An established energy sector trend in recent years has seen major oil and gas producers increasingly turning their backs on the North Sea.
During the last year alone ConocoPhilips, Chevron and Exxon have sold assets in both the British North Sea and the Norwegian North Sea, with Exxon also expected to try and sell its British North Sea assets this year.
Others to have sold North Sea assets during recent years include Royal Dutch Shell.
The logic behind such sales is that the majors see better opportunities elsewhere.
The North Sea is one of the world’s most mature oil and gas resources and the most accessible reserves have already been extracted. What remains will be harder and more costly to extract and, moreover, is not extractable in the kind of quantity the majors seek.
This has, however, created opportunities for smaller players.
These include private equity-backed operators such as Neptune Energy, founded and led by Sam Laidlaw, the former Centrica chief executive, and Chrysaor, whose acquisition of assets from Shell in 2017 immediately made it one of the biggest producers in the North Sea.
The attraction for such operators is that many are specialists able to exploit the technological advances that are improving extraction techniques.
BP, like its major rivals, are seeking new opportunities
Their relative smallness means they can often make decisions more rapidly than some of the larger operators – which have a wealth of opportunities to exploit around the world and which, accordingly, must spread their financial resources widely.
Government has also played its part, with the UK Oil & Gas Authority having made it easier in recent years for smaller producers to acquire licences, which has led to production increasing by a sixth during the last five years.
And, with an estimated 1.5 billion barrels of oil (or oil equivalent) still available for extraction, smaller players still have plenty to go for.
The process took another step today as BP announced it was selling two North Sea assets to the smaller Premier Oil for $625m (£476m) – the Andrew Area project 140 miles to the north of Aberdeen and a 27.5% stake in the Shearwater field, 140 miles to the northeast of Aberdeen, which is operated by Shell.
Separately, Premier Oil is also buying an additional 25% interest in the Tolmount area in the southern British North Sea, where it has recently made a significant gas discovery.
Tony Durrant, Premier’s chief executive, said that, taken together, the acquisitions would take its output to more than 100,000 barrels of oil equivalent per day and predicted that it would generate $1bn of free cash flow by the end of 2023.
He added: “These acquisitions are materially value accretive for Premier and are in line with our stated strategy of acquiring cash generative assets in the UK North Sea.
“We look forward to realising the significant long-term potential of the Andrew and Shearwater assets through production optimisation, incremental developments and field life extension projects.
The North Sea has an estimated 1.5 billion barrels of oil available for extraction
“We are also pleased to have consolidated our interest in the high return Tolmount development where we see material upside.”
Mr Durrant, a former accountant and investment banker who joined Premier Oil in 2005 as finance director, said the cash flow generated from the acquired assets would speed up Premier’s ability to pay down its debts.
The news has gone down well with investors. Shares of Premier Oil shot up by 19% at one point on Tuesday.
Alex Smith, oil and gas analyst at stockbroker Investec, said: “The deal significantly enhances Premier’s position in the UK and will allow the company to accelerate utilisation of its $4.2bn of tax losses, boosting free cash flow and positively impacting the valuation of the business.”
But that may not be the end of the story. Premier is funding the acquisitions by selling $500m worth of new shares to investors and, if required, by using a bridging loan of $300m.
The company also announced refinancing proposals that extend its existing credit facilities to November 2023 – providing it with a further two and a half years of breathing space. The company currently has debts of $2bn.
This has antagonised Asia Research and Capital Management (ARCM), a Hong Kong-based hedge fund, which holds a significant short position in Premier – in other words, it is betting on a fall in the company’s share price – and which also owns 15% of Premier’s debt, making it the company’s biggest single creditor.
It said the deals announced today would “only serve to increase risk for stakeholders” and vowed to “take all steps” to oppose them.
It said the refinancing proposals appeared to be an acknowledgement from Premier that it could not repay its outstanding debt in accordance with the current terms and said the priority for the company’s management should be to meet its existing debts when they become payable.
ARCM also expressed reservations about the strategic logic of today’s deals.
It added: “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. The UK and European gas markets are likely [to be] entering a multi-year period of excess supply due to strong regional gas production and US liquefied natural gas and Russian imports.”
Premier pointed out that 40 out of its 41 creditors have given the refinancing plan their blessing.
It does seem likely, though, that some shareholders will have questions following the announcement.
Sam Wahab, head of oil and gas research at resources specialist SP Angel, said he thought it would focus attention on the company’s finances.
He added: “Whilst we believe that the proposed acquisitions are materially value accretive to Premier and are in line with the company’s stated strategy of acquiring cash generative assets in the UK North Sea, they do come at a considerable cost.
“However, we do see the considerable long-term production and appraisal upside of these assets, with the cash flow having the potential to accelerate the deleveraging of Premier’s balance sheet.”
It will be fascinating to see how this plays out and what ARCM will do next.
Those concerned about the future of the North Sea oil and gas industry, though, will take comfort from the fact that a company like Premier still has faith in it for the longer term.
Recent Comments