No golden age for North Sea M&A—Westwood
Chrysaor-Premier deal could see copycats, says consultancy, but deals will need to meet strict criteria
The swoop by UK independent Chrysaor, backed by private equity (PE) firm EIG through its Harbour Energy vehicle, on London-listed Premier Oil does not, in the view of consultancy Westwood Global Energy, necessarily herald an upsurge in M&A activity in the basin. But other corporate activity could nonetheless follow.
Chrysaor’s reverse takeover is an opportunistic deal, reflecting Premier’s increasingly urgent need to refinance its debt and the PE-backed buyer’s ability to react rapidly. The good fit of the assets and potential upside from reducing tax liabilities added to the deal momentum, says Westwood, but also emphasises that the move cannot simply be added to the North Sea M&A playbook and exactly mirrored by other players.
Westwood identifies other companies that, like Premier, are burdened with debt—such as UK-listed independent Enquest and the non-listed Ithaca Energy subsidiary of Israel’s Delek—and which may be receptive to a corporate deal. And it sees other PE investors with North Sea enthusiasm.
Chrysaor’s reverse takeover is an opportunistic deal, reflecting Premier’s increasingly urgent need to refinance its debt and the PE-backed buyer’s ability to react rapidly
Norwegian PE firm HitecVision, which has an equity stake alongside Italy’s Eni in Var Energi, announced this month that it had a fund of up to $1.1bn available to invest in its Norwegian continental shelf (NCS) vehicle Sval Energi and its UK continental shelf (UKCS) counterpart Neo, says Westwood. The latter recently completed a $635mm purchase of a package of UKCS assets from Total.
But its view of the current market is that there are few cash buyers unless the assets provide a compelling strategic fit and/or they are being sold at cheap prices by distressed sellers.
One key aspect will be the reaction of the equity market to the merged company. Harbour is restricted from selling its shares in the Chrysaor/Premier newco for 12 months from the date of completion, Westwood notes. But, should the appetite prove robust, it could then reduce its stake.
And if all goes well, Westwood sees other PE players, such as those invested in Neptune Energy— which last month stated that it was considering an IPO in 2021—potentially looking again to exit through a listing or reverse takeover.
Success is not a given. Westwood warns recent experiences with firms such as Premier and fellow UKCS producer Hurricane Energy, not to mention concerns around the energy transition, put a question mark on whether equity investors and bondholders will again be attracted to the E&P sector.
On the other hand, some existing metrics point to potentially better days ahead for the share price. Prior to the takeover, Westwood calculates Premier’s enterprise value—its market capitalisation plus its new debt—was just shy of $2.15bn on 2P reserves of 175mn bl oe and production of 67,5000bl/d oe. The market was valuing its 2P reserves at $12.30/bl oe and its production at $31.80/bl oe, neither outliers compared to its UKCS and NCS peers (see Fig. 1).
The newco will have 2P reserves of 717mn bl oe and production of 254,000bl/d oe. While the different profile of the Chrysaor barrels will change those ratios, as a guide the new reserves and production numbers would translate to a $8.1-8.8bn range.
With the newco having net debt on completion of $3.2bn, this would translate to a market cap of $4.9-5.6bn. Premier’s shareholders would own 5.45pc of the newco—assuming the firm’s creditors take a maximum cash payment available (and a 25pc haircut) rather than opt to take shares.
Based on this assumption, the newco would only need to have a market cap above $3.4bn for the deal to be at a premium to Premier’s pre-deal valuation. Even applying the values of Premier’s least-loved peer—Enquest’s deliberately late-life barrels—the newco’s market cap would be in a $1.5-2.2bn range.
Chrysaor’s key UK assets are, Westwood admits, mature and its production profile is in decline. It has calculated the firm’s output is set to fall from almost 190,000bl/d oe in 2020 to 107,000bl/d oe in 2025 and 45,000bl/d oe in 2030. In the short-term, Premier’s assets will help offset the decline—its UKCS production is due to rise from 44,000bl/d oe to 55,000bl/d oe over the next two years, largely driven by the startup of the Tolmount field.
But, from 2023 onwards, Westwood says Premier’s UKCS and international production is also due to decline, although this would be transformed if a fast-track development of the Mexican Zama discovery goes ahead—assuming Harbour decides to keep the asset rather than sell it as Premier had intended. Zama’s operator, US producer Talos Energy, is looking at a 2023 startup date, but Westwood cautions this may be optimistic, not least due to field unitisation issues.
Harbour has stated it will continue to reinvest in the North Sea, but Westwood is not clear if this relates to further deals or for capex in new projects. Chrysaor is spending to extend the life of the production hubs it previously acquired to maximise economic recovery and delay abandonment—two key aims for the UK government.
Harbour has stated it will continue to reinvest in the North Sea, but Westwood is not clear if this relates to further deals or for capex in new projects
But, without further investment, Westwood calculates that the newco’s production would fall by nearly 75pc over the next ten years. The company will, though, be a cash cow, with Premier’s UK tax losses offsetting Chrysaor’s liabilities.
And with UK tax being offset, the economics of new North Sea developments will also be enhanced. This, says Westwood, may be an incentive for the newco to invest further capex in the UKCS.
But it remains to be seen whether the newco’s free cash will be used to fund UK and/or international developments, and/or for corporate purposes such as paying down the newco’s debt and funding dividend payments to Harbour and other equity owners. Westwood notes that HitecVision has received more than $2bn in dividends from its 30.4pc in Var Energi since 2016.
And, late last year, a senior executive of PE firm Kerogen, which has a number of UKCS and NCS investments, suggested that dividends may be a good way to return capital in the absence of good exit options. Both might be templates for Chrysaor/Premier’s future.