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Kerogen talks up dividend distributions

Private equity firm says ongoing return of capital to investors could avert a potential North Sea exit crunch

Kerogen Capital’s North Sea investments are “patient capital” with a 10-year lifecycle that offer “quite a lot of flexibility to execute the strategy and achieve milestones”, the private equity (PE) company’s vice-president for investment and portfolio management Natalia Simakina told the World Energy Capital Assembly (Weca) in London on Tuesday. 

The North Sea asset market has been buoyant of late. Alongside publicly and privately-owned firms as well as companies backed by capital from trading houses—both those with existing presences and new entrants—a number of buyers have been operators backed by PE cash, with the majority of these PE investments made within a few years of each other. 

“The recipe is there,” Richard Cavilli, managing director at bank Wells Fargo, told Weca. “There are still quality assets coming to market, there are willing sellers and there are buyers, including both established and new PE players. The challenge is the 2020-21 exit horizon for many of these PE investments and from where the new capital is going to come.” 

But Simakina is confident that there will be options for exit, or even for extending expected timescales. “There are a number of ways to return cash to investors,” she says. “An IPO is perhaps a suitable route for larger portfolios, while a trade sale might be more suitable and preferred for a PE investor as it would allow a full exit, rather than it likely having to retain a stake after an IPO.” 

Another option is to return investors’ cash through dividend distribution. “With some projects, you can generate significant returns and pay back investors very quickly,” she says. “On a longer-term horizon, a PE fund can better aim to link its exit with certain inflection points for a portfolio, such as a successful appraisal campaign, a project sanctioning or bringing a new development on stream.” 

That search for an inflection point may attract attention, given that Zennor Petroleum, Kerogen’s 100pc-owned UK continental shelf (UKCS) operator, announced the successful completion of its 2019 subsea installation campaign at the start of October, and less than a month later media reports emerged suggesting that Kerogen was exploring a sale of Zennor. The firm sold around a quarter of its holding in listed UKCS producer Hurricane Energy in July for just over £50mn, although it stressed continuing support for Hurricane as a major shareholder. 

Simakina stresses that PE is not simply a provider of capital, it can also offer strategic support

But “when managing your investment and planning an exit, you should also be prepared to hold onto assets for longer, ensuring they are funded and generating returns”, says Simakina. 

While PE has played an important role in providing the North Sea with funding, particularly when equity markets have been closed to many oil and gas firms, Simakina stresses that PE is not simply a provider of capital. It can offer strategic support, working closely with the management teams it supports and putting the right incentives in place. The Kerogen model is to partner with talented management teams—which may also mean challenging those teams—ensuring strong alignment between management and owner, says Simakina. 

Should firms face challenges in raising additional capital, Kerogen aims to leverage its global network to secure more funding. It also promises to facilitate operational excellence, drive down costs and unlock additional value, she continues. For example, two firms in which Kerogen had investment were able to go to market together to secure a rig; the longer timescale for which they were then able to commit helped achieve a materially lower price than if each had contracted separately. 

The firm is also committed to advancing digitalisation within its investee companies. Zennor used innovative seismic reprocessing to de-risk Finlaggan, while its Norwegian vehicle Pandion Energy is in the process of building a platform to make subsurface data machine readable.      

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