The ebb and flow of North Sea upstream finance

Energy majors divesting ageing oil field assets to smaller companies is nothing new in the North Sea. But as such M&A opportunities grow, so does the increasingly diversified lender pool which is emerging to fund the small and mid-cap independent Exploration & Production (E&P) companies in their acquisitions.

The oil price downturn which prompted the likes of Chevron, Shell and Total to cut asset costs has mellowed in recent years and helped assets rebound sufficiently to make sales worthwhile. Coupled with high technical costs eating into oil majors’ break-even points, and the fact oil independents and special operators believe they can squeeze more value out of these well-run assets — deal activity is booming.

Ithaca Energy, Israeli E&P oil independent Delek Group’s subsidiary (which it is looking to spin off in a London listing) signed a deal last month to buy most of Chevron’s North Sea oil and gas fields, for example. The approximately $2 billion acquisition will be financed via an upsized five-year $1.65 billion reserve-based lending (RBL) facility, a five-year and three-month $500 million issue priced at 9.38% and an equity investment from Delek and Ithaca’s existing cash resources.

Lenders on the RBL element include, BNP Paribas, Lloyds, Deutsche, Royal Bank of Canada, Natixis, SEB, RBS, Wells Fargo, Bank of Montreal, Goldman Sachs, DnB NOR Bank, ABN AMRO, Barclays, and ING – each with an equal ticket size. The notes on the bond portion were solely underwritten by JP Morgan and BNP Paribas.

PE investor/RBL lender appetite 

A significant portion of deals in the market still include trading houses or trading arms of the majors putting up debt and/or equity in order to secure offtake agreements. However, the most notable influx of capital that is helping drive the North Sea renaissance has come from private equity (PE) investors looking for yield.

Chrysaor Holdings’s purchase of Conoco Phillips’ assets in the North Sea for $2.7 billion, backed by Harbour Energy (managed by EIG Global Energy Partners), was the landmark that fully signposted the arrival of PE in the European upstream finance market.

Chrysaor doubled the size of its original 2017 $1.5 billion RBL facility to $3 billion in October, alongside funding the acquisition from existing cash resources. The new deal, provided by Bank of Montreal, BNP Paribas, DNB and ING, adds two new operated hubs, Britannia and J-Block – in addition to an interest in the Clair Field area – to its portfolio.

The $500 million accordion feature on the 2017 six-year deal – led by BMLAs Citi, BNP, DNB and ING – was exercised by the borrower, taking the original facility to $2 billion. The 2017 deal was refinanced to the tune of $1 billion, which takes the new facility up to a potential $4 billion (if the new accordion option is used). The upsizing of Chrysaor’s RBL was provided by lenders due to an upgrade in reserves since 2017.  

After the 2017 RBL facility propelled Chrysaor from a small, independent production outfit to the third largest oil and gas producer in the North Sea, the new deal has added further impetus to Chrysaor’s plan to become one of Europe’s leading independent, full cycle production companies. Its latest acquisition in the North Sea will increase Chrysaor’s production to 177,000 barrels of oil equivalent per day (boepd) – the asset produced approximately 72,000 boepd.

The song remains the same 

Aberdeen-based Siccar Point, a Blackstone-backed independent, and Neptune Energy, backed by Carlyle Group and CVC Capital, have also made eye catching deals in recent years.

Neptune Energy sealed a $2 billion financing in 2018, the largest RBL facility raised for an acquisition in the EMEA region. The deal partially backed the energy trader’s $3.8 billion purchase of Engie E&P International – expanding its footprint across the North Sea, North Africa and Asia-Pacific. Pricing on the seven-year loan was in the 300-400bp range and operates on a step-up mechanism over the seven-year maturity of the loan.

In October, Neptune also agreed to acquire the UK and Norwegian upstream assets of Edison Exploration & Production from Energeam Oil and Gas for a cash payment of $250 million and a contingent payment of $30 million – a payment structure which has provided comfort to PEs in recent years. However, closing the deal (expected in Q1 2020) is subject to the completion of Energeam’s previously announced $850 million acquisition of Edisean E&P from Italian energy group Edison.

Neptune is diversifying its funding mix as well, and is out to market for a $500 million seven-year unsecured bond. Proceeds are expected to help repay amounts outstanding under Neptune's RBL facility. Therefore, it is fair to assume the oil company is more likely to fund the new oil portfolio purchase with its own cash, or possibility by upsizing the existing RBL stapled to its acquisition of Engie E&P International.

Chrysaor and Neptune are clearly ramping up oil production to become the largest oil and gas companies in the North Sea. BG Group, for example, grew into a global business founded in the North Sea gas business and was subsequently bought by Royal Dutch Shell in 2016 for $50 billion.

But the likelihood that both these PE-backed independents will be able to emulate BG Group’s big buck sale is slim.

