By Amy McLellan
Shares in Providence Resources edged higher on Monday as the AIM-quoted oil company confirmed it has reached an agreement with a potential farm-in partner to its flagship Barryroe project in the Celtic Sea.
The deal is, however, conditional on the farminee raising the funds to close the deal, which is bound to be a red flag for shareholders given the tough market conditions for tapping finance when oil prices are at US$58 a barrel.
Despite this, the announcement does take some heat off Providence as it demonstrates there is interest in the project regardless of the weak oil price and shows progress is still being made to finalise the financial and commercial arrangements that will be key to monetising what is still Ireland’s first commercial oil discovery.
Shares in the £36 million market cap company were 2.7 per cent higher in morning trading at 57 pence per share. It will take money in the bank from a partner, however, to really drive a recovery in the share price.
Providence currently has an 80 per cent interest in Barryroe, which lies in the North Celtic Sea Basin. AIM small cap Lansdowne Oil & Gas holds the remaining 20 per cent and is farming-down alongside Providence: its shares were also higher, up 3.6 per cent in morning trading at 7.12 pence.
For Providence followers, there was also an update on the company’s high profile Spanish Point project off Ireland’s West Coast. The Dublin-based company has upped its stake in the appraisal project by buying out junior partner Chrysaor E&P Ireland, part of privately-owned Chrysaor Holdings, which held a 26 per cent stake in the FEL 2/04, 4/08 and 1/14 frontier exploration licences in the northern Porcupine Basin.
In a signal of the times, Providence is buying up this material slice of equity for a nominal payment of just US$1 with a contingent US$5 million success fee to Chrysaor Holdings should Spanish Point move into development. Chrysaor, which acquired its position off the west coast when Providence struck a farm-out deal in 2008, isn’t completely exiting the project: its Chrysaor CNS subsidiary will take a 15 per cent interest in FEL 1/14.
The price on this deal shows the pressure being felt by oil companies to exit high risk frontier projects in order to preserve cash. Analysts at Davy Research pointed out that London-based Chrysaor’s decision to walk away for US$1 is no reflection on the quality of the project with the remaining licence holders “firmly committed to drilling” this year.
This means that the JV now brings together cash rich Cairn Energy as operator with a 38 per cent stake, privately-owned London and Copenhagen company Sosina Exploration with four per cent and, following Monday’s transaction, Providence with 58 per cent stake apart from FEL 1/14 where Providence will have 43 per cent and Chrysaor 15 per cent, pending ministerial approval.
This is a hefty slug of equity for Providence to carry for an Atlantic Margin project and the company will likely seek to reduce its exposure ahead of the anticipated Q2 well spud: indeed, on Monday it said it has received a number of third party expressions of interest in the area.
As regular readers will know, Spanish Point is an intriguing project that has lain dormant for decades. The project area stretches for 2,000 sq km, most of it covered by high quality modern 3D seismic, some 175 km off the west coast of Ireland.
It was discovered back in 1981 by Phillips Petroleum when an exploration well flowed 1,000 bpd and 5 million cf/d of gas from Upper Jurassic sandstones but this wasn’t enough to overcome the technical and commercial challenges of that era. Today, many of those challenges no longer exist as technology means the remote location and the water depths, a modest 400 metres, can be easily accommodated.
Work in recent years points to stacked reservoirs with 730 million boe of unrisked hydrocarbons in place and combined contingent plus prospective recoverable resources of up to 337 million boe.
At least one appraisal well is planned this summer and because of various carries agreed under past farm-outs, Providence expects to bear around 43 per cent of the well cost with Cairn contributing 55 per cent. The timing and location of the second well will be determined following the results of the initial appraisal well.
Providence chief executive Tony O’Reilly said recent technical studies have highlighted the upside resource potential at Spanish Point, which, if realized, would “confirm the field to be a major hydrocarbon accumulation”.
Analysts at SP Angel Corporate Finance welcomed the update from the Dublin company, noting that while Barryroe development is likely to be pushed out to 2018-2020, there will be newsflow from the finalisation of the farm-out and the upcoming drilling at Spanish Point.
They also noted Providence’s relatively strong balance sheet, the result of decisions taken when the oil price was riding high: at the end of June, the company had cash of €18 million .
“The current operating environment is difficult of all operators, but Providence at least is in a good position to weather what is becoming a difficult storm,” they said.