The Irish government’s approval of a site survey at the Barryroe oil target has led stakeholders Lansdowne Oil & Gas (LSE:LOGP) and Providence Resources (LSE:PVR) to stage a notable recovery over the last two days. However, with ongoing funding issues for both companies remaining, there remains uncertainty around whether this positive momentum can continue.
To recap, Barryroe is based offshore Ireland and contains gross 2C resources of 346mmboe with substantial further potential in additional appraisal and exploration targets. An appraisal well drilled at the site, which is 10pc owned by Lansdowne and 40pc held and operated by Providence, in 2012 tested at a rate of 3514 barrels per day.
The partners faced a major setback in November 2018 when Ireland’s National Trust challenged the legality of government permission granted to Providence to conduct well site survey operations at Barryroe. After consulting its legal team, Providence decided to apply for a new permit to carry out surveying as early as practicable in 2019.
This permission was finally granted on Friday, allowing the partners to undertake a seabed debris clearance, environmental baseline and habitat assessment site survey at Barryroe from next month. The real significance of this update is that the site survey effectively gives Providence the green light to begin drilling operations in Q4 this year, as per Providence’s updated timeline issued in June. However, while this is obviously positive, a key issue remains before investors can really get excited – funding.
As Providence highlighted in Friday’s update, the initiation of the site survey is ‘pursuant to the terms of the updated farm-out agreement with APEC (as amended), and subject to the receipt of funding from APEC’. The firm, here, refers to the farm-out agreement it signed with Hong Kong-registered company APEC Energy Enterprise for 50pc of the project back in September last year.
In exchange for this stake, APEC agreed to make an immediate $9m payment to Providence alongside a further $10.5m payment 14 days before the commencement of drilling. This $19.5m figure was subsequently increased to $24m and is designed to fund the forward costs of Providence as the operator of Barryroe. This involves activities such as carrying out the well-site survey operations, consenting the drilling programme, and other project-related expenses.
Unfortunately, the initial $9m payment has still not appeared. In fact, Providence has pushed back the deadline for the payment – the backstop date – on numerous occasions over the last two months. The has been put down to a whole host of reasons such as ‘delays associated with internal transaction processing with [APEC’s] investors’ and ‘ongoing banking processing delays’.
The good news is that Providence has now received a remittance notice for the payment and, as of earlier this week, was waiting on ‘final processing by HSBC’ ahead of receiving the funds. The rub, however, is that the business said on Friday that the initiation of the Barryroe site survey remains contingent on the ‘receipt of funding from APEC or alternative financing arrangements being put in place’.
Now, this by no means the funds are a write-off. However, one has to wonder why the business would mention alternative financing arrangements if some doubts didn’t remain around APEC’s commitment. This, then, creates a sort of ‘all-or-nothing’ type of scenario for both Providence and Lansdowne.
If we see an update from the firms next week confirming that the APEC money has been received then the gates are opened for drilling later this year – shares could stage a significant recovery. However, if APEC the ‘Waiting for Godot’ act that it has been playing out to date, then Providence’s reliance on alternative financing arrangements could be very damaging. Indeed, sourcing the $24m needed for drilling Barryroe will be no mean feat for a business with a £52.3m market cap.
With all this in mind then, Lansdowne and Providence seem like a risky play as it stands, even if APEC’s money is nearly in the bank for all intents and purposes.