Mol buys time with ACG deal
The Hungarian energy firm’s Azeri acquisition gives it breathing space as it implements its 2030 strategy
Mol’s $1.57bn acquisition of Chevron’s 9.57pc stake in the BP-operated Azeri-Chirag-Gunashli (ACG) field in the Azeri sector of the Caspian Sea, along with a stake in the Baku-Tbilisi-Ceyhan oil pipeline, is key to giving the firm cashflow to fund its wider transformation set out in its 2030 strategy, the firm’s upstream executive vice-president Berislav Gaso tells Petroleum Economist.
“People might arguably ask all sorts of questions on why you are investing in a dying industry. Why would you take the long exposure that a 30-year concession bring?” says Gaso. But the acquisition “ticks all the boxes” for Mol.
It offers “longevity, reserve replacement, long-term plateau production, a world-class operator and a very low-cost break-even in a very low oil price environment”, the Mol upstream chief adds. “There are lots of upside in the asset that can still be extracted, and it sits in the right country—Azerbaijan is extremely investor-friendly when it comes to energy, it has a very stable fiscal regime and a very friendly attitude towards oil and gas.”
“As an industry,
no‑one is yet
And companies “need those cash flows from upstream in order to finance the energy transition”, says Gaso. “That is why we believe it remains important to find opportunities to invest smartly in the E&P industry, because a large part of global energy demand is still covered by “Azerbaijan is extremely investor friendly when it comes to energy” . If you got rid of all the oil and gas right away, you would probably be able to provide electricity only for four hours a day.”
Importantly, the ACG barrels have “come, in Mol’s view “at a decent price” and have a healthy lifespan. “[The deal] puts us in a comfortable position,” says Gaso. “It is a large step for a company of our size; it takes away the pressure of continuous reserve replacement. We can now be really opportunistic in our outlook—we have bought time, and we can be comfortable in really searching out the next equally good deal. It may, of course, be smaller in size than the Azeri one, but we are not in a rush now.”
$19/bl - Mol’s 2019 FCF
As a Europe-based energy firm, Mol is certainly aware of an increasing focus on ESG issues from investors in the oil and gas sector. On the other hand, while the awareness is growing, “as an industry, noone is yet compliant with achieving the Paris goals”, says Gaso. “It will require a lot of hard and continuous work; we at Mol have started major transformational programmes.
“In the upstream sector, you could perhaps draw a parallel with the tobacco industry—particularly in Europe declared a dying industry in the past. But if you look at the cash returns of tobacco compared to many of the other FTSE member firms, they have continuously outperformed. Similarly, the cash that upstream generates can be used to finance the transformation of energy firms.”
At board level. Mol has started work on an ESG framework that it will follow and that will complement its 2030 strategy. “We have moved beyond the point of awareness to discussing how to create a plan that is actionable,” says Gaso. Mol feels that it is at a similar point in this journey as the majority of its peers; “I have not seen many truly actionable roadmaps out there yet.”
One oft-discussed step that the upstream sector could take in its ESG investment response is coming up with uniform rules by which all projects could report comparable measures of CO₂/bl in the production lifecycle. So, did Mol audit ACG’s carbon footprint as part of its deal due diligence? “No,” concedes Gaso, “the honest answer is we did not look at that in particular, although we obviously looked at a large number of things. But clearly we will have to look at that more in the future.”
The ACG deal is another example of majors divesting non-core assets to concentrate on global mega-projects and, with the exception of Total, on US shale— and Gaso believes it is a logical strategy. “Capital allocation is usually made centrally, and it is not a democratic process. The lowest break-evens and the fastest cash returns are always going to be the priority.”
This opens up opportunities for midsized players such as Mol. “But the question,” says Gaso, “who is ready to take on those opportunities—because that becomes a question of having the balance sheet, of being prepared and having the ability to execute deals of [ACG’s] size. This is not a small deal for mid-sized players.”
When the deal completes, half of Mol’s production will be in its core central and eastern European (CEE) region, and half outside. But the firm is expecting its non-CEE output to increase that share going forward, not least for geological reasons.
“I tell my team that I can manage many things such as costs, partners, governments and relationships, but I cannot manage Mother Nature,” Gaso jokes. “What I mean by that is that fields decline, that is the nature of our industry. Unfortunately, that is where my managerial skills are constrained.”
Mol’s CEE production is not declining rapidly, he stresses, but over a 15-year horizon output will fall and international assets will play a larger role in the firm’s supply mix. Further acquisitions outside of CEE could augment the trend, but Mol will not rush this process.
