624 – The Weekend Podcast: 3 reasons to Providence Resources on your Watchlist

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624 – The Weekend Podcast: 3 reasons to Providence Resources on your Watchlist

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ON TODAY’S PODCAST:
624 – The Weekend Podcast: 3 reasons to Providence Resources on your Watchlist
Providence Resources (PVR)
Share Price: 11.875p
Market Cap: 65m
Shares Issue: 597m

PVR

Providence Resources is an Irish based Oil and Gas Exploration Company with a portfolio of appraisal and exploration assets located offshore Ireland.

The Story So Far…
barryroe-rig

In September 2015, the Irish government’s Petroleum Affairs Division closed the books on the country’s most successful offshore licensing round to date.

A total of 43 licence applications were submitted by oil companies, including some of the biggest players in the world.

This is quite a different story from the previous licensing round, in 2011, where none of the world’s oil majors applied. Only Providence and its partners applied.

Therefore Providence had the largest licence holding, in Ireland’s Atlantic margin and applied for and won new acreage in the most recent round.

So why the sudden interest in the Atlantic Margin, offshore Ireland?

oil-majors-01

Exploration successes in, an area offshore, Canada.

What?

Let me explain, Canada is on the other side of the Atlantic, which is geologically similar. Apparently hundreds of millions of years ago, before the continents separated, they would have been located relatively close together.

In November 2015, oil companies committed around US$1.2bn of exploration work in Canada’s Atlantic margin, as part of its latest licensing.

So all of a sudden, not only are Providence Resources the largest licence holder in the new hot exploration target, offshore Ireland, but they also won more acreage, in phase two, of the latest 2015 licensing round.

The first phase, licences were awarded to Eni, Europa, ExxonMobil, Nexen, Scotia, Statoil and Woodside as operators, along with BP, who will partner with Eni. ExxonMobil and Statoil will partner on six total licenses.

3 Reasons to put Providence Resources on your Watchlist:

spudding

Reason No. 1 : The Spud Effect

A Druid exploration well is currently expected to spud (the process of beginning to drill a well) in June 2017. Apart from the assets and cash Providence Resources have, this is also what’s attracted me. Invariably the share price of an oil company will rise, the closer it gets to spudding.

A few good recent examples of this are:

Prospex Oil & Gas (PXOG)
pxog-chart
Their share price has increased by nearly 300% in the last 4 months from 1p to 2.95p. They are starting the construction on their drilling pad on November 7th.

Canadian Overseas Petroleum (COPL)
copl-chart
COPL’s share price has increased by over 500% since the start of 2016. They are expected to start drilling their deep impact well, offshore Liberia, with partners ExxonMobil, in Q4 2016 to Q1 2017.

I understand there’s still a bit of time to go until Providence Resources start drilling their well (in June 2017) but I feel there’s no harm, dipping my toe in at this level and using my scale in model, of being prepared to buy more shares should the price fall back.

 

Reasons No 2: Assets
Providence Resources have interests in 9 oil fields.
pvr-estimated-resources-volumes
Providence Resources have approximately 358 MMBOE net audited 2C contingent resources (see glossary below). This means the best estimate for their resources, net to them is 358 million barrels of oil equivalent.

Their gross un-risked Prospective Resources is approximately 4,792 MMBOE.

Having said this, over the next 12 months, there focus is on two of these assets: Druid / Drombeg and Barryroe.

Drombeg / Druid Oil Fields (PVR – 805)
– Druid Prospect Size (Pmean): c. 1,120 MMBO REC
– Drombeg Prospect Size (Pmean) : c. 675 MMBO REC
– Net to PVR: c. 1,436 MMBO REC

Druid sits on top of Drombeg, so the two structures could potentially be drilled with one drill. Drill depth for Druid is estimated to be 4000m and Drombeg, 5000m.

CEO, Tony O’Reilly describes Druid as a rare opportunity. The untested prospect, located in the Atlantic Margin off West Ireland, is estimated to host as much as 3bn barrels of prospective oil resources.

“The securing of funds to be able to drill the Druid prospect is a rare opportunity for us to avail of the cost dynamics that currently exist in the industry. With estimated Pmean in place oil resources of over 3 BBO, we believe that Druid represents one of the few world class deep-water exploration prospects being planned for drilling in 2017. Having secured the necessary finance and now with an even lower cost estimate than previously forecast, we are moving forward with our drilling programme targeting a spud date in June 2017″

The cost of drilling Druid is estimated to at c. $35 million and the additional cost for deepening of well to penetrate the Drombeg prospect amounts to c. $15 million.

The are still looking to farm out Druid and Drombeg but are fully financed to do it on their own, having secured £53m (US$73.8mln) of new capital this summer, with a fund raise at 12p a share, above the current share price.