To IPO, or not to IPO

PE-backed buyers are not alone in the North Sea oil asset capital pool. Delek Group, which is majority owned by Israeli billionaire Yitzhak Tshuva, is planning to float Ithaca Energy on the stock exchange and recently sounded out banks for $300 million before marketing the asset.

There are now industry concerns over how much market appetite there is for PE-backed owners to IPO – and the possible threat to the only exit strategy for newly established firms. Some market observers predict smaller PE-backed operators could grow by merging, however, larger ones may look to float on stock exchanges. If dreams of grand sales are never realised for these ‘want-to-be’ majors, like Chrysaor and Neptune, Delek’s successful IPO will certainly provide food for thought to PE players looking to cash in their equity in the sector.

But the favoured route for PE-backed players is almost always a trade sale to maximise value in cash – for now. An IPO is an alternative but depends on the vagaries of the stock market. Both options are seemingly closed off for PE’s now though. Activity in US M&A has petered out and the mooted sale of multiple high-profile Permian basin players has yet to materialise, which doesn't bode well for any PEs currently eyeing an exit across the pond. The sell-off in US independents’ shares this year reflects the difficult market – perennially weak cash generation, soft commodity prices and a lack of access to finance have killed investor interest. Critically for PE sellers, perceived value in drilling inventory has evaporated.

But back in Europe, Big Oil are the ones selling so an IPO may be the preferred route. There’s certainly a gap in the market with a dearth of larger, listed independents. But it won’t be easy. PE will need to present a differentiated growth story, a clear strategy for the energy transition and meet ESG criteria to command investors’ attention. Most European PE-backed players are still in the development stage and have a bit of time to work up a rounded package.

German oil company Wintershall DEA is slated for an IPO in 2020, and much bigger than most prospective PE-backed packages (at around $20 billion). The deal will undoubtedly be a critical bellwether for PE aspirations. And while the recent North Sea oil field renaissance among investors and lenders took place over 20 years after oil production peaked in the late 1990s, the second renaissance for independents to IPO, which is expected within the next three or four years, may well be just around the corner.

Now time to get up to speed on the markets.
      Here's our exclusive TXF Essentials subscriber content

LNG: Cross-dressing commodity traders and portfolio players
Commodity traders have always been customers to portfolio players in the LNG space. However, as traders up the signing of long-term offtake contracts, portfolio players are beginning to sell a large chunk of their LNG on the spot market as both parties compete for volume.

Shop talk: VTB on trade flows and growth in China
On the sidelines of VTB’s RUSSIA CALLING! event in Moscow last month, Igor Ostreyko, managing director of trade and export finance at VTB and Anna Ponomareva, head of ECA and agency finance at VTB, discuss the health of the bank’s trade finance portfolio amid record growth in China.

Voting now open for the Perfect 10 Deals of the Year
The winner takes it all! The TXF Perfect 10 Deals of the Year Awards voting is now open across export & commodity finance! We are looking for the best of the best. Extraordinary deals that closed in financial year 2019, that deserve to be put on a pedestal as innovative, market-influencing transactions.
Vote now on the user-generated deals database tagmdydeals.com

Plus, to top things off...
 the news you thought you had but didn't

Vung An 2 to sign next year
One Energy – a 50/50 joint venture between CLP Holdings and Mitsubishi-owned Diamond Generating Asia – is expected to sign the financing for the $2.2 billion 2x600MW Vung An 2 Power Co (Vapco 2) project in Vietnam in the first quarter of next year.

Shandong Qingyuan closes biggest teapot loan to date
Shandong Qingyuan has closed the first ever $1 billion loan for a Chinese independent oil refinery (known in the industry as teapots).

Protos WtE project debt signing imminent
Biffa and Covanta are very close to signing a loan with AIB, ABN Amro, Natixis, NatWest, and Banco Sabadell for the Protos waste-to-energy (WtE) project in the UK.

Fox joins Carbon Engineering as CFO
Kerri Fox has resigned as market manager and managing director of Project Finance at Silicon Valley Bank to join Canadian clean energy company Carbon Engineering as CFO. She starts her new role in around two weeks and will be based in Vancouver.

More details on Omaezakikou biomass plant deal
Omaezakikou Biomass Energy – comprising Renova (38%), Chubu Electric Power (34%), Mitsubishi Electric Credit Corp (18%) and Suzuyo Shoji (10%) – reached full financial close on the ¥50 billion ($459 million) 74.95MW Omaezakikou biomass power plant in Japan on 19 November.

Metalloinvest seals PXF with record length tenor
On 3 December, Metalloinvest closed a 6.5-year €200 million ($221 million) pre-export finance (PXF) loan - a record length PXF tenor for the Russian metals and mining company.

More details on super six wind deal in Pakistan
On 18 November, the IFC lead arranged and signed the financing for six wind farms in the Jhimpir corridor area of Pakistan.

Turkey's new solar tender auction date set
Turkey will tender out 1GW of new solar capacity in a reverse auction in April 2020 under its Renewable Energy Resources Area Project (YEKA) scheme.