A longtime power sector pattern lately has seen main oil and fuel producers more and more turning their backs on the North Sea.
Over the past 12 months alone ConocoPhilips, Chevron and Exxon have offered belongings in each the British North Sea and the Norwegian North Sea, with Exxon additionally anticipated to try to promote its British North Sea belongings this 12 months.
Others to have offered North Sea belongings throughout latest years embody Royal Dutch Shell.
The logic behind such gross sales is that the majors see higher alternatives elsewhere.
The North Sea is without doubt one of the world’s most mature oil and fuel sources and essentially the most accessible reserves have already been extracted. What stays can be more durable and extra expensive to extract and, furthermore, isn’t extractable within the form of amount the majors search.
This has, nonetheless, created alternatives for smaller gamers.
These embody personal equity-backed operators resembling Neptune Power, based and led by Sam Laidlaw, the previous Centrica chief government, and Chrysaor, whose acquisition of belongings from Shell in 2017 instantly made it one of many greatest producers within the North Sea.
The attraction for such operators is that many are specialists in a position to exploit the technological advances which are bettering extraction strategies.
Their relative smallness means they will usually make selections extra quickly than a few of the bigger operators – which have a wealth of alternatives to use all over the world and which, accordingly, should unfold their monetary sources broadly.
Authorities has additionally performed its half, with the UK Oil & Fuel Authority having made it simpler lately for smaller producers to amass licences, which has led to manufacturing growing by a sixth over the past 5 years.
And, with an estimated 1.5 billion barrels of oil (or oil equal) nonetheless out there for extraction, smaller gamers nonetheless have loads to go for.
The method took one other step as we speak as BP introduced it was promoting two North Sea belongings to the smaller Premier Oil for $625m (£476m) – the Andrew Space undertaking 140 miles to the north of Aberdeen and a 27.5% stake within the Shearwater subject, 140 miles to the northeast of Aberdeen, which is operated by Shell.
Individually, Premier Oil can be shopping for an extra 25% curiosity within the Tolmount space within the southern British North Sea, the place it has lately made a big fuel discovery.
Tony Durrant, Premier’s chief government, stated that, taken collectively, the acquisitions would take its output to greater than 100,000 barrels of oil equal per day and predicted that it could generate $1bn of free money movement by the tip of 2023.
He added: “These acquisitions are materially worth accretive for Premier and are in keeping with our said technique of buying money generative belongings within the UK North Sea.
“We look ahead to realising the numerous long-term potential of the Andrew and Shearwater belongings by means of manufacturing optimisation, incremental developments and subject life extension initiatives.
“We’re additionally happy to have consolidated our curiosity within the excessive return Tolmount improvement the place we see materials upside.”
Mr Durrant, a former accountant and funding banker who joined Premier Oil in 2005 as finance director, stated the money movement generated from the acquired belongings would pace up Premier’s potential to pay down its money owed.
The information has gone down properly with traders. Shares of Premier Oil shot up by 19% at one level on Tuesday.
Alex Smith, oil and fuel analyst at stockbroker Investec, stated: “The deal considerably enhances Premier’s place within the UK and can enable the corporate to speed up utilisation of its $4.2bn of tax losses, boosting free money movement and positively impacting the valuation of the enterprise.”
However that might not be the tip of the story. Premier is funding the acquisitions by promoting $500m price of recent shares to traders and, if required, through the use of a bridging mortgage of $300m.
The corporate additionally introduced refinancing proposals that stretch its current credit score services to November 2023 – offering it with an extra two and a half years of respiration area. The corporate presently has money owed of $2bn.
This has antagonised Asia Analysis and Capital Administration (ARCM), a Hong Kong-based hedge fund, which holds a big brief place in Premier – in different phrases, it’s betting on a fall within the firm’s share worth – and which additionally owns 15% of Premier’s debt, making it the corporate’s greatest single creditor.
It stated the offers introduced as we speak would “solely serve to extend threat for stakeholders” and vowed to “take all steps” to oppose them.
It stated the refinancing proposals seemed to be an acknowledgement from Premier that it couldn’t repay its excellent debt in accordance with the present phrases and stated the precedence for the corporate’s administration needs to be to satisfy its current money owed after they turn into payable.
ARCM additionally expressed reservations in regards to the strategic logic of as we speak’s offers.
It added: “We’re involved in regards to the provide/demand dynamics of the UK fuel market and the potential impression on the corporate’s money movement era capability. The UK and European fuel markets are seemingly [to be] coming into a multi-year interval of extra provide as a result of robust regional fuel manufacturing and US liquefied pure fuel and Russian imports.”
Premier identified that 40 out of its 41 collectors have given the refinancing plan their blessing.
It does appear seemingly, although, that some shareholders may have questions following the announcement.
Sam Wahab, head of oil and fuel analysis at sources specialist SP Angel, stated he thought it could focus consideration on the corporate’s funds.
He added: “While we imagine that the proposed acquisitions are materially worth accretive to Premier and are in keeping with the corporate’s said technique of buying money generative belongings within the UK North Sea, they do come at a substantial value.
“Nevertheless, we do see the appreciable long-term manufacturing and appraisal upside of those belongings, with the money movement having the potential to speed up the deleveraging of Premier’s stability sheet.”
Will probably be fascinating to see how this performs out and what ARCM will do subsequent.
These involved about the way forward for the North Sea oil and fuel trade, although, will take consolation from the truth that an organization like Premier nonetheless has religion in it for the long term.