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Wellesley focuses on exploration

The new entrant wants to find new resources in mature areas

Wellesley Petroleum, a Norwegian continental shelf (NCS) independent backed by private equity (PE) firm Blue Water Energy is one of the area's most active current explorers. Its 2018 work plan encompasses nine explorations wells, four of which it will be operator.

Chris Elliott, previously deputy exploration director at Revus Energy, which was funded by PE firm 3i, as well as co-founder of Agora Oil and Gas, of which Rothschild investment fund RIT Capital Partners was a backer, is Wellesley's CEO. He recently spoke to Petroleum Economist editor-in-chief Peter Ramsay. Edited highlights follow.

PR: Is it fair to say that "PE in the North Sea" is almost a misleading term, given that the differences among PE-backed firms?

CE: "Private equity" can be a term bandied around, sometimes by those who don't entirely understand what it entails. It's just another mode of financing, one that is quite common in the oil and gas industry. Why is it more prominent now? I would turn the question in its head and ask, "Where would the UK and Norwegian basins be without PE funding?" The utilities have given up, North American independents have gone back home into shale and the majors are getting out.

PR: Some coverage of North Sea PE investment has suggested a focus on cutting costs and sweating assets, or even hinted at simply shuffling numbers or compromising safety. Should PE investment be seen in a more positive light?

CE: PE is an effective oil and gas E&P funding model. It is not all about spreadsheets. On compromising on safety, absolutely not; the UK and Norway have robust regulatory regimes. On brownfield developments, you are not going to make money without investing-even to maintain ageing fields, there is an opex commitment. And if you are looking to get more out of assets or find new resources through exploration, without investment it just is not going to happen.

PR: What is Wellesley's "value add" strategy?

CE: There were more companies like us a few years ago, but we are rarer now in that we are very exploration driven. We are focused on finding more resources in mature areas. Some firms are looking at IOR or squeezing more out of existing assets; the alternative is finding oil close to existing infrastructure. We want to explore for and monetise new oil and gas and we believe where we are exploring still holds lots of promise

PR: Is Wellesley intending to focus on the Greater Grosbeak area or expand its horizons?

CE: We are currently looking only at Norway, specifically within the Norwegian North Sea and mid-Norway. We have defined several core areas. What we were looking for was acreage that was prospective, but also accessible within an appropriate timeframe-obviously around Johan Sverdrup is prospective but it is not accessible, for example. The acreage also had to be commercially attractive, you need to be able to find an offtake route. There are also operational parameters; you will not find us doing HPHT, or deep-water mid-Norway or, not just for operational reasons, the Barents Sea.

PR: Given your past PE experiences, what are the advantages, and challenges, of this structure?

CE: On an operational level, the big PE advantage is that they are informed, engaged investors. You do not have the churn of retail investors or changing sell-side analysts, or the demands of keeping institutional investors happy. There is a discipline with private equity-capital needs to be used most effectively. You are given a certain amount of capital and you need to generate a certain multiple of return on it. Publicly-listed companies may be tempted to engage in certain projects less owing to a strong belief in their underlying value, but more to deliver a news flow for investor updates. It may sound a bit cynical, but a "good story" is often needed for the quarterly results. Private equity means you are entirely value-driven, and its decisions are quick.

Private equity also works more to a defined timeframe, less to a cycle, so it is easier to make counter-cyclical decisions. For example, in 2015, we were able to go exploring when no-one else really was. PE provides more stability across the cycles than alternative capital sources.

Among the biggest challenges is ensuring that your level of capitalisation matches the phase of the business. You may have capital for exploration, but, if you are successful, suddenly you can then be under-capitalised for the next phase. Based on past experience, when raising funds for Wellesley we ensured the equity line also allowed for some development of discovered resources, giving flexibility for the business in the success case. The incentives also need to be aligned, first to exploration but then also to development. If it is your first PE experience, the consequences of success can be difficult to predict.

PR: What do you think has brought the raft of PE money into the North Sea, and will it slow/halt if oil prices remain high?

CE: Inherently, Norway and the UK are good places to be if you have energy funds to place. So much money is going into US shale, there is an appetite for capital in conventional plays and not an abundance of supply. In the North Sea, the sub-surface risk is acceptable, even if you know that you are not going to find something enormous. There is a firm legal base in both the UK and Norway, which is not something you find everywhere in the world. And there are lots of commercial opportunities and operators out there-you can enter, you can grow a business and you have exit options. It is rich in opportunity.

In terms of future investment, PE demands capital discipline and a need for demonstrable returns, so if oil goes on another surge, that may be difficult. If there is an entry premium, which a public company might be prepared to pay, it is unlikely PE would win those bids, so they would be less competitive. But I think PE is here to stay in the UK and Norwegian basin, and, as soon as any oil price spike cools, I would expect the investment interest to return. The typical PE investment length is 5-7 years, in which period you would always expect an oil price cycle. You will always factor changes in the oil price and in the cost environment into the investment decision. And you can be flexible within that timeframe-for example, we expected to do exploration, we did not plan on becoming an operator. But when it became clear there were becoming less and less operators in Norway, we were able to shift our focus and adapt, but our thesis-that there are returns to be made from Norwegian exploration-remains valid throughout the cycle. We just reposition the business to accommodate the changing environment.

PR: Does Wellesley have any views on likely exit strategy/timescales for its PE investor?

CE: We have a relatively long cycle, so we are in no rush. We still have a good portion of our equity line undrawn and plenty of growing left to do. If you have built a good business, when the time comes, all options will be open, so we focus on building the company. As soon as you start focusing on an exit, you lose momentum, it is a fatal mistake.

PR: Utilities were notable buyers when PE investors of the '00s exited. Do you see an obvious "class" of  new buyer when the new wave of PE money wants to exit?

CE: These things tend to go in cycles — a certain class of investor enters a basin and then that class changes its mind and leaves again. There has been speculation about what growing Asian producers might do next. The IPO market is going to be available. And there is something you see in other industries, but less thus far in North Sea E&P, where larger PE houses with bigger capital pools and different return requirements come in as buyers of assets.

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