Barryroe – (PVR – 80%)
– Field Size (2C): c. 346 MMBOE REC
– Net to PVR: c. 277 MMBOE REC
barryroe

“Key to the Providence portfolio is Barryroe, where the financial restructuring combined with the industry’s falling cost profile, now provides increased flexibility in terms of our commercial farm out negotiations. We look forward to updating the market further as we continue to develop and consolidate our leading position offshore Ireland”, CEO Tony O’Reilly.

Barryroe is supposedly host to some 346 million barrels of recoverable oil. Based on the findings of Providence’s successful well and testing programme, in 2012, the company envisages an initial 30,000 barrel per day development, at peak production.

For years now PVR have, tried unsuccessfully to farm out this asset but a lot of these issues was related to the global slump, in the price of oil. Currently the oil price seems to be stabilizing around $50 a barrel and Providence are now negotiating from a position of strength, having cash and a debt free balance sheet.

PVR are currently involved in 3 major farm out programmes at Barryroe, Spanish Point and Druid – with active participation by interested parties.

How do you value this?

back-of-the-envelope

I’m no expert but these are resources and so the amount of oil recoverable and brought into reserves will not be 100%. This is called recovery efficiency and it can range anywhere from 10% to 70%. Recovery Efficiency depends on both technical and economic factors, NOT just geology.

So using basic, back of the envelope maths, let’s say their recovery rate is at the lower end of the scale, at 10%.

Providence Resources have approximately 358 MMBOE net audited 2C contingent resources. This means the best estimate for their resources, net to them is 358 million barrels of oil equivalent.

10% of 358 mmboe  = 35.8 mmboe.

Assuming, when they start producing this oil, for the sake of round figures, lets say they make $10 profit on each barrel.

This is how much profit they will earn, based on 10% recovery on their 358 MMBOE net audited 2C contingent resources:

35.8 mmboe x $10 = $358m (£294m)

Remember these are their resources at the moment, more exploration will, hopefully increase these resources, which in turn will hopefully be proven up into reserves.

The Brokers View

On Thursday 14th July 2016, Cantor Fitzgerald today reaffirmed its buy rating on Providence Resources and raised its price target to 33p (from 24p). This would give PVR a market cap of £195m. They currently have a market cap of £65m.

 

Share Register

pvr-shareholders

Only 50.62% of Providence Resources shares are outstanding and there’s some big names on the share register including: M&G Investments, The Capital Group, Henderson, Hargreave Hale, Blackrock and River & Mercantile,.

It’s both disappointing and perplexing the directors don’t have more skin in the game.

Whenever I research a company, I always look to see how much the CEO believes in the company, by way of their shareholding. CEO Tony O’Reilly subscribed for just £60,000 worth of shares in the recent fundraise. Considering he earned €494,000 from Providence Resources in 2015, this is does not instill a lot of confidence.

If he really believes that, “Druid represents one of the few world class deep-water exploration prospects being planned for drilling in 2017”, why didn’t he buy more shares?

The biggest shareholder amongst the directors, is Pat Plunkett, appointed to the role of Chairman on 27th September. He bought 1m shares on October 5th, at 12p a share, which is only 0.17% of the issued share capital and worth £120,000.

Rather than buy more shares the directors have taken the following options:

pvr-director-options

 

Reason Number 3: Cash

Cash 004

As I mentioned above, on 14th July, Providence Resources raised aggregate gross proceeds of approximately $70.0 million through the Placing Offer and the Open Offer at 12p per share. This means they we were able to repay all of their corporate debt, settle the outstanding litigation with Transocean and provide the appropriate resources to finance the drilling of the high impact Druid exploration well in 2017.

This placing also puts them in a stronger position to negotiate a farm out agreements on Druid and Drombeg, Barryroe and Spanish Point, which they hope to drill in 2018.

Management

pat-plunkett

Pat Plunkett – Chairman (holds 0.17%  of total issued share capital)

Pat Plunkett was appointed Non-Executive Chairman of the Company in October 2016.

He was previously Non-Executive Chairman of Tullow Oil from 2000 to 2011, during which time Tullow grew from a small cap Oil & Gas to become Africa’s leading independent oil company and a constituent of the UK’s FTSE 100.

He is currently Executive Chairman of T5 Oil and Gas Ltd, a private company he founded in 2013 and which is focused on acquiring oil and gas assets in Africa and the Middle East. Pat has over 30 years’ experience in the financial services sector. He was a founding partner of the Riada & Co stockbroking and corporate finance businesses and following their acquisition by ABN AMRO NV, he continued to manage these businesses until 1998.

He is a former director of the Irish Stock Exchange.

 

tony-oreilly-ceo

Tony O’Reilly – CEO (holds 0.08% of total issued share capital)

Tony O’Reilly has been Chief Executive of Providence Resources since 2005, having founded the Company in 1997 and he has served as a Director since its incorporation.

He has previously worked in mergers and acquisitions at Dillon Read and in corporate finance at Coopers and Lybrand, advising natural resource companies. He served as Chairman of Arcon International Resources P.l.c. (having been Chief Executive from 1996 to 2000) until April 2005 when Arcon merged with Lundin Mining Corporation.

