Assets in the Wrong Hands
The previous oil price downturn in 2014-15 prompted some international E&P companies to sell
North Sea assets. This was largely a result of the previous owners seeing North Sea investment as a
low priority due to lower returns or higher risk when compared with the rest of their international
portfolio. Utility companies were also struggling to see value in the North Sea with the combined
effect of the oil price slump and investor pressure to decarbonise. Assets have generally changed
hands away from the Major oil and gas companies and utility companies, and towards Mid to Small
Cap operators and non-traditional owners such as Private Equity (PE). The new owners often
approach these assets differently, enabling them to realise value which would have remained in the
ground under the previous owner and support the OGAs Maximum Economic Recovery (MERUK)
strategy.
A prime example would be the utility company E.On selling its North Sea portfolio to Premier Oil for
$120 million in 2016. This allowed E.On to pursue its decarbonisation strategy whilst handing over to
a company which was able to immediately add value by consolidating the assets with the rest of the
business to gain tax and opex synergies, and gain growth opportunities such as the Tolmount
development. In 2015 we saw the entry of chemical giant INEOS with the purchase of RWE DEA’s
assets from LetterOne for $750 million. INEOS then picked up the DONG Energy (now Ørsted)
portfolio in 2017. The transfer of assets allowed RWE and DONG to follow their carbon reduction
strategies, whilst giving INEOS an established portfolio with growth potential in areas such as the
West of Shetlands and the development of Hejre.
There are many well-known examples of Majors and Large Caps selling North Sea assets over the
past few years to PE backed companies such as Chrysaor and NEO Energy. These transactions
allowed the sellers to focus on their core areas such as the large LNG developments, US onshore
Shale, and the pre-salt offshore Brazil. The buyers picked up established portfolios with experienced
teams, and the potential for growth.
What Will Happen Now?
We believe that there are still numerous UKCS assets in the wrong hands. The recent COVID-related
oil price shock will have forced many companies to look at portfolio restructuring again. Earlier this
year, Shell cut its dividend for the first time since the Second World War, and over the summer BP
announced that it would halve its dividend, bringing home the seriousness of the situation. Many of
the large companies will be under further pressure to find savings and to make asset sales so that
they can focus on their core areas. It has been publicly reported that Exxon is looking to sell its North
Sea assets. BP and Shell also still have large positions in the North Sea, as do Total, and it may be
possible that some of these assets become divestment candidates in the current environment. It has
also been reported that Perenco, Repsol, and Apache may be selling their North Sea interests.
There are some remaining utilities with positions in the North Sea such as SSE, with a diverse
portfolio including interests in the West of Shetlands. Centrica also still has a large North Sea
exposure via its 69% interest in Spirit Energy. Both SSE and Centrica are reportedly selling their
North Sea interests.
Buyers may include PE and smaller oil and gas firms who may be more willing to invest in smaller or
higher risk growth opportunities, or may believe that they can deliver decommissioning obligations
at lower cost. We may also see distressed debt funds moving to pick up single assets from
companies that have seen their debt capacity come under recent pressure. Reserves Based Lending
facilities have been used to fund several acquisitions in recent years, and some of the debt may need
to be repaid when the banks revalue the assets at current oil prices.
As of September 2020, the Brent oil price has been sitting in the $40-50 per barrel range for the best
part of two months, following a period of relative instability. Public data from UK focussed
companies shows that this is well above the price needed for opex breakeven for most North Sea
assets. If the oil price continues to show some stability or even some upward pressure, then it may
give more potential sellers the confidence to bring assets to market, and for more buyers to chase
them.