Oil and gas giants are selling off their North Sea assets to clean up their balance sheets, fuelling US$12bn-worth of merger activity on the UK and Norwegian continental shelves last year. But the buyers of these assets are not other energy giants, they are independent exploration and production (E&P) companies, who are stirring up North Sea oil. Maddy White reports.


For the UK and Norway, merger and acquisition (M&A) activity in the North Sea reached US$12bn from January 2019 to the beginning of December, Sonya Boodoo, senior analyst at Rystad Energy, an independent energy research and consulting firm based in Norway, tells GTR. She says that this is a high figure compared with the year before, where the value of deals announced was just US$4.5bn.

Boodoo explains that the 2019 figure is down to three big acquisitions by E&P firms of oil and gas giants’ assets.

In November, Ithaca Energy acquired US energy giant Chevron’s North Sea arm for US$2bn, adding a further 10 asset producing “field interests” to its existing portfolio and increasing 2019 forecast production by 300%. The energy firm is an independent oil and gas company with its exploration, development and production operations focused in the North Sea – specifically the UK’s portion. Another deal saw ExxonMobil sell its assets in Norway to Norwegian E&P company Vår Energi for US$4.5bn in September, making it the second largest E&P company on the Norwegian continental shelf. The other major takeover came earlier in the year, in April, when ConocoPhillips sold its UK assets in the North Sea to Aberdeen E&P firm Chrysaor for US$2.7bn.

The deals represent the trend of oil and gas supermajors shedding their assets to finance investments elsewhere that have higher returns, pleasing shareholders who are calling for stricter discipline of capital in the process. Boodoo says that merger activity will continue to be high on the UK and Norwegian continental shelves for oil and gas assets, although it will be a “stretch” to reach US$12bn in announced activity in 2020.

Yann Ropers, director of structured commodity trade finance at Deutsche Bank, tells GTR that the merger activity has been triggered by oil majors’ divestments of non-core assets, European utility groups divesting their oil and gas upstream businesses and private equity firms’ interest in the sector. “It’s a win-win situation; it gives opportunities for new players and smaller independent E&P companies as well as enabling oil majors to sell off non-core assets,” he explains.

It’s a trend that’s driving increased opportunities for banks operating in the commodity trade finance space. Ropers says: “Since 2015, we have seen a significant stream of mergers and acquisitions activity reshaping the sector and almost each transaction has created a new client or reserve-based lending (RBL) financing opportunity.”


Reshuffle via reserve-based lending

According to Ropers, much of this merger activity is financed through reserve-based lending. “It is a huge trend we have seen over the past few years. The reason for this is because RBL is a reliable and stable financing tool for the exploration and production sector.”

RBL is a type of asset-based lending commonly used in the oil and gas sector. It is a borrowing-base loan that is sized on underlying oil and gas assets. The facility is repaid using the proceeds from sales of oil and gas from these assets and the amount of the facility will fluctuate during the loan tenor to reflect changes in, for example, production, oil and gas prices and reserve assessment.

Ithaca’s acquisition was funded through a US$1.65bn RBL senior debt facility, a US$700mn acquisition debt financing facility, an equity investment by Delek (Ithaca is a wholly-owned subsidiary of Israeli conglomerate Delek Group) and the company’s existing cash resources. JP Morgan acted as financial advisor for the transaction and the RBL facility was underwritten by BNP Paribas. The acquisition debt financing was jointly underwritten by the two banks.

Vår Energi funded its transaction from existing cash resources and an RBL debt facility underwritten by BNP Paribas that will subsequently be syndicated.

Meanwhile, Chrysaor financed its acquisition from existing cash resources and an upsized US$3bn RBL debt facility underwritten by Bank of Montreal, BNP Paribas, DNB Bank and ING.

The takeovers are, in part, because the E&P companies think there is more oil to be found in the North Sea.

Les Thomas, Ithaca Energy CEO, says that the acquisition proves the company’s “belief in the North Sea”, and Phil Kirk, chief executive of Chrysaor, said in a statement in April: “This significant acquisition reflects our continuing belief that the UK North Sea has material future potential for oil and gas production.” He added: “In the west of Shetlands region, we have secured long life cashflows from two world-class fields operated by BP.”

Ropers explains that all the activity presents an “exciting prospect”. “Not only do you have the divestment trend, but you also have all of these new assets coming upstream which means outright organic growth from exploration.”

This North Sea revival is underpinned by a number of world-class low-cost oil discoveries, in particular on the Norwegian continental shelf, he says.


Norway and the UK

Norway is Europe’s second-largest crude oil producer (after Russia) and, since 2005, has allowed companies to deduct 78% of their exploration costs from taxable income to encourage firms to invest in E&P activity. Ropers says: “It could have been seen as controversial at the time, but it has triggered large sums of investment in exploration in the oil and gas sector in Norway, not from majors, but mostly from new players.”

One big find was the Johan Sverdrup field which began production in October 2019 and is already producing 350,000 barrels of oil per day (bpd), says Norwegian multinational energy company and field operator Equinor. This is expected to increase to 660,000 bpd by 2022. Discovered by E&P company Lundin Petroleum in 2010, the field is one of the largest oil discoveries ever made on the Norwegian continental shelf, with its resources estimated to be between 2.2 and 3.2 billion barrels of oil equivalent (boe). Lundin Petroleum has a 20% working interest in the Johan Sverdrup field, Equinor has 42.6% and the remaining partners are Norwegian state-owned firm Petoro with 17.4%, exploration company Aker BP with 11.6% working interest and energy giant Total with 8.4%.

Rystad estimates that cumulative discoveries from January 2019 to November in Norway reached 520 million boe, surpassing the 518 million boe found in 2018. “Norway could see total discoveries reaching 650 million boe by year-end with decent success in ongoing exploration drilling campaigns,” senior analyst Palzor Shenga at Rystad said at the time of the findings. “After a string of recent discoveries, 2019 is shaping up to be the most successful exploration year since 2014 on the Norwegian continental shelf.”

Aker BP has been the most successful driller in Norway in 2019, with 41% of discovered volumes. Equinor comes in second with 23% of total volumes, and Lundin Petroleum, Vår Energi, and Wellesley Petroleum are tied in third with 4% each, according to the energy consultant.

Ropers says: “New discoveries are happening in Norway and potentially in the UK in the future, if there’s enough investment. I think merger activity will also continue in the North Sea, but not so much in Denmark or the Netherlands because there are fewer assets there.”

There are potentially big oil and gas assets to be found in the UK – but with fewer fiscal incentives to foster new exploration investments than in Norway, says Ropers. “There have been a few discouraging changes of fiscal terms over the years.” Nevertheless, in terms of M&A activity in the UK, he believes there will be more to come.