Upstream pauses for breath [NGW Magazine]
The year has got off to a flying start for takeovers as the Norwegian DNO bought Faroe Petroleum despite its protest and more happily Indonesian Medco bought Ophir. The Faroe board called the low bid ‘opportunistic’ suggesting that it was somehow not sporting to pick a low point in the market. Medco paid $512mn using cash and a prearranged loan from Standard Chartered, a deal subject to approvals.
Both buyers are hoping the new assets will increase the value of their own. Faroe was active in the Norwegian upstream, which is where DNO is based; but it had a run of bad luck with wells in its core area as the takeover was progressing.
Ophir, relieved of the burdensome Fortuna LNG project by the government of Equatorial Guinea, is now weighted towards southeast Asia, where Medco is based. Ophir had bought Australian Santos’ assets there.
Faroe went for a premium of 30% to the market while Ophir went for 66%. Once the government of Equatorial Guinea had removed the Fortuna licence and so halted the LNG project, the uncertainty relating to that asset disappeared. That enabled Medco to focus on the synergies that resided in the southeast Asian part of the business. The Ophir share price was still depressed but a major headache for Medco had gone, enabling the deal to go ahead at a higher price than Medco had wanted to pay.
And in a smaller deal, privately backed Rockrose bought Marathon’s remaining UK oil and gas producing and transporting assets (see box).
Other deals might not be far off: French Perenco, following some approaches from other companies, has appointed an adviser Tudor, Pickering & Holt to see what its UK southern gas basin assets would be worth to a buyer. It had bought them from BP along with terminal capacity at Bacton some years ago, but it is not necessarily going to sell them.
On the other hand, Conoco and Chevron have both so far failed to find buyers for their UK upstream assets, and it is questionable how much capital there is for multi-billion dollar deals, given the continuing volatility of the oil price.
Lawyers at the London office of US energy specialist firm Bracewell commented on the upstream deal-making last year at a press briefing in February. They had been surprised that Ineos paid for exclusivity in its talks to buy Conoco assets as they had never seen that in North Sea transactions; but those talks ended with no deal.
Ineos is both an energy company and a buyer of feedstock for its petrochemicals plants. So its reasons for buying upstream assets might not be the same as for a straightforward oil producer or trader. Its plans to invest heavily in the critical Forties pipeline system might however suggest more purchases are on the way (see box).
Bracewell lead partner Jason Fox explained that a producer typically needs one of three distinct kinds of debt: to cover normal running costs upstream; to cover a specific event such as a takeover; and to refinance because better terms have become available. Borrowers can push out maturities or otherwise improve on old agreements with new lenders, he said. Siccar Point for example bought the OMV North Sea assets in early 2017 and less than two years later it had refinanced.
Last year the partners saw plenty of activity in all of these areas as the debt market had recovered from the downturn. Crude averaged $71/barrel, compared with $41 in 2016 and they believe the market is happiest when oil is between $60/b and $80/b. There are several deep-sea projects hoping to reach close this year and which will need financing, including the Cairn/Woodside field off Senegal and Premier Oil’s Sea Lion field near the Falklands.
But the drop in the oil price late last year has spooked the market, they said. People want more stability than there is at present and it might take three months or more of prices in that range before they feel comfortable about parting with more money for more production.
The partners said that last year it had been the US independent oil and gas producers that were the world’s biggest bond issuers, with a fifth of the transactions involving assets in the Permian. This was reflected in the number of US deals, but the level of activity began to tail off in the fourth quarter in the US. And that has now spread to London too this quarter. There is a different feel to the market, according to Fox.
Mostly it is private equity that is involved now in takeovers. The biggest was Neptune’s takeover of Engie’s upstream assets in May last year, giving it UK and Norwegian production. Bracewell had acted for Neptune. Another upstream asset buyer was Verus Petroleum. But there has been nothing to compare with the Chrysaor-Shell deal of last year.
This year there is less visibility on the transaction financing, raising the question: Is it the end of the rebound after 2015, or is it going to be full steam ahead?
Oliver Irwin said that the US companies Anardarko and ExxonMobil are leading the development of two separate large-scale LNG projects in Mozambique, both of which are reportedly looking to achieve financial close in 2019.
These financings will be complicated by Mozambique’s on-going sovereign debt issues, he said. As NGW was going to press, Mozambique had launched a claim against Credit Suisse for its part in a $2bn secret bond issue. That suggests a long-running legal battle.
