Providence shares plummet 46% as water found in key well

Providence Resources shares plummeted by as much as 46 per cent on Friday as the oil and gas explorer said preliminary analysis of drilling of its Druid project off the southwest of Ireland indicated the reservoir contained water.

Shares in the company, led by chief executive, Tony O’Reilly jnr, slumped to as low as 8.625p per share, a record, valuing the company at £51.5 million (€57 million). The shares closed at 9.625p, down 39.4 per cent.

Drilling at the site in the southern Porcupine Basin about 220 kilometres off the Irish coast began last month, after Providence sold a 30 per cent stake in the development – or what’s known as a farm-in deal – to Edinburgh-based explorer Cairn Energy.

Providence retains a 56 per cent interest, while long-standing partner on the project, Sosina Exploration, holds a 14 per cent stake. French oil giant Total has an option to buy 35 per cent of the project.

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Providence said on Friday that preliminary data following drilling “indicates that the Druid prospect comprises a porous water-bearing reservoir”.

The company now plans to drill deeper to its so-called Drombeg exploration target, stacked 1,000 meters beneath Druid. Analysts at Davy in Dublin expect an update on this by the end of the month.

Pretty disappointed

“Clearly, the company is going to be pretty disappointed with Druid, but they’ve got another shot, with Drombeg,” said David Round, an analyst with BMO Capital Markets in London, adding that his core 16p valuation on the stock does not factor in any benefit from either of these wells.

In July last year, Providence raised $70 million (€63 million at the time) in a rescue fundraising to pay part of a $7 million bill, arising from a court battle with a drilling company that worked on another project, and repay more than $20 million owed to its main creditor at the time, New York-based Melody Capital.

Additional money raised at the time gave it financial flexibility to sell a stake in its Barryroe project, which was found in 2012 to have more than 300 million barrels of recoverable oil, and proceed with drilling at Druid and Drombeg.

The company claimed at the time that Druid had the potential to deliver 3.9 billion barrels of oil and Drombeg a further 1.9 billion.

Shallower target

Davy analyst Job Langbroek said that his estimates had factored in “a greater risk-weighted value” on the Druid well than Drombeg, given that it was a shallower target and oil estimates for it were higher.

“If the well cost is broadly in line with the pre-drill $42 million estimate, Providence’s share of costs will be covered by a Cairn farm-in and Total option payment,” said the analyst. “This in turn means we estimate that Providence will have in the order of $30 million of capital available for 2018 operations.”

Mr Round said that Providence “could still surprise” by unveiling a long-awaited stake sale in its still undeveloped Barryroe project.

It had targeted a deal within 12 months of last year’s share sale. A previous “farm-in” agreement for the project fell through in 2015 as its chosen partner, known to be Sequa Petroleum, failed to raise the necessary money to participate.