Is this former market darling a falling knife to catch after dropping 35% today?

Has this market champion lost its edge?

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Shares in small-cap oil & gas company Providence Resources (LSE: PVR) have fallen by as much as 35% in early trading today after the firm announced yet another disappointing update regarding its exploration programme.

Specifically, today Providence revealed that the Drombeg prospect, the second and final target in its exploration plan, has been found to be water bearing, following a similarly disappointing result for the well’s Druid exploration prospect. Following these findings, the well will now be being plugged and abandoned.

However, despite these disappointing results, management remains upbeat about the future. “Frontier exploration requires perseverance and we look forward to seeing the outcome of exploration wells planned for acreage proximate to FEL 2/14, which will test plays similar to Diablo and to those which have proved to be successful in the conjugate Flemish Pass Basin, offshore Canada,” CEO Tony O’Reilly said in a statement alongside today’s update. 

Further, according to O’Reilly, as the company had farmed out around half of its exposure to these prospects, it remains “well funded for our forward drilling operations offshore Ireland.” The next target is the Barryroe oil field where Providence is the operator of the prospect with an 80% share. 

Disappointing news 

Today’s news from Providence is disappointing for shareholders, but it’s not the end of the line for the oil minnow. Oil & gas exploration is a high risk, high reward business, where companies with the most diversified portfolios usually come out on top. Providence’s management realises this and has sought to reduce risk by acquiring other exploration licences. 

The company’s Barryroe prospect has seen it recently being granted a two-year extension to its existing exploration licence by the Minister for Communications, Climate Action & Environment of Ireland. Providence is in discussion with a number of parties regarding farm-out agreements for Barryroe to help push the exploration programme forward and achieve first oil. But as with all projects like this, it’s almost impossible to put a time frame on when the company will achieve first oil from Barryroe. 

Time is running out 

After the two latest drilling failures, it looks as if Providence might need to sign a farm out for Barryroe as soon as possible. At the end of 2016, the firm reported a cash balance of €31m (£28m), after raising £53m in June. For the year, the company accumulated losses of €20.5m

While it is true that Providence owns an attractive set of assets, which could prove to be lucrative for the firm, exploration activities are expensive, and without cash to keep the lights on, Providence might struggle to unlock value. 

Is it time to catch this falling knife today? For risk-averse investors the answer looks to be a firm ‘no’ as Providence is still in its early stages and there’s plenty more that could go wrong for the company before it’s able to generate revenue. On the other hand, high-risk investors might be attracted to the firm’s portfolio of assets offshore Ireland, some of which might yet yield results. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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