Providence Resources - E&P with strategic Gas Storage

Providence Resources is shaping up to have a good deal of positive newsflow in 2009.  The company strategy is a portfolio approach, holding a variety of diversified business interests in various geo-politically safe venues. On the one hand this creates a very stable platform for the company to build it’s plans, but on the other - it does give investors more of a headache in valuing the company.  But such is our lot.... so let’s take a look.

Providence Resources (PVR) is an Irish company with 28 years operating history run by the wiley O’Reilly family who hold 35% stake.  A charismatic man, the CEO Tony O’Reilly spoke recently at the First Energy Conference [ref] http://www.firstenergy.com/conference_details.php?conf_id=80&webcast [/ref] in London with great enthusiasm about his development pipeline, tier-1 farm-in partners and the great potential for his offshore gas storage facilities in the Irish Sea.  It’s a credit to the assets Providence holds that they have attracted such partners as ENI, Exxon Mobil and Chevron across their global development pipeline.

The company is the largest offshore acreage holder around Ireland, owning the only producing gas complex in those seas with significant exploration and development plans across it’s interests.  It also holds production assets in the UK & Gulf of Mexico and holds some opportunistic fields in West Africa.  Providence holds total P2 reserves of 8.5MMboe of oil and P2 gas of 17.4MMBOE.

 

A stable production base....
With 4000boepd production across UK and Gulf of Mexico Providence is able to finance much of it’s development with cashflow.  Singleton, a UK onshore field just north of Chichester in which PVR has a 99% interest  is a company cash machine - producing 700boepd with plans to double it to 1500boepd by bringing in standard US style onshore production processes.  They are currently trying to secure a rig for a new production well in 2010 to tap further into the proven 4.6mmb oil + 1.6BCF gas at the location.

With a 40% interest acquired in 2008, PVR has a portfolio of 8 producing fields and a number of exploration assets offshore Gulf of Mexico.  Net production to PVR is 1600boepd across assets with a proven 23.2BCF gas and 1.7mmb oil.  The assets were hit in late 2008 by Hurricanes Ike and Gustav with 15% production lost and delays in construction, but this production is being brought back online and further drilling success at Vermillion 60 has increased production there 30fold to 600boepd net to PVR.  Proven but undeveloped reserves (PUDs) will be the main feature of the future drilling plan by the operating partners SPN, Petsec and Peregrine.

Other production comes from the 40% owned Kinsale Head assets with 2000boepd equivalent gas production in Q109 net to PVR’s wholly owned subsidiary EIRGAS. Production should remain at 10BCF per year over the next 4 years in this declining asset, but as explained below the gas storage possibilities at Kinsale Head and Ballycotton should increase profitability at these venues over the medium term.

...with significant development in the pipeline...
PVR’s development assets are seen as adding an incremental 10,000boepd across all their geographies, with key interest in offshore Ireland and West Africa.  

Of all the offshore development sites, 56% owned  Spanish Point has brought very promising seismic results showing further reservoirs above those already drilled. Chrysaor - a private firm backed by Barclays Capital - has farmed in for 30% based on the seismics with option to go to 70% if they drill 2 wells.  Plans are to drill in 2011, derisk and farm down.  With a development plan of production rates of up to 120,000boepd Tony O’Reilly has said he’d be ‘more than happy’ to have a free 10-15% carry after farm down.

The 6.7% owned AJE field in Nigeria operated by Chevron was opportunistic, but all the wells drilled to date have encountered oil and gas.  In Feb 2009 it was deemed commercial. The Turonian reservoir is seen to be similar to the Tullow/Anadarko run giant Jubilee discovery.  It’s currently in the pre-FEED (front end engineering and design) process.

...and exploration upside...
Offshore Ireland continues to excite Providence especially at the 16% owned Dunquin licence.  With Exxon & ENI farmed in for 40% each and operating, they have committed to drilling at a well cost of approximately $150m having carried out extensive geological studies.  The most notable prospect may contain up to 18TSCF - this is a big prospect attracting big players and PVR is effectively carried.

