Friday 27 April 2018

Can Providence strike it rich?

Tony O'Reilly Jr is on course for a fresh attempt to bring oil into production in Irish waters

'Barryroe - located in the Celtic Sea off the Cork coast - is often described as the company's flagship asset.' Picture: Finbarr O'Rourke
'Barryroe - located in the Celtic Sea off the Cork coast - is often described as the company's flagship asset.' Picture: Finbarr O'Rourke
Gavin McLoughlin

Gavin McLoughlin

Samuel Beckett wrote "Waiting for Godot", and without wishing to spoil anything, Godot ultimately never showed up. For the last five years or so, the play's title felt pretty analogous with Providence Resources.

"Waiting for a Barryroe farmout partner" doesn't quite have the same ring to it as a title. But the story of Providence Resources looked like it might end in the same fashion.

Not so, however, as a Chinese consortium has arrived on the scene, sparking fresh hope for Providence's long-suffering investors.

It's a triumph for chief executive Tony O'Reilly Jr who has taken plenty of stick along the way, but has now concluded multiple farmout deals across various Providence prospects in the last year.

O'Reilly told the Sunday Independent that the company will look to commence drilling at Barryroe in the second quarter of next year.

"The plan is 2019 drilling. Some people would have said 'why can't they drill this year?'. People have to understand that there is a new consenting regime in Ireland for the drilling of wells and that's a minimum nine-month process to get things all in order," he said.

Barryroe - located in the Celtic Sea off the Cork coast - is often described as the company's flagship asset. It's not a question of whether there is oil down there - there is. The question is whether it can be extracted on a commercial basis.

If production goes ahead, there will need to be infrastructure in place to get any oil back to Ireland. There is existing equipment nearby from the Kinsale gas field which might come in useful, but this wasn't a consideration during commercial negotiations.

"I don't think anybody's looking at Barryroe being reliant on existing infrastructure. But obviously if there is some infrastructure there and it makes sense for the consortium, then they would look to see if they could," O'Reilly said.

"Maybe some of the pipelines or some of the things like that could be something for discussion but then it really depends on the JV but it also depends on what Kinsale Energy are planning to do because they're running their own business.

"The more important thing is you're putting investment into an area that is a significant hydrocarbon-producing area already so you've got infrastructure, you've got the deepwater port at Cork. In that sense it's a good backdrop when you're looking at ultimate development options. But we can't say at this stage what the final development option will be, because that's all part and parcel of the appraisal and development programme," said O'Reilly.

But before any oil can be shipped back to the mainland, it has to be taken out of the ground. That's where the Chinese consortium comes in.

Market reaction to the deal was pretty muted considering how long the company has been trying to get this deal over the line. On Friday, shares were trading at 10.25p in London.

That's lower than the first day of trading in January, a couple of days after the announcement that Providence was in exclusive discussions with a potential Barryroe partner, with whom commercial terms had been agreed.

So what's behind the lukewarm reaction? One explanation might be that the deal is still contingent on Government approval.

The way the deal will work is that the Chinese consortium will cover the upfront drilling costs, aiming to recover half from Providence (and its partner in the field, Lansdowne Oil & Gas) via a loan repayable from the cash flow from any production. The consortium will get 80pc of the production cash until the loan is repaid, at which point it will get 50pc. Providence and Lansdowne will then get 40pc and 10pc respectively.

The Chinese consortium will also have the right to buy 59 million Providence shares (roughly 10pc of the company's shares in issue) at 12p each.

But it's better to have a smaller piece of a massive pie than a bigger piece of nothing.

And nothing is what Providence would have had from Barryroe if it didn't get a deal done.

Perhaps the key advantage of the deal is that three vertical wells (plus so-called sidetrack wells) are planned, as opposed to the one well and sidetrack that Providence had been planning to do itself at Barryroe in a parallel process.

The other advantage is there is no upfront cost when it comes to drilling, which will avoid eating into Providence's healthy working capital balance (in the order of $20m) which has the potential to be deployed towards other prospects in its portfolio.

As far as taxation of production goes, the prospect is covered by tax rules that existed before the current regime. A corporation tax rate of at least 25pc will apply, with the potential to go as high as 40pc depending on the level of profitability.

Geneva-based Mirabaud Group has recently initiated coverage of Providence with a "buy" rating. In a note circulated to clients, Mirabaud thinks the Barryroe farmout deal "should mature the project to the point at which commerciality can be declared".

Outside of Barryroe, the Mirabaud Group note describes two other Providence prospects off the Southwest coast - Newgrange and Dunquin South as the "two nearest term exploration opportunities".

O'Reilly agrees with that description. Newgrange is a shallow structure meaning that in theory Providence could look at drilling it by itself due to the cheaper well costs. But O'Reilly's preferred strategy is to bring in a farmout partner and is in engaged in a process. He says there is good industry interest in that regard.

Dunquin South is adjacent to Dunquin North, which was drilled five years ago and was full of water, though there were traces of oil. It was taken badly by the market, but O'Reilly believes that it sparked interest in the region for multiple so-called "supermajors". ExxonMobil and Statoil were among those who took up licensing options in 2015. "It proved oil was present in the basin and that then led to the very successful licensing round in 2015. We think that Dunquin was an important catalyst for the basin," said O'Reilly.

The company has shot seismic imagery of Dunquin South and O'Reilly says the results "look very encouraging" in terms of Dunquin South being structurally different from Dunquin North when it comes to being breached by water.

But drilling Barryroe will be the main event over the next year or so.

Will O'Reilly strike it lucky at last?

Sunday Indo Business

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