Providence Resources' potential significantly undervalued says broker

Irish oil and gas explorer ProvidenceResources (LON:PVR) looks significantly undervalued, according to broker Cenkos Securities. 

Cenkos has set a target price of 857p for Providence shares, with an estimate of the Barryroe prospect alone at $370.6 million or 476p per share.

Providence is currently drilling at Barryroe as part of a $500 million offshore Ireland programme started with its partners last year. Initial results are due in February.

The group upped its stake in the prospect to 80% in December by acquiring San Leon’s 30% stake in return for a 4.5% net profit interest.

As a consequence, Cenkos believes Providence will potentially be able to farm down more of the asset and still retain a holding in Barryroe of 30-40%.

Following a successful drilling programme at Barryroe, it expects Providence to make a declaration of commerciality for a development to produce in excess of 20,000 barrels per day.

“We have valued their ownership in Barryroe alone, on a very conservative 65% COS risked basis, at $370.6 million or 476p per share,” Cenkos said.

The broker adds that with high impact exploration properties and major partners including ExxonMobil, ENI, Repsol and Petronas, Providence has demonstrated its ability to bring on assets while maintaining its exposure for minimal expenditure – “so the outlook for the farm down on success of Barryroe is good.”

In total, Cenkos said its sum of the parts, risked basis, estimate valued the current production assets and the 2012/13 drill programme at $1.28 billion or £15.76 per share.

That includes a value of £1.88 per share for the producing Singleton onshore field in the UK, which Cenkos says underpins the current valuation.

“With current production of approximately 900 BOEPD, revenues are expected to increase to almost $30 million in 2012 with cash flows of over $24 million.” 

The aim to increase production to 1500 barrels daily (BOEPD) means the downside value of the business is well protected, Cenkos added.

Providence has approximately $100m in debt outstanding in the form of an oil swap and bond covered from the production income from Singleton.

Cenkos said the upside is in Providence’s medium risk appraisal and development assets such as Barryroe, Dragon and Spanish Point and its high impact, high risk exploration assets including Dalkey, Rathlin and the multi-TCF Dunquin prospect.

“Providence typically holds high equity interests in its assets before farming down to a free carry option or a manageable position, with a major as operator.”

“Using this model the company is in a position to further farm down, and so capture shareholder value or maintain an interest for negligible capital expenditure towards development.“

Providence is trading on an enterprise to 2P of approximately $4.09 per barrel, a significant discount to Risked NAV of the next two years drilling programme at approximately 0.17 times.

“This is a 70% discount to the sector and an indication of how much Providence is overlooked by the market.”

“While there is significant risk in the portfolio, and Providence holds significant equity investments in some of its assets, we feel that this is still an undervalued company.”

“With Singleton to cover the debt and an active few years of drilling underway on the asset portfolio, any one of which could be transformational for Providence, the investment case is compelling,” the broker said.