BRENT OILFIELDS BUYING
Deals for North Sea oilfields — which have been held back by the plummeting price of Brent crude — could soon come back on stream, as a new tax cut helps to draw in private equity investors.
Last week's UK Budget measure to reduce the rate of "supplementary" tax on North Sea profits is a move that "clearly helps" North Sea mergers and acquisitions, according to one senior private equity executive — and bankers believe there are now buyers for a number of assets that are being put up for sale.
Before the halving of the Brent crude price, from $115 a barrel last summer to $55 now, a wave of North Sea mergers and acquisitions had been anticipated. Analysts had talked of operators leaving a region where production is in long-term decline. For the biggest energy companies — such as BP, Royal Dutch Shell, Total and ConocoPhillips — investing in smaller fields, or those nearing the end of their lives, makes less sense than pouring capital into finding the larger discoveries they need.
Nimbler competitors, including tiny explorers and midsized producers that specialise in extracting value from depleted assets, were expected to take a bigger slice of output. But while the sliding oil price hastened disposal plans, it also froze the M&A market.
Investment bankers point to a number of mooted North Sea deals that have not happened. They include Conoco's auction of its stake in the Clair oilfield, the UK's largest, which appears to have stalled, and BG Group's failure to sell its Armada, Everest and Lomond fields.
"In the glory days, a few years ago, you would have run a process, got bids and gone back," says one banker. "Now it is really hard work to sell assets. The idea of a process is a misnomer."
In part, the UK's high tax rate — up to 80 per cent on some North Sea projects — has acted as a deterrent to investment. But it is only one of the issues to have kept buyers and sellers apart. With many fields nearing the end of their lives, deciding how to resolve decommissioning liabilities has been a bigger hurdle to deal making.
Nevertheless, last week's Budget tax cut has been well received and coincides with a number of assets being put on the block — most notably a 20 per cent stake in Total's Laggan Tormore deepwater gas project west of the Shetlands. Eon's North Sea portfolio, valued at $1bn-$2bn, could also be sold.
One possible buyer, Russian billionaire Mikhail Fridman's $29bn investment fund LetterOne, has turned likely seller following UK government pressure, and is exploring the disposal of a dozen gasfields that it acquired through its €5bn purchase of Dea from Germany's RWE.
Bankers say there are only "a handful" of serious buyers. Private equity group Carlyle and Siccar Point Energy, a vehicle backed by Blackstone and Blue Water Energy, are among them. Germany's Wintershall, Maersk of Denmark and Spain's Repsol, which is already buying Canada's Talisman Energy for $8.3bn, are also cited as possible acquirers.
Carlyle, for its part, is planning to spend up to $1bn on investing in the UK North Sea. It is prepared to take operating stakes, but will be looking for assets that have many years of production left.
Private equity has long been a big investor in energy, especially in the US. Buyout groups have piled into oil and gasfields, oilfield service companies, power plants, utilities and wind farms. But their forays into oil differ from standard private equity investments. Investment horizons in the oil industry tend to be much longer than the standard three to five years for conventional private equity stakes.
Offshore projects, and the UK continental shelf especially, pose further challenges. Targeted returns of, say, three times investment look unrealistic in an area where the industry estimates a fifth of production is unprofitable.
Decommissioning costs can also prove as much a risk for the seller as the private equity buyer. If the buyer is unable to meet the liability, the government can pursue the previous operator. "There are a lot of issues that cannot be resolved easily," says another banker. "Private equity does not have the deep pockets to handle decommissioning liabilities."
Given these factors, a tax break on its own will not be enough for North Sea deals to come flooding back. But once the oil price stabilises, bringing buyers and sellers closer on asset valuations, the benefit of the UK Budget measure will start to be felt.
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