PROVIDENCE REIGNITED
Irish company causes ripples in the world of exploration
TWO years ago, Providence Resources looked like it was on the cusp of going bust. Now, however, it is arguably the most exciting business in Ireland as it starts drilling off the west coast in search of oil. In one sense, the timing is unfortunate in that it came in the week that Shell finally exited the Corrib gas field, a project which lost it around €1bn, with its partners down about the same.
But such is the nature of the oil and gas exploration industry that if Providence gets a good result on the prospect it is drilling, it will probably be taken out by a bigger player long before any oil discovery is brought through to commercial production. It’s a high-risk, high-reward game.
Getting to this point is a remarkable achievement by chief executive Tony O’Reilly Jr, who has had a rough couple of years. Shareholders have been getting restless at the lack of progress on finding a partner to drill at Barryroe, the company’s flagship prospect off the Cork coast.
O’Reilly has been on record many times in the past couple of years, saying discussions were taking place but as of yet no deal has been concluded. This week, the company announced it had been granted an extension to its licence for the prospect.
It said that Providence and its partner at the field, AIM-listed minnow Lansdowne, were “in dialogue with a number of parties regarding advancing the appraisal of Barryroe through to first oil”.
Instead, the action has come at the company’s Druid and Drombeg prospects in the Porcupine basis, off the west coast. Between Druid and Drombeg, the company is telling the market that there could be as much as five billion barrels of oil in prospective resources.
O’Reilly has managed to secure a couple of heavyweight partners for this well and the result is that in effect it won’t have to pay a penny towards it if the well meets current cost expectations (there are no guarantees in this industry).
The money it has received from partners Cairn, the exploration company which has taken a stake in the project, and French supermajor Total, which has paid for an option to take a stake in the project, more than covers Providence’s share of the drilling costs. Even if the well comes up dry, Providence will remain well capitalised.
“Our cost exposure for the well is essentially zero. In fact, on the numbers we look at, using the gross well costs, we actually would have about a $5m (€4.36m) surplus,” O’Reilly told a podcast published by the markets website Vox Markets.
That surplus comes on top of a cash balance of $31.6m at the end of 2016.
“We will have a lot of cash on our balance sheet and that opens up very interesting opportunities for us in terms of how we might deploy that capital in our portfolio. Because obviously, the market is aware we have our big asset Barryroe in the Celtic Sea, we have opportunities like Newgrange in the Goban Spur (an area off the south-west coast). Having cash on our balance sheet post this well, significant amounts of cash, puts us in a very strong commercial position going forward,” O’Reilly said.
PROVIDENCE has deep links to the O’Reilly family. It has its roots in Atlantic Resources, the exploration company founded by Tony O’Reilly Sr and others in 1981. Atlantic was bought by Conroy Petroleum & Natural Resources in 1991 and when the deal was completed, the newly-merged entity changed its name to Arcon.
In 1997, Arcon demerged its oil and gas assets into a new company called Providence, which was floated on the Irish Stock Exchange.
O’Reilly Jr (50) has been chief executive since 2005 — and to say it has been a rollercoaster ride is an understatement. Few Irish companies have had as many twists and turns over the last couple of years.
Indian state-owned explorer Oil India mulled a takeover of the company back in 2013 and was reportedly willing to pay in excess of €1bn. But the deal never materialised and then things began to go downhill.
A well drilled at the company’s Dunquin North prospect in the summer of 2013 was a disappointment, with water having infiltrated the part of the seabed where the company hoped to find commercially-recoverable oil.
Then, when the oil price plummeted at the back end of 2014, Providence found itself in trouble along with many others as the industry was plunged into chaos.
A major knock-back came when a deal to sell a stake in Barryoe collapsed. Providence told the market that it had agreed commercial terms with a partner but said the deal was conditional on the partner completing a required fundraising.
The partner, which Providence never named, is widely known to have been Dutch firm Sequa Petroleum. Sequa never managed to raise the money. Today, Providence (80pc) and Lansdowne (20pc) remain the owners of the Barryroe asset and, given that no deal has yet been done, questions have to be asked about whether Barryroe is as good as the company says it is.
The 20pc stake in the field is essentially Lansdowne’s only asset and that company is valued by the market at £6m. Providence’s market cap is about €120m.
If this well at Druid/Drombeg is a bust, the focus will most likely switch back to Barryroe and whether a deal can finally be concluded. In the company’s defence, it has been a difficult market in which to conclude deals in recent years.
In early 2015, it was forced to tap shareholders for around $30m in funds to cover working capital and potential payments arising out of a legal dispute with drilling-equipment company Transocean. Providence had engaged Transocean for equipment for use on appraisal drilling at Barryroe in 2011 and 2012 but the equipment was faulty and the companies ended up in court.
Despite the acknowledged problem with the equipment, the net result was that Providence was deemed to have to pay Transocean $7m by the London Court of Appeal.
By the time the decision came around, Providence was on shaky financial ground. It ended up with its shares suspended from trading as it sought to work out a deal with its lenders to enable it to make the payment.
The company looked to be on the brink but ultimately O’Reilly managed to get shareholders to foot the bill again — this time the company raised the best part of $70m and paid off Transocean while also paying off its debt facility.
This was the beginning of the turnaround for O’Reilly, with the positive momentum growing when the company announced the capture of Pat Plunkett as its new chairman. Plunkett was chairman of Tullow Oil from 2000 to 2011, during which time the company went from a market capitalisation of £275m to over £12bn.
He was probably instrumental in the later acquisition of Angus McCoss, Tullow’s current exploration director, as a non-executive director.
Plunkett and McCoss are industry heavyweights and securing them was a coup.
Having brought the company back from the brink, O’Reilly’s fate is now in the lap of the gods.
The massive Stena Ice max has begun its work at the drill site and the project is slated to last for about two months.
Davy analysts Job Langbroek and Caren Crowley said in a note circulated earlier this week that the start of the well is a long-awaited event for offshore Ireland. “If it works, it will be transformational, both for the region and Providence. In this regard, it has two very strong targets, with results from both expected within a 60-day window. Providence has been a pathfinder for the Irish offshore and this well is more of the same.”
If the well produces a good result, it will be a massive boost for the region and further exploration activity is likely to follow. Some of the world’s biggest oil companies — including Exxon Mobil, Statoil and Woodside — have exploration acreage off the Irish coast, and a good result for Providence will help undo any damage caused by the massive losses incurred by Shell at the Corrib gas field. Should Druid/ Drombeg ever turn into a producing field, it will be a game-changer for Ireland’s energy independence, even as the country transitions away from fossil fuels towards renewables. It will also be a massive boon for the O’Reilly family, who have been trying to get oil out of Irish waters for the best part of four decades.
Perhaps this time Providence will deliver.
‘We will have a lot of cash on our balance sheet and that opens up very interesting opportunities for us in terms of how we might deploy that capital’