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Centrica to sell North Sea business

The UK utility is confident of interest in its stake in Spirit Energy E&P arm

Centrica will initiate a process shortly to sell its 69pc stake in Spirit Energy, its North Sea upstream business, with the goal of completing the sale by the end of 2020. The firm says it has engaged its largest minority partner in Spirit, German utility Stadtwerke Muenchen (SWM), and SWM is "fully aligned" with its sale plans.

"Naturally, I alerted [SWM] that we were entering a process," says Centrica CEO Iain Conn. "[The minority shareholders] have a right to stay in—we cannot drag them into [a sale]. But they can also tag along."

Conn says the dialogue so far has been constructive and their relationship is good. But ultimately it is up to decision makers such as the city of Munich, SWM's owner, to weigh up risks such as the uncertainty—should they remain Spirit investors—of a new partner.

SWM confirms that it will support Centrica during the sale process in a constructive manner. In the months to come, it will discuss with its shareholders whether to join Centrica in a potential divestment or to follow its current strategy, continuing its E&P activities within a changed Spirit ownership structure.

With or without its partners on board, Centrica is confident that the business will attract suitors. "There is a very free market in E&P. There has been consolidation, and I see no reason we cannot sell in a trade sale," says Conn.

"It is not often that a 50mn bl business presents itself, particularly one that can stand alone," adds Centrica CFO Chris O'Shea.

There have already been several chunky North Sea deals during 2019. Chrysaor, backed by private equity (PE) cash, bought the UK continental shelf (UKCS) assets of US independent ConocoPhillips. Ithaca, the North Sea arm of Israel's Delek, swooped for assets offered by Chevron. And, a joint venture between Oman's Petrogas and PE-backed Neo signed a deal for a portfolio of assets owned by Total. ExxonMobil has also put its remaining Norwegian continental shelf (NCS) business on the block.

The three buyers may have their hands full with the deals they have just made, making them less likely bidders for either Spirit in its entirety or Centrica's stake in it. But two other firms, petrochemicals heavyweight Ineos and UK independent Premier Oil, were previously linked with at least one of those asset packages, so they could be runners in the Spirit race.

Neptune targets the North Sea

Another PE-funded firm, Neptune Energy, could also be a contender. That Sam Laidlaw, Neptune's chairman, is a former Centrica CEO, is perhaps a lazy reason to put the firm in the frame. More compelling is that Neptune is gas-focused—as is the Spirit portfolio—and the firm's two major North Sea acquisitions so far were assets purchased from European utilities, France's Engie and Germany's VNG.

And, Neptune is the operator of the 7mn m³/d southern North Sea Cygnus field with a 38.75pc stake. The other 61.25pc stakeholder? Spirit.

Neptune has made two purchases within the last week, but both deals, in Indonesia and Germany, are relatively small-scale and would not preclude doing a larger North Sea transaction in the next 18 months. Also, Neptune has a portfolio across the UKCS and NCS, which might be a better fit with Spirit's cross-boundary asset slate than Ineos and Premier, which have no existing NCS footprint.

Centrica's Conn denies that a decision to sell out of E&P represents a major change in strategy for the firm. "In 2015, we took a decision to deprioritise E&P," he says, but retain the business for cashflow and other reasons. "Did we have the capability to separate from E&P and get to where we wanted to be as a customer focused business? We could not do that back in 2015," he says.

Centrica will retain 100pc ownership of the North Sea Rough field—a former storage facility owned by subsidiary Centrica Storage that has been converted into a producing field-and focus on maximising value from Rough.

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