PE Live: Hope remains for UKCS buyers
The landscape may look very different to when deals were struck. But it is not all bad news for those that acquired North Sea assets in recent years
“Obviously, the price decks used two years ago did not stress test for the huge fall in commodity price we are seeing today.” So says Geraldine Murphy, partner at investment bank Tudor, Pickering, Holt, speaking on a PE Live webcast on the future of the UK continental shelf (UKCS).
As such, the flurry of deals that have seen a number of firms either exit or trim substantially their holdings in the basin, the expansion of smaller players and a raft of new entrants, are grappling with rather different economics than when the transactions were struck. But this does not necessarily translate into buyers’ regret across the board, according to the PE Live panellists.
Debt is a major issue, concedes Murphy. “We definitely saw the ‘for sale’ sign go up in the last downturn, and—as well as traditional-style players—we also saw a lot of private equity entrants. Many of these companies were relatively small to medium-sized, so they did lever up with quite a lot of debt to support their acquisitions.
“There is a big debt pile to be serviced. If you look across several of the UK-listed companies, you can see market capitalisation collectively c.$4bn. But net debt is double that, so businesses need to be very careful how they manage balance sheets going forward,” she says.
But it is not all bad. “Most of these firms have been able to grow and have had pretty good results so far. If you look at private equity alone, they have funded a lot of growth in the last cycle,” Murphy continues.
“Obviously, the price decks used two years ago did not stress test for the huge fall in commodity price we are seeing today” - Murphy, Tudor, Pickering, Holt
“Admittedly, some may be challenged in the current environment. I think, if you did a post-mortem today, it would be a mixed set of results.”
“A lot of larger operators sold their assets to more focused companies, who put them at the core of their businesses. They have looked at cutting costs and focused on increasing reserves and extending field life,” agrees Clara Altobell, vice-president ESG and business innovation at UKCS independent Serica Energy. “It has been a positive for the basin.”
“It is crystal clear that investment over the last five to seven years has been a real boost for the UKCS, says John Conlin, partner at law firm Bryan Cave Leighton Paisner. “And it has also been a catalyst for some innovative structures on deals that may well have otherwise been quite difficult to get away.
“I am thinking of the treatment of liability for decommissioning, for example. Some of the recent deals have turned on its head the treatment of decommissioning between buyers and sellers, which has helped significantly in getting deals moving forward. Such structures are here to stay and may well help going forward with the exit narrative for private equity investments,” Conlin continues.
“It is crystal clear that investment over the last five to seven years has been a real boost for the UKCS” -Conlin, Bryan Cave Leighton Paisner
“We have definitely benefited from innovative deal structures,” agrees Serica’s Altobell. “Our initial deal had a deferred payment mechanism, while the seller kept most of the decommissioning liability. Our more recent deal had a decommissioning element and also a net cash flow sharing agreement—we were covered for price fluctuations, as well as on production, reserves and contingent considerations for projects that may or may not go ahead. They are great for getting over any buyer-seller expectation gulf because you share the upside, but you are protected on the downside.”
Under a strategy set out by the UK’s Oil and Gas Authority (OGA), asset buyers in the basin have “a duty to maximise economic recovery”, points out Jon Story, vice-president for upstream at consultancy IHS Markit. “That has led to acquisition strategies being led by the extra focus on reduced costs and increased production and, in some cases. novel technology.
“The traditional private equity model used to be: acquire, add value, exit at some healthy multiple around five years later, whether via trade sale or IPO. Of course, with recent North Sea purchases, the conditions for exit are currently not really there,” says Story.
“The issue facing these asset owners is going to be who are the buyers in the future. But, going back to an earlier OGA strategy, it was about ensuring the right assets were in the right hands. There are still a lot of incentives and encouragement to do that, and we have seen it with the likes of Enquest and Serica in recent years taking on assets on which they can really focus.”