Buyer’s market for UKCS sell-offs
Majors may want to accelerate their North Sea divestments. But they may also need to dance to acquirers’ tunes
The first analyst on UK independent Enquest’s half-year results call was not slow to raise the M&A point. Given comments made by BP about reducing its upstream positions, what opportunities did that give the smaller producer for acquisitions, he asked.
Nor is BP likely the only major who may have UK continental shelf (UKCS) assets to sell. Speculation also surrounds potential buyers for ExxonMobil’s portfolio of non-operated UK North Sea assets.
But, while the sellers may prefer to get rid of their portfolios in as few transactions as possible—something ExxonMobil managed to achieve with the two tranches of Norwegian continental shelf assets it shifted to private-equity backed Var Energi—it may not be that simple. Potential buyers know what they want and appear confident that they can get it.
Focus on fit
“We continue to look at opportunities,” says Enquest CEO Amjad Bseisu. But he stresses that any acquisitions must be similar to when they have bought producing assets in the past—or indeed the firm’s July deal to take part of the stake in the Bressay heavy oil find held by Norway’s Equinor—in that they must fit with Enquest’s existing portfolio.
“We are only looking at deals where we bring something to the table” Bseisu, Enquest
Deals will be “capability driven” and with “hopefully very limited upfront consideration”, says Bseisu. “The key is we are only looking at deals where we bring something to the table… That would be the first port of call in terms of looking at the assets in their portfolios that the majors are offering.”
The message seems clear: any buying is on Enquest’s terms and is unlikely to be on a portfolio-wide basis. And it is a similar story with Ithaca Energy, the North Sea arm of Israel’s Delek.
Ithaca notes that it is substantially cash-generative, leaving it with plenty of running room above its debt repayment and “modest” dividend commitments to its owner, to “continue to reinvest in the business”. “Our natural hunting ground in terms of M&A is opportunities around our existing assets … that we can bolt on to our infrastructure,” says Ithaca.
UK independent Serica will likely also be on prospective sellers’ radars but is again in no mood to bend to counterparty whims. The firm notes it has no borrowings, a decreasing cost profile and substantial cash reserves, which “provides the flexibility to pursue growth opportunities”, as well as introducing a dividend policy this year.
It is also still benefitting from the shelter provided by historic tax losses, which stood at £40mn ($51.7mn) at the end of last year and “are expected to provide cover for 2020 and into 2021”. This means its search for new opportunities is focused primarily on the UKCS, particularly given that its operating expertise is Central and Northern North Sea.
“Bolt-on M&A remains part of the strategy… but with a greater focus on reserves and production rather than resources” Laidlaw, Neptune
But it stresses its business model is blending Serica’s low cost base, flexibility and operating capabilities with specific assets which no longer fit the objectives of others. And it is prepared to be choosy about any purchases.
“We have continued to make proposals in a number of acquisition processes, but we were unable to justify offers which met the counterparties’ expectations in terms of price and risk,” says the firm. And it feels that its “caution in this respect has been beneficial and has had the effect of strengthening the company’s position”.
“Serica will not overpay in order to quickly grow our portfolio. We are focused on identifying value rather than volume and will continue to look for the right opportunities,” suggesting it will continue to drive a hard bargain.
Serica is concentrating primarily on production and near-term production opportunities. But will also consider additions to its the portfolio at all stages of the cycle—including exploration, appraisal and development.
Private-equity backed Neptune Energy walked away from its most recent North Sea deal—cancelling an agreement with London-listed Energean to buy assets that the seller had in turn acquired as part of a takeover of the E&P business of Italian utility Edison—but it is not out of the game entirely.
Its strong balance sheet and positive cash flow support the potential for deal-making, albeit with a shift of focus. “Bolt-on M&A remains part of the strategy,” says Neptune chairman Sam Laidlaw, “but with a greater focus on reserves and production rather than resources”.
The potential for mergers, takeovers or swallowing portfolios whole—rather than asset-specific transactions—is not entirely dead, however. UK independent Rockrose agreed to be taken over by London-headquartered commodity trader Viaro Energy in July.
And its peer IOG, which ironically fought off a hostile takeover bid from Rockrose, has turned from potential prey to predator in mulling an offer for fellow gas-focused producer Deltic Energy. The latter was until August also subject to the attentions of Reabold Resources, which is involved in the UK onshore and also holds a substantial stake in UKCS player Corallian Energy.
“Deltic is well underpinned by its cash holding, potentially making a deal easier” Slater, Arden
IOG has until 9 October to make an offer for Deltic or announce it does not intend to do so. Daniel Slater, oil and gas research director at London brokerage Arden, sees “the strategic logic of IOG considering a bid for Deltic—the two companies are similar in that they are going after gas in the UK Southern North Sea”, he says.
But this deal too has complications. It is “less clear whether IOG might get Deltic for a reasonable price [given that] IOG is already trading at what we would view as something of a discount to the fair value of its development projects and the Deltic share price has already run up strongly”, warns Slater. On the other hand, “Deltic is well underpinned by its cash holding, potentially making a deal easier”.
Another potential deal is some sort of marriage of private equity-backed Chrysaor and London-listed Premier Oil. The latter is currently undergoing a major, and not painless, refinancing of its long-term debt which is dependent on both creditor and shareholder approval and a minimum $325mn equity raise. One of the drivers is paying for a deal Premier has struck to buy BP’s stakes in the Andrew and Shearwater fields.
But Premier admitted in mid-September that it has been in discussions with a number of third parties, including Chrysaor, regarding alternative forms of transactions. And, while none of the proposals thus far “provide better outcomes for either [Premier’s] shareholders or creditors than those proposed under the heads of terms” for the refinancing, “discussions on such transactions continue to be explored”.
“Given the position Premier is in, with large debts and an ongoing transaction that it is trying to close—and which itself has already been restructured—it is not hugely surprising that the company is in discussions with other parties as to alternatives, quite possibly at the behest of those other parties,” says Slater.
What might a Premier-Chrysaor deal look like? “Given Chrysaor’s existing North Sea portfolio, we would not be surprised if this were an asset sale, potentially of some or all of Premier’s North Sea portfolio,” Slater suggests. “The proceeds [could go] to pay down debt, leaving Premier with its international business,” although he concedes there “are plenty of other possibilities, including a potential full sale of the company or partial asset sales”.