

Work is expected to get underway on Dunquin in mid-2012 and will be followed in the autumn of next year by an appraisal well on the Dragon Field, which is equidistant between Wales and Ireland.

“Along with oil production from Singleton in the UK, the main focus of Providence’s business is the exploration, appraisal and development of hydrocarbons in and around the various sedimentary basins of Ireland,” said Werner Riding of City broker Ambrian, who repeated his buy advice.

“Over recent times the Gulf of Mexico production assets within Providence’s overall portfolio have held less and less prominence; as such, this divestment comes as no surprise.

“Portfolio rationalisation is an important activity for any E&P company and the realisation of cash for what are considered non-core assets not only frees up a portion of management time, but also allows Providence to reduce its outstanding lending facility with BNP Paribas.” 

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