Foresight: prudent management and thrift: timely preparation: the foresight and benevolent care of God. That is how one dictionary defines providence. With such lofty aspirations, is Providence Resources plc the correct mantle to bestow on Arcon International's oil and gas interests which are to be hived-off into the new company? Is the name meant to inspire investors into the cloud cuckoo land where hope value is the motivation for investment?
Arcon, whose main asset is the Galmoy lead/zinc mine in Galmoy, Co Kilkenny, has pointed to the "consensus" among fund managers that oil and gas interests and mining interests do not fit well within a single company. "We believe that by creating this separately-quoted vehicle for our hydrocarbon interests, Arcon will be better able to focus on the Galmoy zinc mine which has been in production since March," is how Arcon's chief executive, Mr Tony O'Reilly jnr puts it.
There is indeed industrial logic in making such a split, but one suspects that the main reason must be the truism that the sum of the parts is greater than the whole. Mr O'Reilly has already said that the share price of Arcon, excluding the oil and gas interest, should not fall as a result of the split. That is probably an astute reading of the stock market's behaviour, but technically it should fall to reflect the diminution in the value of its book assets. The shares of Providence Resources will have a value, 2.5p based on the asset split. So the sum of the parts will probably end up greater than the whole.
What has not been mentioned by the promoters of the split is that costs will be higher. Each company will - if the Arcon shareholders agree at an extraordinary general meeting - have to bear extra costs; these include the once-off restructuring, separate boards and separate management.
If the oil and gas interests were large, such extra costs could be easily justified. But by Arcon's own admission, the book value of the oil and gas is only some £6.6 million. Indeed, the real value is much less. The last Arcon annual report values the assets at £6.55 million, but £5.31 million of that is capitalised development expenditure. Is it any wonder that Arcon has never received any offers, based on the book values, for these interests?
So what do these interests comprise? The oil and gas interests are mostly the old Atlantic Resources assets. They did nothing for investors before; why should they do so now?
The assets are a mixture of production, development and exploration, located on and offshore UK, offshore Ireland and onshore Papua New Guinea. They include the following.
Arcon has a 20 per cent stake in Singleton field onshore UK and 0.5 per cent of the Claymore field offshore UK. The Singleton wells were running at 900 barrels of oil per day at the end of 1996 and the potential for future wells is being assessed.
It has a 100 per cent stake in block 49/9 in the Helvick field in the Celtic Sea. Recent studies have indicated recoverable reserves of over 6 million barrels of oil. A feasibility study will indicate its commerciality, but with new technology it has potential. Arcon reckons this could generate revenue of $115 million.
The assets include a 100 per cent interest in blocks 49/14 and 49/19 in the Celtic Sea. These are located just south of the Helvick field offshore Ireland. The area covers the Ardmore gas field discovered in well 49/14-1 by Marathon. These blocks also have potential revenue, estimated by Arcon, at £60 million.
Arcon has a 15 per cent interest in block 48/9a offshore UK. The commercial merits of this field with 100 billion cubic feet of gas are being assessed. Arcon reckons that this could have potential revenue of £28 million sterling for the group. The development options are now being examined.
Clearly the proposed split makes a lot of sense and the accumulated tax losses of around £30 million in the oil and gas interests are a decided plus, provided sufficient revenue is generated. Dr Tony O'Reilly, with a 43 per cent interest in both companies, will be the main beneficiary, but it is also in the interests of the other shareholders. With such undefined potential, there will be plenty of hope value which is likely to be reflected in large gyrations in the share price.
Nobody wants a second Atlantic Resources. But the new company should be judged on its achievement in turning potential into reality. Investors will obviously be hoping that Providence Resources will conjure up images of Providence in Rhode Island and not divinity, that the name will not be abbreviated to PR and that the second coming will prove to be more provident.
