With the INEOS deal completing I cast my mind back to 2014. It was rumoured then that over 75% of North Sea assets were for sale, but questions around ability to shoulder decommissioning liabilities and inability to agree on an oil price stifled deal making. Prices are depressed but major operators wish to raise cash and stifle outflows the interest for private equity investment is increasing. Managers such as Bluewater Energy [Link], Riverstone[Link] and many others are said to be considering deals.
The Financial times reports that this month’s redetermination of reserves in relation to asset-based lending is unlikely to cause havoc [Link] but it may accelerate deal making.
I recently asked a senior partner at a well-known advisory firm what he thought would be different with private equity arriving. He pointed out that the PE players backed management teams – such as Siccar Point, Fairfield and others. He thought that these management teams might be surprised about the amount of data and “proof-points” that the PE backers would require, he also reflected that some management teams would be used to working within large corporates with in-house teams they can mobilise. They will now have to find providers they can trust and who are credible in-front of investors.
The known model of exploration and farm-down during development is now giving way to a new world where valuations are determined using a DCF model and a decommissioning cost. There are no proven rules-of-thumb here now. This means that investors are more cautious doing deals in this context than before. It does appear odd that in a business known for taking investment risk on exploration there is almost no appetite for assuming risk or unknown in this investment stage.
Another advisor at a large accountancy firm noted that very few companies operating in the North Sea were likely to make a profit any time soon (not only because of tough trading conditions, but also because they have various offsets and other tax-shields). This means that decommissioning offsets and other tax-carry forwards are of little interest to them – this might suggest that either a change in the rules is required or that sale to a profitable entity could provide differential value and hence facilitate win-win deals.
Shell recently announced its opinion that oil prices may spike upwards soon [Link], that may be music to the ears of financial buyers. If this is the start of deal-making season it will be interesting to see who the players looking at acquiring assets are. Will it be PE backed new Co’s, will it be established late-life operators like Enquest, or will assets be acquired into existing profitable entities to enable tax optimisation.
