PE Live: UKCS M&A faces challenges
Downturns often usher in buying opportunities, but there are unique obstacles in the current environment
The UK continental shelf (UKCS) has seen substantial revisions to and cancellations of already agreed deals and a slowdown in ongoing sales processes as players take stock in a post-Covid world. Panellists on the latest PE Live webcast see both short and longer-term challenges to M&A in the basin.
But they also remain convinced that, if the right assets are available at the right price, deals will be done.
And it is worth remembering that the UKCS is far from alone in facing hurdles in this respect. “Globally, M&A activity in 2019 was half of the average over the past two decades,” says Jon Story, vice-president for upstream at consultancy IHS Markit. “And it was a third of what it was at the peak in 2012.
There is an overarching trend here—access to capital for the oil and gas sector and the flow of money towards the energy transition,” he continues. “But if there is demonstrable value available, someone will find the means to do a deal.”
Clara Altobell, vice-president ESG and business innovation at UKCS independent Serica Energy, argues that the basin’s stakeholders should consider trying to use the move towards a lower-carbon future to their advantage. “When we look at the majors and larger players getting out of the most polluting assets, is it really fair for them just to sell to the highest bidder?” she asks.
“Perhaps the ESG credentials of the buyer should be taken into account, or maybe sellers should have to make a commitment to helping reduce emissions in those assets before they are approved to pass them on. That could be a better option than them just simply selling a sulphurous heavy oilfield to a buyer with no obligation to change that footprint.”
The challenge for would-be UKCS dealmakers is to close a gulf in price expectations that has opened up between buyers and sellers, says John Conlin, partner at law firm Bryan Cave Leighton Paisner. “People are turning to shared risk and contingent consideration structures,” he says.
“And we are also looking at technology drivers that may come into the buyer landscape for any private equity exits—we may be looking at niche technology-focused players ready to come in and help unlock value.”
But these are not the only possible buyer types. “Nimble players backed by private office war chests looking for bargain assets or services players coming in on an equity-for-services basis” could also play roles, he predicts.
$10bn – Live deals at start of year
“Funding is the big issue,” says Conlin. “Reserves-based lending was becoming significantly more conservative and that will continue. Debt and equity markets are tight for oil and gas assets and that will only be exacerbated as the trend for more ESG-conscious lending accelerates”.
“There were about $10bn in live deals on the table at the start of the year,” says Geraldine Murphy, partner at investment bank Tudor, Pickering, Holt. “Some of the buyers are trying to terminate or renegotiate; other deals have just been put on pause.”
The changed landscape could attract new entrants. But Murphy is unconvinced about any influx of NOCs that have not previously dipped into the North Sea, seeing them as more focused at present on domestic markets.
And the buyer-seller gap and innovative ways to bridge it is also on her mind. “We will see more of these creative structures—vendor financing, more traders offering financial assistance, and more contingent price mechanisms,” she says.
“Globally, M&A activity in 2019 was half of the average over the past two decades” Story, IHS Markit
“People are doing some window shopping. But most boards and most managements are, I think, going to be pretty disciplined for now,” predicts Murphy, while capital for M&A is also likely to be more expensive even for the quality names that can raise it.
Private equity capital will, in Murphy’s view “probably be more focused on funding existing teams and making sure they have sufficient liquidity to thrive in this market”. That said, “we are hearing about a few private equity firms raising new multibillion-dollar funds, so there may be some dry powder out there. But there are also a lot of scars.”
Given much of that pain has been felt in the US, “we might see more of that money come to the North Sea for a change,” she says. “But, ultimately, it is about monetisation. We have had no IPOs or trade sales; the talk is of permanent capital vehicles and rewarding investors with dividends.”