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Providence Resources rejuvenated as Ireland returns to favour as oil destination

Jamie Ashcroft - ProactiveInvestors

“We are about to drill the biggest well ever drilled offshore Ireland"

Investors in the exploration sector have been treated some very significant successes of late, though a new well starting next month promises what might be the biggest prize yet.

London listed stocks such as Hurricane Energy, Sound Energy and Falcon Oil & Gas have all been somewhat transformed by recent successes, and this summer Providence Resources PLC (LON:PVR) will likely be next in the sector’s spotlight.

Providence and new partner Cairn Energy PLC  (LON:CNE) will this summer test two very high impact exploration targets, with potential for 5bn barrels of oil, in the Atlantic margin in waters off Ireland’s west coast.

Drilling is due to start in towards the end of June, with one well testing both the Druid and Drombeg prospects.

Ireland’s biggest ever well

“We are about to drill the biggest well ever drilled offshore Ireland, indeed probably one of the biggest well’s drilled offshore Europe in a long time,” said Tony O’Reilly, Providence Resources chief executive.

“Suddenly an area that hasn’t had a lot of wells is going to have a number of wells in the next couple of years. So obviously the Druid/Drombeg well is a key well, all the industry is watching it with keen interest.”

“Other companies will be responding to it. They’ve all got committed programmes that they’re moving forward with, doing 3D [seismic], and any success with our drilling will only accelerate activity in the region.”

Initially, the explorer’s plan was to test only the Druid prospect which has been estimated to potentially host some 3.18bn barrels of crude.

March’s farm-out deal that brought in Cairn, however, advanced Providence’s plans allowing the explorer to drill deeper to also test the 1.9bn barrel Drombeg target.

Unearthing such a prize would be the kind of shot in the arm that could see Providence’s valuation bounce back, closer to the former immediately-post-Barryroe glory – in 2012, the price shot up to almost 700p after appraisal drilling success in the Celtic Basin off Ireland’s south coast.

Providence is Ireland’s first mover

“We’ve been banging the drum about offshore Ireland for the last twenty years, and for the West coast in particular since 2004 when we ventured out and we got our Dunquin and Spanish Point licences,” O’Reilly said.

“Even then we were saying this is a hot area.”

A quick glance at a recent Providence investor presentation quite succinctly underlines just how far ahead of the game the explorer was.

One slide shows a ‘map’ of Ireland’s licensed offshore acreage back in 2004. Basically, what is shows is Providence’s Dunquin and Spanish Point licences but little else but unclaimed ocean.

The other image, a comparative representation following Ireland’s 2016 licensing round, shows Providence surrounded by the names of much larger international oil firms - names such as ENI, Exxon, Statoil, CNOOC, Woodside, Cairn Energy, and BP.

“Many of the big players are now offshore Ireland, and now they’re gearing up for more future activity,” he added.

“We were ahead of the posse because we had acreage long before, so we’ve already got the 3D seismic and we’ve got our well plans.

“What we are seeing is that the industry seems to be moving pretty aggressively now towards actual activity - they all got their licensing options last year and they’re shooting seismic this year.”

Third party drilling could come as soon as next year, according to O’Reilly, who cites industry scout reports  suggesting CNOOC and Woodside may go ahead with exploration wells.

Providence may too be drilling again next year, but as the focus is presently on this summer’s work, as the follow plans aren’t yet solidified.

“We’ve got a lot of acreage.

“We’ve Avalon which is a Druid lookalike, but potentially bigger, we’ve got Dunquin South which is a different type of structure – where ENI and Repsol are our partners – than Druid and we’re acquiring 3D seismic over that.

“Then we’ve got Newgrange to the South, where we’ve got a system that is similar to Dunquin South.

“We’ve got a lot of follow-on things that we’ll be doing, though obviously our primary focus right now in the Porcupine Basin is Druid-Drombeg - but any modicum of success will just further accelerate our plans and indeed those of the other industry players.”

Barryroe remains a possible catalyst

All this exploration is in addition to all the currently unrealised value down in the Celtic Sea, where the substantial Barryroe oil field development is awaiting further ivestment.

After appraisal well success in 2012, the company had come close to sealing a partnership deal that would have brought in a development partner to fund the project into production – though that was another time, back when crude was worth more than US$100 per barrel – and ultimately the counter party failed to deliver in the end.

Barryroe’s economics still stand-up in the current oil market, but, the market impacts have nonetheless been felt due to the retreat away from spending on growth among the calibre of companies with deep-enough pockets to bank-roll the project.

Recent stabilisation of crude prices, a rebalancing among the industry majors and growing interest in Ireland as a destination for oil and gas investment have, however, meant that a deal may again be on the agenda.

As a reminder, Providence owns an 80% stake in Barryroe which is located in the Celtic Sea, adjacent to the Petronas operated Kinsale Head gas field. The project is believed to contain just over 1bn barrels of oil in place, with some 311 barrels said to be recoverable.

A possible development outlined by Providence sees a phased development plan across the filed, the first phase project planned at some 30,000 bopd.

As well as an improved oil price and better appetite providing a boon, the company also expects to achieve significant costs savings compared to prior estimates which were devised when there was much more demand for equipment and services.

A deal for Barryroe remains a potential game-changing catalyst for Providence, especially as investors have been waiting for several years and it is far from factored into the current share price.

O’Reilly is meanwhile sticking to his rather consistent messaging regarding Barryroe, giving little away, commenting: “commercial negotiations are ongoing.

However, he does add that, ”One of the things that the capital raising last year achieved was  to free up our balance sheet and this allows us to move forward with commercial discussions.

“There are a number of commercial discussions ongoing, at Barryroe as well as some other assets in the Porcupine Basin.”

Barryroe is distinctly separate from the Atlantic Margin exploration assets being tested in the coming weeks and months, so there’ll be little in the way of a direct ‘read-across’.

That being said, a successful discovery off the west coast will go a long way to cement the Irish oil frontier, and would potentially further investment. And, one might presume that any of the new entrants to Ireland that seek a long-term footing in the country may welcome the opportunity to build in already blue-printed production growth whilst the Atlantic assets mature.

Still so much promise for investors

Plainly, Providence remains a company with a lot of promise.

It has already a long, and at times meandering road, but, the problems and financial uncertainties of the past are now history.

With the offshore drilling now within sight, it is time to start getting excited about exploration again – and with some 5bn barrels to potentially tap in one well this summer, there’s certainly plenty for investors to be getting excited about.

Posted Date: 
24 May 2017