Given the huge capital cost of these projects, both sponsors will look to utilise Export Credit Agencies (ECAs) to optimise their finance plans, as ECAs help to reduce the cost of financing through comparatively low interest rates. It will be interesting to see whether there is sufficient capacity in the ECA market to bring both of these mega-projects to financial close in the same year, he said.
Traders are also moving further upstream. They are taking equity stakes and assisting with the project financing in order to be able to participate in deals to secure the offtake volumes. They are getting deeper into the industry and that is expected to continue, the partners said.
UK North Sea still attracts investment
Independent producer RockRose is to buy all of US Marathon Oil's UK assets in a reverse takeover for about $140mn subject to customary adjustments. RockRose expects to pay for it from its existing resources and facilities.
Marathon holds 37%-40% operated interests in fields in the late-life Greater Brae Area, including a share of the St Fergus gas terminal and other revenue-generating assets; 28% of the BP-operated Foinaven Field unit; and a 47% interest in Foinaven East. The deal is backdated to January 1, 2019 and Marathon's onshore and offshore staff will transfer to RockRose on completion.
The deal is expected to add some 35mn barrels of oil equivalent (boe) of proven plus probable reserves or 21mn boe of proven reserves. RockRose said: "This gives the company a net 2P position on completion in excess of 70mn and 2P+2C of 86mn boe." With output from the assets expected at 13,000 boe/d in 2019, RockRose should produce about 24,000 boe/d this year in total.
RockRose executive chairman Andrew Austin said the deal marks "a major step change in the group's reserves and production profile. Given the quality of these assets the board's view is this is a good opportunity to make the transition to the role of operator." Before founding RockRose, Austin was the CEO of Igas from 2007-15.
Offshore lobby group Oil & Gas UK said the deal was "a further signal of confidence in the industry – new entrants bring fresh ambition for investment, reinvigorating activity in existing fields and pursuing new opportunities. The multi-million pound transaction is a fitting illustration of how the hard work to improve the attractiveness of the UK Continental Shelf is enabling a diverse range of investors to play into the basin.
“While we cannot comment on the commercial decisions of our members, we commend the contribution Marathon Oil has made to the success story of the UK North Sea. The sale, and indeed purchase of assets, is a natural part of the commercial life of the UKCS and presents new opportunities to maximise recovery," said upstream policy director Mike Tholen.
Tholen also welcomed the announcement that the new owner of the Forties oil and gas pipeline, petrochemicals giant Ineos, was planning to invest £500mn ($665mn) on refurbishing the line, extending its life for at least another two decades. This fits with the government strategy to maximise the economic recovery of the continental shelf, a province whose gas output has been in decline since 2000.
He said: “The modernisation programme will provide operators with a greater degree of certainty when making investment decisions about the future development plans for their assets."
Crunching the numbers
A total of 305 deals with a combined value of $47.9bn were registered in the upstream oil and gas industry in Q4 2018, according to analysts GlobalData.
Of the total, $27.3bn was registered in mergers and acquisitions (M&A) which it said was “a significant decrease” of 41% from the $46.2bn announced in Q3 2018. Of that, 120 M&A deals, with a combined value of $7.9bn, were recorded in the conventional segment, and 53 deals, with a combined value of $19.4bn, in the unconventional segment.
A total value of $20.6bn of capital raising was announced in the upstream sector, down 43% from the $36bn announced in the previous quarter.
Of the total M&A deals, 104, with a combined value of $14.4bn, were domestic acquisitions and the remaining 69, with a combined value of $12.9bn, were cross-border. A quarter-on-quarter comparison shows domestic deals were about a third of their value in Q3 2018 ($39.1bn) while cross-border deals jumped 82% from $7.1bn in Q3 2018.
Capital raising, through debt offerings almost halved in deal value, recording $16.7bn in Q4 2018, compared with $31.9bn in Q3 2018. The number of deals almost halved, as well.
Capital raising, through equity offerings was up a third in Q4 with a combined value of $3.2bn, compared with $2.4bn in Q3. There were 11 private equity/venture capital deals, with a combined value of $708.3mn, recorded in the upstream industry in Q4 2018, compared with 14 deals, with a combined value of $1.7bn, in Q3 2018.