Latest Barryroe setback could end up being good news for Providence investors

Investors in oil and gas exploration stocks need a strong constitution at the best of times. But followers of Providence Resources have had to be a breed unto themselves.

Shares in the company slumped as much as 22 per cent within an hour of trading getting underway in London on Thursday as the market digested news that a partnership to develop the group’s much-hyped Barryroe oil and gas field 50km off the Cork coastline had fallen through.

The company said it had terminated a so-called farm-out agreement with a Norwegian oil and gas development company, called SpotOn, which was supposed to ultimately receive a 50 per cent stake in the project subject to completing a $166 million (€138m) fundraising to develop the field.

The deal with SpotOn, which had been in the works since early last year but agreed in November, ran into problems in recent months as it became clear that the Norwegian Credit Export Agency, which was due to contribute a key 20 per cent of the funding, was unwilling to pitch in without recourse to Barryroe assets as security.

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Providence has been here before – twice – on Barryroe, a field that was found, in 2012, to have more than 300 million barrels of recoverable oil.

An initial farm-out agreement with a firm called Sequoia Petroleum fell through in 2015 after the chosen partner failed to raise the necessary funds to participate.

A subsequent agreement with a Chinese group, APEC Energy, was abandoned in 2019 after that partner missed a series of deadlines to put up the agreed cash. This precipitated the exit of then chief executive Tony O’Reilly jnr after more than two decades with the company.

Scores of wells drilled off the Irish coast since the early 1970s have only delivered two operational gas fields: Kinsale and Corrib.

But rather than focusing on bringing Barryroe to production in the years after the scale of the find was established, O’Reilly allowed himself to become distracted by the prospect of potentially bigger – but much riskier – projects.

A report circulated by the company in 2016 as it was raising $70 million in emergency funding, highlighted a Providence prospect called Druid, some 220km off the southwest coast of the Republic, as potentially holding 3.2 billion barrels of black gold, 10 times Barryroe. A further 1km lower, Providence’s Drombeg field was estimated to contain a further 1.9 billion barrels.

But drilling at Druid and Drombeg in 2017 revealed little more than water in the reservoirs.

Sole focus

Under Alan Linn, the company's chief executive since early 2020, the focus has been solely on Barryroe.

Some in the market may view the collapse of the SpotOn deal – with the shares down again on Friday – as sending the project back to square one. But the setback could, ultimately, lead to a better outcome for investors as Providence has now decided to lead the development of the project itself.

Crucially, the consortium of oil field service providers that the Norwegians assembled, including Schlumberger, Aker Solutions and Maersk Drilling, remain on board. These parties are willing to help with the financing of an initial phase of Barryroe – or what's called an early development scheme (EDS) – with payment deferrals "on equivalent or better terms" than what was originally agreed, according to Providence.

It’s understood that the deferred payments will give the company as much as €50 million of financial headroom.

Providence is also continuing to work with Oslo-based investment bank Pareto Securities, a specialist in fundraising for energy projects that SpotOn brought to the table. It is preparing to lead an $80 million bond sale to fund most of the deal.

Meanwhile, the company's biggest shareholder, Pageant Holdings, has agreed to underwrite a $2.5 million share sale portion of the fundraise, with the remainder being raised through the issue of warrants that give buyers the right to buy shares for up to a year. Pageant and its founder Nick Furlong own about 15 per cent of the company.

This leaves about $30 million of a funding gap that needs to be bridged to get to the amount SpotOn had committed to raise.

It’s a tiny amount if you put stock in Providence’s calculations that an early development scheme at Barryroe – amounting to 48 million barrels of oil, or the equivalent of 16 per cent of the wider licence area – is valued at $560 million, based on an oil price of $60 per barrel.

Shareholder upside

The original deal with SpotOn would have seen Providence’s and Lansdowne Oil & Gas’s respective 80 per cent and 20 per cent stakes in Barryroe falling by half. Going it alone leaves more upside for shareholders in both companies.

“We are taking control of our destiny. I am not relying on others to lead the project. We got a lot from our work with SpotOn and we’re going to use that,” Linn told The Irish Times on Thursday. “We’re very convinced that we can actually do this ourselves. And that means it’s going to get done.”

If the Glaswegian chemical engineer, with 35 years of experience working for Big Oil groups Mobil and Esso and independents such as Cairn Energy and Tullow Oil, and who's been involved in 10 major oil field developments, can't deliver, who can?