Gas pivot draws Premier lender’s fire
A switch to the perceived cleaner fossil fuel has been a popular narrative for E&P firms but a major creditor has raised price concerns
A row has broken out between UK independent Premier Oil and the largest holder of its debt, Hong Kong hedge fund Asia Research and Capital Management (ARCM) over the producer’s plans to push back repayment of its bonds to help fund two new North Sea acquisitions.
And among ARCM’s concerns is that the proposed deals will increase Premier’s exposure to the UK gas market, where both spot and forward prices are currently low. Its latest public comment on the issue even bears a negatively charged title—Premier Oil becoming “Premier Gas”.
That a pivot to gas is not positive is an interesting development that highlights a lack of certainty over the future shape of the energy industry. For many E&P firms, such as growing North Sea and international producer Neptune Energy, a gas-heavy portfolio has been something to trumpet, based on assumed demand growth as gas plays at least a bridge fuel role in the energy transition. European majors BP, Shell and Total are all prioritising gas and LNG growth over oil.
Cynics have wondered whether ARCM’s vocal dissent could be linked to the 16.85pc short stake it is has built up in Premier
Clearly, the sustainability of their businesses is on a majority of upstream companies’ radars. Sweden’s Lundin Petroleum, despite being primarily a producer of crude, revealed in late January its strategy to target carbon neutrality by 2030 and proposed changing its name to the less oil-redolent Lundin Energy.
But its strategy was based on reducing the carbon intensity of its production, full electrification of offshore assets and power-from-shore, and offsets through carbon capture; gas did not warrant a mention. And there are growing fears that the EU's technical expert group on sustainable finance will rule in March that, at least unconstrained, gas as a power generation fuel cannot be considered a sustainable investment, amid a growing anti-gas backlash in Brussels.
Premier is proposing to buy stakes, of 50-100pc depending on the individual asset, in the Andrew Area and 27.5pc of the Shearwater field from BP for $625mn and increase its share in its operated Tolmount Area complex from 50pc to 75pc by buying half of South Korea-owned producer Dana’s current 50pc holding, paying $191mn plus contingent payments of up to $55mn. It also wants to extend its existing credit facilities to 30 November 2023.
The deal has been largely well-received, with Premier’s share price jumping from just over £1/share to a high of almost £1.20/share by mid-January. But Premier’s $2.4bn debt pile has been a concern for some time and the firm is taking steps to reduce its gearing by selling its 25pc non-operated stake in the Zama discovery in Mexico and farming down its 60pc operated stake in the Sea Lion prospect in the Falkland Islands.
FIG 1: NBP forward prices crumble in final quarter of 2019 | Source: Argus Media
Its proposal to extend debt maturities to help fund the new deal has not caused too many ripples with its bondholders, with the firm saying in mid-January that over 85pc of super senior commitments and 75pc of senior commitments have agreed to vote in favour of its plans in February creditor meetings, enough to give it the green light to proceed. But ARCM, Premier’s largest single lender with $455mn due for May 2021 repayment, is a loud dissenting voice.
Cynics have wondered whether ARCM’s vocal dissent could be linked to the 16.85pc short stake it is has built up in Premier, more than double, in percentage terms by a single actor, the next largest bet against a firm disclosed to the UK’s Financial Conduct Authority (FCA)—particularly as the fund was almost three years late in disclosing the short. On the other hand, the bet is still worth less than $150mn based on Premier’s late January market capitalisation, dwarfed by ARCM’s exposure to Premier debt. The sheen has come off the firm’s share price slightly in recent weeks, sliding back to just over £1.05/share, although the impact of ARCM’s campaign on this is debatable among other macro factors.
ARCM has a number of questions about the deal, including cost of debt, increased decommissioning liabilities, inability to access the reserve based lending and free cash flow assumptions.
But it specifically asks whether net asset values (NAVs) for Shearwater and Tolmount were calculated based on realistic assumptions. The fund’s concern is that falls in the NBP calendar year 2020 and calendar year 2021 forward contracts from c.50p/th at the end of the third quarter to expire at less than 32.5p-th at end-of-year and to sub-36.5p/th by late January respectively (see Figure 1) have not been accounted for.
$2.4bn Premier’s debt
“We believe that these acquisitions would likely transition Premier to becoming primarily a gas producer by 2021-2022 with significant exposure to the UK gas market. We are concerned about the supply/demand dynamics of the UK gas market and the potential impact on the Company’s cash flow generation capacity,” says ARCM.
The prospect of weak European market prices discouraging investor and lender appetite in gas-heavy portfolios could have an impact on one of the largest North Sea asset books currently on the block—UK utility Centrica’s 69pc stake in Spirt Energy, which also leans towards gas. A smaller gas-focused portfolio, including a potentially prized 20pc stake in Total’s West of Shetland Laggan field, is also available for sale from fellow utility SSE.
The appetite for North Sea deals does not, though, seem particularly deflated even in depressed gas price environment and with Brent dipping below $60/bl. Aside from Premier’s purchase, fellow UK independent Jersey Oil and Gas has agreed to take a 70pc stake in the Verbier oil discovery from Norway’s Equinor, while in the final quarter of last year Norwegian investors snapped up the long-offered UK assets of bankrupt Houston producer Endeavour. The province’s biggest available prize, though, remains Siccar Point Energy, the West of Shetland-focused, private equity-backed E&P firm that initiated sale proceedings in the second half of 2019, according to documents seen by Petroleum Economist.