By Richard Jennings
News released on Thursday last week detailing the final terms of the farm in with the Chinese consortia APEC Energy & the consequent drill program at Barryroe was, as is ever the case with PVR, met with a seemingly muted response by the market. On Friday however it looked as if the “penny was beginning to drop” ref the implications for Providence Resources and the wider Atlantic margin basin with the stock picking up on decent volume. As an aside, market intelligence has revealed that a perpetual ongoing seller that has “sat on the stock price” for many, many months is now effectively cleared. When coupled with the company’s fundamentals, we expect the stock price to, finally, begin to reflect a modicum of the true value in the portfolio of licences as the countdown to Barryroe drilling begins next year.
The revised deal incorporates additional drilling (four instead of three and two additional potential wells dependent upon drill results) which has been estimated at upto $200m in value. Set against a market cap of circa just $100m and a residual interest of 40% in the post farm in Barryroe field, this figure alone should illustrate the magnitude of the prize that the consortia see within Barryroe and the glaring disconnect in value ref the current PVR stock price as APEC clearly are not committing $200m without seeing upside of many times this.
The cash receipt of $19.5m also illustrates how the balance sheet of PVR is being preserved with the prospect of a capital raise pre any Barryroe drill results now pretty much non-existent from what we can see, particularly set against the warrants that APEC have over 59.2m shares with a strike of 12p for 6 months post completion of the drill program. Incidentally, in the event of their exercise this would position APEC with just under 10% of the company. We do not believe this is a coincidence and the resultant stake would provide an ideal platform in our view, in the event of successful drilling, a likely potential wholesale swallowing of the company (more on this later).
Let us remind ourselves of the key elements of the APEC farm in deal:
- There are no upfront nor actual drill period capital costs (the costs being defrayed pending actually putting Barryroe into production by way of, most importantly, a non recourse loan structure for the drill costs).
- PVR retains a 40% residual interest.
- The drill program comprises 4 vertical wells and 1 horizontal sidetrack together with 2 potential further horizontal wells.
- Cash payment of $19.5m to PVR.
We have previously valued the Barryroe field net to PVR (138.5m boe) at circa $2 per barrel if moved to 2P status (from 2C) and which equates to approx 35p per share at the current FX rate. However, one of the major elements of this drill program is to prove up additional resources in the Wealden basins. Estimates run up to 3bn barrels of oil with recoverable amounts of upto 624m. Should this be proved then the incremental value uplift for PVR would be dramatic, increasing on a 2P basis alone the value of Barryroe to over 63p per share to PVR shareholders. This however does not account for any future cash flows should the reservoirs be ultimately put into production. The value to any one of the majors, or indeed APEC, even at a discount rate as high as 20% and with an oil price as low as $50 a barrel would be many, many multiples of this.
Of course PVR is not wholly about Barryroe. There are major prizes potentially on the horizon at Dunquin South which the company has indicated could be drilled as soon as 2020 and also Newgrange which is currently subject to an ongoing farmout process. Estimates of STOIP at Dunquin South run to just under 1.4bn boe with PVR holding a current 26.846% interest. At Newgrange, recoverable oil estimates run to over 9bn boe. This field is truly a gigantic potential opportunity and it is worth pointing out that PVR hold an 80% current interest here giving them plenty of latitude for a meaningful farm down whilst retaining upside that would be totally transformative for PVR shareholders. It is clear that even the option value of these 2 prospects alone would go a good way towards underpinning the current stock before we even account for Avalon and Spanish Point etc.
Make no mistake, should the Barryroe drill program to be a success the “option value” (which we would argue is negative at this point) of the company’s other prospects would increase dramatically overnight. We also suspect that the deal with APEC is likely to be the first of others within the PVR exploration portfolio.
To revisit the potential takeover end game – ToR Jnr is on record in stating that they do not seem themselves being involved in Barryroe through to actual production and thus the granting of the warrants at 12p to APEC I believe, as alluded to above, is the platform giving them the potential to bid. Recall that the options for PVR management kick in at 45 euro cents per share (approx 40p) and must be exercised by August 8th 2019 (See HERE – https://www.investegate.co.uk/providence-res—pvr-/gnw/providence-resources-p-l-c-alteration-to-2009-s—/20160809111958H4029/). This provides a serious and realistic marker of where management would like to see the stock price exceed within less than 1 year. Should Barryroe prove to be what many in the industry believe it is we would expect that the stock price would comfortable exceed this.
With a very tight free float as the top 10 shareholders hold approaching 60% of the stock, any renewed buying into this unique listed play on proving up once and for all the waters offshore Ireland will likely have the stock motor materially. We remain resolutely long and believe at the current stock price that the risk/reward ratio is compellingly skewed in our favour. At a price of 13p per share we highlight what happened with 2 of our last mid cap O&G picks – Genel Energy and Gulf Keystone Pet when we are advocating purchases at fractions of the current stock prices as the likely direction of travel for the PVR share price over the next 12 months. Buy.
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