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Providence and Lansdowne Barryroe farm-out to the Chinese, good news but buyer beware (PVR LOGP)

Providence Resources (LSE:PVR) and Lansdowne Oil & Gas (LSE:LOGP) both surged today after announcing the highly anticipated farm-out of their co-owned licence over the Barryroe oil site based off the south coast of Ireland. A consortium led by privately owned Chinese company APEC has been assigned a 50pc working interest in the SEL1/11 licence that contains Barryroe, leaving Providence with a 40pc interest and Lansdowne with a 10pc interest. On the face of it this is great news for both companies, but long-term investors should be mindful of the finer details of this deal.

In exchange for the 50pc stake, APEC must directly pay for half of the upcoming drilling programme at Barryroe, which will involve drilling three vertical wells.  APEC will also have to pay half the cost of any side-tracks and well testing associated with the programme and will provide a drilling unit and related operational services.

By way of a non-recourse loan facility, APEC will also finance the remaining 50pc of the costs associated with the drilling programme. This loan will incur an annual interest rate of Libor plus 5pc and APEC will be entitled to 80pc of production cashflow from Barryroe until the loan is repaid in full. After the loan has been repaid, APEC will be entitled to a 50pc share of production cashflow, with Providence and Lansdowne being entitled to a 40pc and 10pc stake respectively.

Although EXOLA, a wholly-owned Providence subsidiary, will be the operator of the drilling programme, once it has completed APEC will have the right to become operator for Barryroe’s development and production phase. Furthermore, once the programme has completed, APEC will be able to subscribe for warrants representing around 9.9pc of Providence’s issued share capital, exercisable at a 12p a share for six months.

The farm-out will close in Q3 this year subject to all conditions being met and the approval of the Minister of State at the Department of Communications, Climate Action and Environment and the approval of the Chinese government. APEC has a strategic partnership with China Oilfield Services and JIC Capital Management for the investment and development of offshore oil and gas opportunities worldwide utilising Chinese drilling units, services, and equipment.

Although the terms of the farm-out look attractive, Providence and Lansdowne’s decision to bring in a private Chinese firm rather than a well-established oil major will ring alarm bells for some. As a private company, APEC will not be required to meet the strict corporate governance standards and reporting requirements of a company like, say, Exxon, raising concerns around transparency. Furthermore, due to its jurisdiction in China, it may prove to be difficult to find out much about the company, something which could result in a lack of accountability further down the line.

The history of Chinese investments into resource stocks on AIM has not been a happy one for private investors. While today’s news looks encouraging, if taken at face value, it would probably pay in the long run to maintain a healthy degree of caution.

Regardless, the strong terms of the hotly-anticipated Barryroe farm-out pleased investors and share in Providence rose by 15.4pc, or 1.5p, to 10.9p, while Lansdowne jumped by 34.7pc, or 0.5p, to 1.8p. This is hardly surprising, either, with the total combined audited gross on block 2C recoverable resources at Barryroe amounting to a hefty 346 MMboe, comprising 311 MMbo and 207 BCF.

Both Providence and Lansdowne are understandably bullish.

Tony O’Reilly, chief executive of Providence, said: ‘This is a significant transaction for Providence and Lansdowne which will deliver multiple new penetrations of the areally extensive Barryroe field.  In addition, it also provides for the acquisition of modern dynamic well test data that should assist in advancing the field to production.  Over the coming months, we will be working with the APEC Consortium to close the transaction and finalise the specific timeline and the precise details of the drilling programme.  We are very pleased to have agreed [on] this deal, which will allow us to avail of ‘state of the art’ drilling units and technical capabilities in order to advance Barryroe to first oil.’

Lansdowne CEO Steve Boldy added: ‘Upon closing [the farmout], Lansdowne will retain a net 34.5MMboe of contingent resources (2C) for its 10% ownership of Barryroe, with significant additional upside in terms of further exploration potential. The third party funded Drilling Programme will look to convert a sizeable amount of these resources in to proven and probable (2P) reserves ahead of subsequent development and production. With a current market cap of just US$10M, Lansdowne’s valuation equates to less than US$0.3 per contingent barrel for its 10% ownership.”

The deal now needs to complete. There could well be a trade in this stock in anticipation of this happening, but if the opportunity presents itself to take profits on much further strength that should probably not be ignored.

Authors: Daniel Flynn & Ben Turney

Disclosure: The authors of this piece do not own shares in any of the companies mentioned

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