Westwood Global Energy Group comments on Premier Oil reverse takeover by Chrysaor - part one

The deal consolidates Chrysaor’s position as the number one UK producer. Premier’s North Sea assets are a good fit and the combined portfolio will provide synergies, with Chrysaor now having the ability to reduce its UK tax liabilities from Premier’s tax losses – though at a cost to the UK treasury. Premier’s international assets, particularly Zama and Sea Lion, could provide growth options to diversify the portfolio and offset the underlying decline in production from the mature UK fields.

This note gives a preliminary assessment of the deal from each company’s perspective and the outlook for the merged company and the wider North Sea M&A market.

The deal

Premier is to merge with Chrysaor, the UK’s largest oil and gas producer, in a reverse takeover which will maintain Premier’s stock market listing. Premier will issue new shares to Chrysaor’s private equity owners which will repay Premier’s US$2.7 billion of gross debt facilities.¹ Premier’s current letters of credit worth US$0.4 billion will also be refinanced as part of the deal. Premier’s recent deal to acquire BP’s equity in the Andrew Area and Shearwater fields² has been terminated, as has its previous refinancing plan based on the BP deal.

This latest deal was opportunistic – Premier announced last month that it was in discussions with third parties, including Chrysaor, to see if it could agree a better deal than the refinancing plan it announced in August. Premier needed to conclude a deal due ahead of its debt maturity in May 2021.³ Chrysaor was able to move quickly given its private equity ownership and has agreed a deal, subject to the approval of Premier’s creditors and shareholders. Deal completion is expected during 1Q21.

The deal with Chrysaor will see Premier’s existing creditors receive a cash payment of US$1.23 billion, equivalent to 61 cents in the US$ owed to them, together with new shares in the combined company. A partial cash alternative to the new shares is being offered, up to a capped limit of US$175 million. If creditors take the cash equivalent up to the limit available, it would be equivalent to 75 cents in the US$. The creditors will have to choose between the upside that equity in the new combined entity could potentially provide them with, or an additional 14 cents in the US$ in cash paid on completion.

Assuming that all the partial cash alternative is taken, Premier’s stakeholders would own 16.08% of the new entity, with 10.63% of that held by existing creditors and 5.45% held by Premier’s existing equity holders. Chrysaor would own 83.92%, of which 39.02% would be held by Harbour Energy, Chrysaor’s main private equity financier. If none of the partial cash alternative is taken up the new entity will be owned 23.0% by Premier (with existing shareholders having 5.0%) and 77.0% by Chrysaor (with Harbour 38.5%).

Based on Premier’s immediate pre-merger announcement share price, its market cap. was US$184 million. With its shareholders set to own 5.45% of the new entity (assuming that the creditors take the maximum cash payment available), the newco needs to have a market cap. of at least US$3.38 billion for the deal to be at a premium to the pre-deal valuation. The newco will have net debt of US$3.2 billion on deal completion, which would give an enterprise value of $6.58 billion.

The newco will have 2P reserves of 717 million boe (at end-2019) and 1H20 combined production would have been 254 000 boe/d. If an EV of US$6.58 billion is achieved, it is equivalent to EV/2P US$9.2/boe and US$25 900 per flowing boe/d. The following table compares the newco’s metrics against Cairn Energy and Enquest, with UK production, and Aker BP and Lundin, Norwegian players.

It looks highly probable that the Chrysaor / Premier newco would achieve a higher enterprise value for Premier’s shareholders than pre-deal, based on the benchmarks.

It would seem to be a fair deal for Premier’s shareholders given the company was technically insolvent and the alternatives such as the refinancing associated with the BP asset acquisition, had it gone ahead, would also have been significantly dilutive to shareholders too. Premier’s share price closed 2% up on the day of the merger announcement reflecting a perceived value-neutral deal for equity holders.

A key upside for Chrysaor from the deal will be to utilise Premier’s US$4.1 billion of accumulated UK tax losses. At end-1H20 Chrysaor had deferred tax liabilities of US$1.5 billion on its balance sheet. Although Chrysaor received a tax credit of US$96 million in 1H20, it has paid an average US$223 million/yr in tax over the past two years. Offsetting the tax liabilities from the producing assets with Premier’s tax losses could create significant value for the newco and its investors – but at the expense of significantly reduced tax revenues from the North Sea for the UK. The government’s UKCS tax revenues in 2019-20 were US$1.6 billion⁴ with the Brent oil price averaging US$52.3/bbl.

Further savings will be made through eliminating G&A costs from the Chrysaor / Premier merged newco. Chrysaor’s G&A costs are currently US$58.4 million/yr based on its 1H20 accounts, with Premier’s G&A costs US$8.4 million/yr. Savings are also likely on net financing costs.⁵ Chrysaor’s net finance costs were US$307.0 million in FY 2019 with US$2.2 billion of net debt. Premier’s FY 2019 net finance cost was US$352.5 million with net debt of US$2.2 billion. The newco is expected to have net debt of US$3.2 billion on deal completion.

References

1. The US$2.7bn includes debt and currency and interest rate hedges. Premier’s gross debt at H1 2020 was US$2.1bn with net debt of US$2.0bn
2. Westwood Wildcat Corporate Report, June 2020
3. Westwood Wildcat Corporate Report, August 2020
4. UK Oil and Gas Authority
5. Finance expenses less finance income

Part two of this commentary is available to read here: https://www.oilfieldtechnology.com/special-reports/20102020/westwood-global-energy-group-comments-on-premier-oil-reverse-takeover-by-chrysaor--part-two/.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/19102020/westwood-global-energy-group-comments-on-premier-oil-reverse-takeover-by-chrysaor--part-one/