Summary

If I were to apply my C.A.S.H. acronym to Providence Resources and give a score for each heading, from 0 to 5, then this is how it would look:

Cash – 5
They have around £35m in cash and no debt. Even though they are still looking to farm out Druid and Drombeg, should they need to go it alone, they have the cash to do so. Having a clean balance sheet puts them in a strong position to negotiate farm out deals.

Assets – 4
They have interests in 9 assets in the Atlantic Margin, offshore Ireland and some of them have the potential to be world class. I’m only marking them down due to the uncertainty of the specifics on volume of oil that’s recoverable. Of course this uncertainty will be reduced, as further exploration and appraisals occur.

Shares – 2
I’m going to give 1 point here for the strength of their shareholder register, as far as institutions are concerned.

I’m giving no points for the small amount the directors hold.

The biggest holder, the Chairman, Pat Plunkett has less than a fifth of one percent. Meanwhile, Tony O’Reilly, the CEO, holds less than a tenth of one percent. This truly baffles me. It creates uncertainty in my mind. It make me think, “why should I risk my capital, if the directors aren’t prepared to risk theirs?”

As for the share price, I’m giving this 1 point as it’s at a near, an all time low and below 12p the price at which they raised $70m, in July. This says to me that a lot of uncertainty and doubt about the director’s lack of commitment is priced in.

Head Honchos – 2
I’m giving 1 point to Chairman Pat Plunkett for the relevant experience he brings to the board.

I’m giving 1 point to CEO Tony O’Reilly, for his involvement in bringing about the capital raise that cleaned up Providence Resources balance sheet. I have marked him down on lack of leadership in regards to share ownership. It is incumbent on any CEO to stand behind the company they run, if they believe in it, not only in words but in actions. Tony had an excellent opportunity to prove how much he believed in Providence Resources strategy, during the capital raise but for reasons I cannot fathom, he choose not to.

Total Score = 13 / 20

So my 3 reasons to put Providence Resources on your watchlist are as follows:

1. The Spud Effect

2. Assets

3. Cash

The content of this podcast (or content associated with it) is not intended as investment advice and people featured may hold positions in the companies they talk about. Please do you own research.

Glossary

The total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called oil in place (OIP). When it comes to petroleum PIIP (petroleum initially in place) could be used.

However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is only this producible fraction that is considered to be reserves.

The ratio of reserves to the total amount of oil in a particular reservoir is called the recovery factor. Determining a recovery factor for a given field depends on several features of the operation, including method of oil recovery used and technological developments.

classification-of-reserves-copy

RESERVES

Are those quantities of oil anticipated to be commercially recoverable.

Proven Reserves (1P or P90)
Proven reserves are those reserves claimed to have a reasonable certainty (normally at least 90% confidence) of being recoverable under existing economic and political conditions, with existing technology. Industry specialists refer to this as P90 (that is, having a 90% certainty of being produced).

Proven reserves are further subdivided into “proven developed” (PD) and “proven undeveloped”.

Probable Reserves (2P which is 1P + 2P or P50)
Probable reserves are attributed to known accumulations and claim a 50% confidence level of recovery. Industry specialists refer to them as “P50” (i.e., having a 50% certainty of being produced). These reserves are also referred to in the industry as “2P” (proven plus probable).

Possible Reserves (3P which is 1P + 2P + 3P or P10)
Are attributed to known accumulations that have a less likely chance of being recovered than probable reserves. This term is often used for reserves which are claimed to have at least a 10% certainty of being produced (“P10”). Reasons for classifying reserves as possible include varying interpretations of geology, reserves not producible at commercial rates, uncertainty due to reserve infill (seepage from adjacent areas) and projected reserves based on future recovery methods. They are referred to in the industry as “3P” (proven plus probable plus possible).

RESOURCES
Are those quantities of petroleum estimated to be potentially recoverable.

The reserves will always be a smaller number than the resources. On average companies only recover 35% of their resource but this entirely depends on the recovery efficiency.

Recovery Efficiency = Reserve Volume / Resources Volume.

Recovery Efficiency depends on both technical and economic factors, NOT just geology.

The higher the percentage of reserves recovered from a resources the more economically viable for the company the oil field.

1C
Denotes low estimate scenario of Contingent Resources.

2C
Denotes best estimate scenario of Contingent Resources.

3C
Denotes high estimate scenario of Contingent Resources.

Unproven Reserves
Unproven reserves are based on geological and/or engineering data similar to that used in estimates of proven reserves, but technical, contractual, or regulatory uncertainties preclude such reserves being classified as proven. Unproven reserves may be used internally by oil companies and government agencies for future planning purposes but are not routinely compiled. They are sub-classified as probable and possible.

Risked V’s Unrisked
Risked reserves are unrisked reserves multiplied by the chance of success (CoS). So the risked reserves will be the lower figure.

P – Mean
This is the average of all the P reserves, that is adding up all the resources in 1P, 2P and 3P and dividing them by 3.

 

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