“I do not feel that I am at all in an imminent rush [after doing the ACG deal],” says Gaso. “That is important— the worst investment decisions are usually made either when you are in a rush or when you have too much money. Both can be equally dangerous.”
Mol will be on the outlook to add further production, but Gaso attaches greater importance to sustaining the cash generating ability of the firm’s upstream division. Year-to-date, the unit free cash flow (FCF) on every barrel Mol has lifted is $19, a “remarkable number in today’s oil price environment”. That FCF is achieved on unit opex of $6/bl, a number that adding ACG to the portfolio will bring even lower, says Gaso.
“For me, Norway is
more like hunting
Any additional reserves that Mol will look to add “would have to come in at the high end of that unit FCF”. “So, whether I maintain upstream profitability by adding 5,000bl/d or 50,000bl/d, it is frankly a less relevant question for me. And, trust me, I really love barrels!” Gaso jokes.
Nor does growth have to come simply from M&A activity. “There is a debate about the value of an exploration portfolio in a $30/bl oil price environment,” concedes Gaso. “It is zero, to be honest. If your unit finding costs are $7-10/bl, in a $30-40/bl price environment you can transact risked reserves at below your unit finding costs, so why should you explore? “But this is a short-term view. You have to do both [organic and inorganic reserve replacement]. I cannot exclude M&A but, if it does take place, I know where it will not take place. That is where strategy starts, knowing where you are not going.
“We are not going to do shale or go to the US, we are not going to Latin America, Asia or Australia. Beyond a strong balance sheet, there would be nothing else we would be bringing to the table. And I do not believe in partnerships based only on a financial contribution. There has to be technical, commercial or geographical overlap.”
That leaves Mol eyeing possible opportunities on the UK and Norwegian continental shelves (UKCS and NCS), but also in the slightly less fashionable province of Continental Europe onshore. The driver for this, says Gaso, is that the firm is a “very qualified and efficient conventional onshore operator of mature fields”.
“We do a much better job of it than any of the majors, or indeed many other companies. You have to look at exploiting what you are good at. We are not experts in deepwater offshore, so we leave the bigger firms to take the lead on that and make sure we team up with the right partner, like BP in [the ACG] case.”
North Sea ambitions
Mol’s other potential growth areas are the Middle East and the CIS, with operations in Russia and Kazakhstan beyond its expanded Azeri footprint.
Mol has had a challenging year with a largely disappointing exploration campaign on the NCS. But Gaso, waiting for the results of another wildcat as he spoke to Petroleum Economist, is undeterred. Norway’s policy of returning 78pc of unsuccessful exploration costs is one factor that encourages him to keep drilling.
But another is the size of potential prizes. “For me, Norway is more like hunting elephants than smaller animals. And you have to shoot often enough to hit a target,” says Gaso. Mol also entered Norway (in a 2015 acquisition of independent Ithaca) in an anti-cyclical manner, “when everyone argued that the Norwegian exploration business model had disappeared”.
The deal gave it access to a team of 20+ experts with over 500 years combined experience of NCS exploration.
The firm now has interests in c.20 NCS blocks, of which around half are operated, and it is working with some of Norway’s largest players such as Equinor, DNO and Aker BP. “It gives me reassurance that the concepts that my team are pushing are being recognised by world-class players,” says Gaso, while admitting that, if the current exploration strategy has another unsuccessful 12 months, Mol may have to review.
He is also hopeful that the famed stability of Norway’s fiscal regime is not a serious risk of imminent change, despite increasing political support for anti-hydrocarbon policies in the Nordic nation.
“They had those debates in Norwegian politics a year ago, but they are pretty much shut down. I do not expect any change there,” says the Mol upstream chief.
On the UKCS, Mol’s key Catcher asset is “performing very nicely”—with “fantastic uptime” for its floating production, storage and offloading (FPSO) vessel above what Mol initially thought it would be capable of achieving—and with significant further upside to the asset. And it has just sanctioned a new pipeline that should solve a waxing issue that has limited output from its Scolty/Crathes development.
“I really like to have the UK in my portfolio,” says Gaso, strongly contradicting past reports that Mol could consider a UKCS exit. “There is no fiscal regime on earth that is so sensitive to oil price, and you want to have an element [in the portfolio] that swings with oil price exposure. UK barrels are really high margin when oil goes up. I still believe there is opportunity in the UK and there are no plans to divest the UK business.”