Chrysaor Expands UK Output with Conoco Deal (Update)

(Adds analyst's comment at end)

Privately held Chrysaor Holdings is to pay $2.675bn for ConocoPhillips’ UK assets with effect from January 1, 2018, it said April 18. The deal almost doubles its reserves, and brings its own forecast production this year to above 185,000 barrels of oil equivalent (boe)/day, making it one of the biggest companies in the UK North Sea, it said. Last year, ConocoPhillips' assets produced 72,000 boe/d, while Chrysaor expects to produce more this year from its own assets.

Chrysaor CEO Phil Kirk said the acquisition reflects our continuing belief that the UK North Sea has material future potential for oil and gas production. These assets complement our existing operations and, with operating costs at less than $15/barrel across the enlarged group, our portfolio delivers high margins and significant positive cash flow.

"In the Central North Sea, we will own a range of operated hub infrastructure providing access points in an area with the largest undeveloped contingent and prospective oil and gas resource base in the UK. In the West of Shetland region, we have secured long life cashflows from two world-class fields operated by BP. Chrysaor's West of Shetland position also provides exposure to a developing region with significant interest and momentum from major oil companies. We will seek to build on that through the acquisition of additional interests and acreage."

The US major will retain its London-based commercial trading business and its interest in and operatorship of the Teesside oil terminal when the deal completes, which is expected later this year, subject to the usual approvals.

The assets include two new operated hubs in the UK Central North Sea: Britannia and J-Block. Britannia gas flows to St Fergus in Scotland while the J-Block gas flows to Teesside. In addition to the associated high-quality oil and gas reserve base, these hubs have access to significant contingent resource potential providing near field opportunities for production growth and reserve replacement, Chrysaor said. 

The third material acquired asset is an interest in the world class Clair Field area in the highly prospective West of Shetland region. This interest and the Clair field's prospects for future additional development complement Chrysaor's existing West of Shetland position in the Schiehallion field.

Chrysaor intends to become “one of Europe's leading independent, full cycle exploration and production companies," it said. As at the effective date, ConocoPhillips UK assets contain over 280mn boe proved and probable ("2P") oil and gas reserves with a further significant contingent resource base. Chrysaor's pro forma 2P reserves total over 600mn boe, after the deal is taken into account.

Chrysaor will assume responsibility for an ongoing decommissioning programme on ConocoPhillips' end-of-life assets, which is very well advanced and proceeding in accordance with ConocoPhillips' plans. Chrysaor plans to have materially completed execution of this programme by 2022, and values decommissioning competency as a long-term commercial opportunity and enabler in the UK. 

Chrysaor is backed by Harbour Energy, a permanent capital energy investment company managed by EIG Global Energy Partners ("EIG''). Chrysaor will fund this acquisition from existing cash resources and an upsized $3bn reserve-based lending debt facility underwritten by Bank of Montreal, BNP Paribas, DNB Bank, and ING Bank.

Kirk said ConocoPhillips' "highly competent workforce" would work with it. "We will have the skills and resources of a major independent oil and gas company and the drive to help ensure the basin's potential is fully realised."

Chrysaor chair Linda Cook said Chrysaor would be able to bring “the strategy and capital required for reinvestment and growth. The outcome is a reinvigorated oil and gas sector, an extension of the producing life of existing fields and the maximisation of hydrocarbon resource recovery."

"Maximising the economic recovery" is the watchword of the UK regulatory authorities, which is to be achieved through the principle of "the right assets in the right hands." New entrants can often appraise assets with a fresh eye, forge new relationships more easily and have lower materiality thressholds than the previous owners.

Vertical take-off for Chrysaor: Wood Mackenzie

Saying the deal will make Chrysaor the top producer in the UK in 2019, Wood Mackenzie described Chrysaor's growth as "incredible." It had been a relatively small producer before it acquired a batch of assets from Shell.

Chrysaor has already shown it is willing to take older assets and invest to increase production with its efforts at the UK Greater Armada Area, which was due to be decommissioned before Chrysaor acquired it from Shell in 2018.

“It could take a similar approach here, particularly with it now becoming operator at the Britannia and J-Area hubs in the Central North Sea, which have potential for further growth,”  Woodmac said.

And from the seller's perspective, Woodmac pointed out, there are lower cost opportunities elsewhere in the world, particularly in the US. "Among such a wider global portfolio, UK fields would have struggled to compete for capital," Woodmac said.