BWE building on history in the North Sea
The name Blue Water Energy (BWE) may be new, but the faces are familiar
BWE is a London-based, energy focused private equity (PE) firm. It has invested in UK continental shelf (UKCS) producer Siccar Point Energy and Norway's Mime Petroleum, both alongside fellow PE investor Blackstone, and the Norwegian continental shelf focused Wellesley Petroleum.
Graeme Sword—a BWE founder partner and formerly head of oil and gas at PE firm 3i, which was active in North Sea E&P throughout the 2000s—recently spoke to Petroleum Economist editor-in-chief Peter Ramsay.
PR: Is it fair to say the private equity (PE) investment has received something of an at least, cautious, if not bad press? And that even the term "PE in the North Sea" belies differences in approach?
GS: I agree that the role of PE is not always understood. Within the North Sea PE has backed several different strategies. I think that PE is very much needed—it provides growth capital and starts new companies. It seeks to grow cashﬂows through investing when many public companies and investors are retreating. In many ways, PE is more suited to the needs of new E&P companies—it can be more ﬂexible, not focused on quarterly, annual metrics but rather seeking to grow value over the life of its investment in a company. And PE in the North Sea is not a new phenomenon. This has been a source of North Sea funding for 20+ years, establishing Venture Production, CH4 Energy, Highland Energy, Caledonia Energy, Faroe Petroleum, Revus, Agora, Noreco etc., so arguably there are less PE backed companies in the North Sea today than in previous cycles.
PR: Would you agree that PE investment should actually be seen in a positive light?
GS: PE is absolutely a positive for the sector. It is a source of long-term funding for a sector which is short of capital and unloved by public market investors. PE stimulates growth by starting new companies, investing growth capital and investing in a wide range of E&P strategies. It is positive because it instils a ﬁnancial discipline that is required for companies to prosper through the cycle and not just rely on commodity price inﬂation to deliver proﬁtability. I would accept, however, that PE has not positioned itself well enough as an industry partner.
PR: What has brought PE in general, and BWE speciﬁcally, into North Sea E&P? Will the trend slow or even halt in the current sustained higher oil price environment?
GS: BWE has not been brought into the North Sea, we have never left! The BWE partners have set up more North Sea companies than [the rest of the PE industry combined]. The Partners at BWE have 20+ year history of doing exactly this, namely building North Sea E&P companies. The BWE name may be new but the people, track record and approach have been established over a long time period and through cycles.
I think some others have been attracted by the longer life, more stable cashﬂows versus US E&P but have struggled for market access. We like to lead the creation of business plans with high quality, proven management teams and then bring in partners as the deal progresses if we decide we need more capital.
PR: A number of the PE actors have stakes in more than one company, most often split between UKCS and NCS actors. What are the advantages of this approach compared to one vehicle across geographies?
GS: PE companies manage funds which have a portfolio of assets. In that respect we are no different from quoted fund managers that have investments in multiple companies. Having investments in various companies in different markets with different strategies offers portfolio diversity. At BWE we are looking for best in class teams—it is difﬁcult to ﬁnd a team that can be the best in many different things. We also believe that different strategies have different risks and require different capital structures.
PR: What are the particular "value add" strategies for i) Siccar Point, ii) Mime and iii) Wellesley around optimising existing assets, undeveloped resources, exploration prospects and/or acquisition?
GS: BWE has the experience of working with both Siccar Point and Wellesley teams previously, so had the advantage of knowing skills, experiences and capabilities. We work with all our management teams from inception in building plans jointly ahead of thinking about bringing in additional capital from partners. With Siccar Point we are seeking to build a differentiated production and development company on the UKCS. We have established a long-life, high quality asset base and so the team is focused on delivering operational and project management excellence whilst also preparing for two exciting exploration wells next year. Wellesley is an exploration and appraisal focused company seeking to build Norway's' leading exploration company. Its core skills are geoscience and, more recently, its performance in drilling operated wells has been excellent. Mime is less developed and is in the process of seeking to establish itself through an acquisition of producing and development assets on the NCS.
PR: What are options and timescales for exit for PE generally and Blue Water in particular? Does that vary between Siccar Point, Mime and Wellesley?
GS: PE will typically hold investments for 5-7 years so this is not short-term investing. PE is trying to build value using funds which typically have a 10-year life. However, and I make no apology, at some point our business is about retiring capital to shareholders. This imposes a ﬁnancial discipline from which PE portfolio companies beneﬁt and which some others in the industry have lacked. We continually evaluate whether we have an efﬁcient capital structure and if cheaper sources of capital are available. For the BWE companies we are still focused on building value, we want to grow these companies and believe that, if we build high performing North Sea companies with quality assets, then the exit will take care of itself.
PR: Is there a risk of a lack of potential buyers—given the retreat of European utilities from the upstream, the majors' gradual withdrawal and the US independents' focus on shale—if a sale was the preferred exit option? Might PE-to-PE sales, common in other industries but less so in E&P, emerge as a possible trend?
GS: I do not believe there will be a shortage of buyers for quality companies with long-life, low cost assets that are globally competitive. PE-to-PE sales, or secondaries, may happen but I think this is unlikely—although various PE backed companies may be part of a consolidation strategy. More likely, I think PE portfolios will be attractive to strategic acquirers looking for growth or will raise capital from public markets through IPO.