These players are also farmed in at Drombeg where 1000km of 2D seismic are being processed.  With Newgrange and Cuchulain similarly containing assets attractive to majors, Providence’s huge Irish Sea acreage is set to pay dividends.  We can expect significant newsflow across these assets in the coming 12-24 months.

...and the future’s a gas...
The UK & Ireland is the fifth largest gas consuming economy in the world but our production rates are declining and we import the majority of our gas (Ireland only produces 4% of it’s total consumption).  With 23% of EU imports,  Russia’s gas holds enormous sway over Western Europe, bringing with it key political security fears due to the increasingly rogue nature of Russian decision makers.  

Europe as a whole is expected to increase it’s gas consumption by 43% through 2030.  [ref] http://www.providenceresources.com/uploads/gasstoragesectorreportv26.pdf [/ref] The huge investments in recent years into LNG tankers and offloading facilities are responses to the increasing global demand - but as gas is transported further afield and fully globalised as a market, the storage infrastructure will need to increase in response.   A recent EU directive (...yes another one) encourages all member states to bring gas storage up to 3 months supply.  Ireland only has 11 days average storage, and the UK 14 - which is paltry compared to Germany, France and Italy who all have storage capacity around 20% of annual consumption.

Providence aims to ride this trend, pitching their Kinsale Head storage facilities and surrounding developments as a key piece of utility infrastructure for Ireland.  They acquired a 40% stake from Petronas for a net $40m in September.  It’s ireland’s only gas storage facility with 8BSCF capacity offshore Cork.  The plan is to develop the site and surrounding facilities to a total 40BSCF over the next few years.

Depleted fields such as those at Kinsale Head are attractive as storage as they leverage the extraction and distribution infrastructure that remains from  a field’s production life. Future developments with the goal of eventually reaching 80BSCF capacity include the Kish bank complex near Dublin and the nearly depleted Ballycotton reservoir which has the potential to be a 25-30BCF reservoir.

The climate change brigade are also pushing to lock away excess carbon emissions in depleted gas fields in a process known as CO2 sequestration - effectively storing solidified CO2 in old gas reservoirs.  The depleted main field in Kinsale Head is ideal for CO2 sequestration with the capacity to store 380m tonnes of CO2.  As a major component of the environmental agenda, it’s worth keeping an eye on but probably shouldn’t be factored into valuation.

...on financing...
PVR have secured a $100m debt facility from BNP Paribas announced in September ‘09 of which they have drawn $64m to date at a 500bp margin and maturity in September 2014.  This comes on top of a EUR42m convertible bond from July 2008.

...on valuation... hmmm.
Of course, as ever with diversified portfolio companies, investors can find it hard to get to the bottom of it all.  Broker Cenkos has recently put out a note (2/11/09) [ref] http://www.providenceresources.com/uploads/pvr2nov2009.pdf [/ref] with a rather punchy price target of 23p.  Producing assets are valued by Cenkos at 5p which ‘more than covers the debt’, near term growth from development assets at 13p, core exploration upside at 5p and the gas storage business at 2p.  The gas storage business  could triple in size by adding the Ballycotton gas fields and further developing Kinsale Head and should really be valued as a utility business.  I wonder whether, by wrapping it up in an EIRGAS subsidiary, Providence is intending to spin it off, and such a move might unlock more shareholder value by forcing investors to focus on valuing each part individually.

Outlook
The company’s stated plans for the next year and beyond include...
    •    Doubling production rates to both onshore UK and offshore Gulf of Mexico by 2012.
    •    Trebling production by end 2014 through development of the AJE and Dragon fields.
    •    Unlock the potential of the Atlantic margin with Exxon, ENI and Chrysaor.
    •    Develop and expand EIRGAS storage business up to 80BSCF with Petronas

And over the next 12 months we can expect news from Exxon’s commitment to drill Dunquin and more news & drilling after the Spanish Point/Burren 3D seismic interpretations... the company should have a good number of value drivers and newsflow to come.

I’m watching Providence - as a sum of parts, it looks good value but as an investor one does have to put in a lot of homework to get to the bottom of it all.  Is that something that the management is aware of, and what are they going to do about it?