By Richard Jennings
News out yesterday from Providence Resources provided long, long suffering shareholders (of which we are one!) with real hope that their fortunes are about to be transformed.
This year’s drills at Druid and Drombeg were a major disappointment and cut the market cap by 75% from the pre drill peak and has had investors focus once more upon the deemed “certainty” of reserves in the form of Barryroe and also Spanish Point. Barryroe has been the Achilles heel of the company in that the 2C reserves of some 277m boe net to Providence have not been able to be moved to the all important 2P status and progress towards commercialisation has been sadly lacking due to a failure to conclude a farm in for near 5 years now. The blame for this lies squarely at Tony O’Reilly Jnr’s door as the CEO. It is this abject failure that has cost shareholders so dearly and that is at the root of my long standing wish to see him depart the company. Sadly, Chairman Pat Plunkett has continued to stand O’Reilly Jnrs corner…
Notwithstanding the concerns over the CEO, the RNS today I believe is likely to prove a watershed for the stock for the following reasons – firstly, the language used after the history of failing to farm out was extremely encouraging, namely – “In parallel, the Company has continued to engage with interested co-venture partners and earlier this month, having reached provisional agreement on key commercial terms with a potential farminee, we have granted a period of exclusivity to them in order to conclude contractual negotiations which, if successful, would deliver a multi-well programme at Barryroe. However, given its conditional nature and subjectivity to final contracts, no specific commercial details are being released at this time. Shareholders should note that there is no certainty that this farm-in will be concluded and further announcements will be issued in due course and as appropriate.”
Whilst management caveated the negotiation success with the latter sentence, to put this statement out after the multitude “jiltings at the altar” simply defies belief on my part ref the probability of this deal not actually concluding. That really would be ToR Jnr not with eggs on his face but a veritable basket of them! I cannot stress the importance that I believe this statement infers re a pointer to the likelihood of a successful conclusion to the farm in.
The second important point is the reference to a “multi-well programme”. The intent here I believe is to prove up once and for all the reserves and, importantly, try to bring on balance sheet the circa 700m additional boe they have said they believe is in the Barryroe licence area. With a per well cost of $20m ($5m for a sidetrack) being mooted then the farm in terms are, in my estimation, likely to result in PVR going down to around a 40% net interest in exchange for most of the drill cost.
If we assume that these are the framework terms and that the company moves the net 138.5m boe that would be attributable to PVR to 2P status (based on a net 40% interest) and a value of say $2 per barrel is placed on these reserves then this would imply circa $277m of imputed value to PVR or 34 pence per share. At a just $1 per boe this would equate to 17 pence per share and at a ludicrously low 50c then 8.5p per share. Of course, depending on the partner, if there is a path to build out the production pipeline and infrastructure facilities (so creating a real end commercialisation pathway), then based on “all in operating costs” of circa $35 boe (company’s estimate) and set against the current Brent price of circa $65m then this would give a pre discounted NPV of over $4bn to PVR’s slice. The real prize in the drilling programme is of course bringing new reserves on board at the Barryroe field and if they did find anywhere near the suspected total of circa 1bn barrels then it is plain to see just what effect this will have on the stock price. Most likely the stock would trade towards £1. Either way at 7.75p per share there is, to my mind, zero in the way of a Barryroe firming up of reserves presently reflected in the stock price. I am personally very surprised that we were not higher on the day in percentage terms relative to Lansdowne O&G which near doubled at the close.
The final point I will make is that the steady increasing over the past 2 years by Pageant to a now @ 11% of the stock in issue should not be underestimated. I believe that their “all in” price is around 10-12p based on previous holding disclosures and that size of holding simply is not really tradable out of in the stock market. Pageant are therefor, in my opinion, in for the material value realisation event and this is likely to be provided by way of a takeover by one of multitude other potential parties. With many of the oil majors now surrounding PVR in most of their licence areas, a (hoped for) finally proved up Barryroe field (with potentially upto 1bn in gross in place boe) together with Spanish Point still to play for and all their other licence areas, such an asset spread is likely to prove to be an irresistible acquisition target and may, just may, finally catalyse oil production offshore Ireland.
We did not put PVR in our top picks for 2018 simply due to ToR Jnr having been a serial disappointer for shareholders for so many years however, should a farm in finally conclude early in the New Year, we will then revert to our original position all along – that being that the company’s assets we believe are worth many multiples of the current stock price. The trick is in the monetisation. This however moved a material step closer yesterday and the farm in would cement this. At 7.75p the stock still does not remotely reflect the impact that a concluded farm in on terms we anticipate here will have on the company’s fortunes. We remain long and eagerly await details of the terms in early 2018.
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