Additional breathing room ahead of farm-out
On 10 March, Lansdowne Oil & Gas (LONDON:LOGP) announced that it had placed £1.04m worth of new shares and issued a £1.86m non-convertible, one-year loans from its major shareholder LC Capital Master Fund. The placing and loan issue were partly triggered by the recent c $7.5m settlement with Transocean (RIG), of which LOGP’s share is c $1.5m (c £1.0m) due by end March. The £2.9m liquidity injection gives LOGP welcome breathing room until year end while it awaits a Barryroe farm-out. In February, LOGP and Providence (PVR) announced they had reached an agreement on commercial terms with a proposed farminee, although the deal remains contingent on funding.
Settlement agreed; progress on Barryroe farm-out
In May 2012 Transocean (NYSE:RIG) sued Providence for $19m regarding the use of the semi-sub unit used to drill a well on Barryroe. The December 2014 verdict found that RIG was in breach of contract, and left it to the parties to negotiate a settlement.
Last month’s positive news on a tentative farm-out agreement was the most tangible sign of progress in the last 18-24 months. We believe a deal is more likely to take the form of a phased farm-out than a full cost carry. In our view, it could make sense for LOGP/PVR to seek alternative financing sources, eg from contractors similar to Xcite’s Bentley development. On the positive side, falling rig rates and service costs could improve project economics and make a farm-in more attractive.
Background on Barryroe discovery
Barryroe is a 346mmboe 2C oil field, located in shallow water in the North Celtic Sea Basin. A 3D seismic survey was conducted in 2011 and a total of six wells have been drilled into the structure, of which three were flow-tested. The last well, drilled in 2012, tested at c 4mboe/d, increasing confidence in the field’s commerciality. The partners envisage a phased development with a six-well early production system. First oil was targeted for late 2017 as of mid-2014, but is likely to slip to 2019.
Valuation: Farm-out key to unlocking value
LOGP is trading at a low EV/2C of $0.14/boe based on Barryroe alone, which compares to a PV10 of c $9.5/boe implied by the NSAI audit. LOGP had £2.6m of current liabilities and cash of £1.1m at end June 2014. We estimate that LOGP’s cash balance should be around £1.8m after paying the RIG settlement and associated legal costs, leaving it funded until around year end. LC Capital Master Fund, backed by a New York-based hedge fund, now owns 28.0% of LOGP’s share capital. In light of the non-convertible nature of the £1.86m loan, we suspect that the fund would prefer to stay below the mandatory bid threshold of 29.9%.
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