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

The asset portfolio

The following charts show the combined Chrysaor / Premier newco’s 2P reserves and 2C resources as at end-2019 and the contribution to the total from each company.⁶

The newco will have 93% of its 2P reserves in the UK, with 76% of this contributed by Chrysaor reflecting its position as a major UKCS player. Premier’s 24% contribution includes its small international 2P reserves. 63% of the 2P reserves are operated by the newco.

Premier has a much bigger 2C resources position largely due to its equity in Sea Lion in the Falkland Islands and Zama in Mexico, and contributes 73% of the newco total compared to Chrysaor’s 27%. Premier has been in discussions to farm-down its equity in Sea Lion and had put Zama up for sale. Harbour has stated that it wants to create a diversified E&P portfolio and may look to retain some or all Premier’s international assets. In 2018 Harbour made an unsuccessful bid for Santos, so its international aspirations are credible.

The following charts show 254 000 boe/d 1H20 production of the combined Chrysaor / Premier newco, broken down by key assets / hubs and the contribution from Chrysaor and Premier.⁷

Chrysaor operates three main production hubs in the North Sea, the Armada, Everest, Lomond, Erskine hub; the J-Area; and the Greater Britannia area. These accounted for 58% of Chrysaor’s production in 1H20 and 43% of the combined newco total. Premier’s key producing asset is its operated Catcher Area which accounted for 42% of its production in 1H20 and 11% of the combined total. Other Premier assets include Solan (100% equity), Chrysaor’s first development in the UKCS which ironically Premier helped Chrysaor to fund⁸ before the private equity investment in Chrysaor.

The following chart shows the production profile⁹ for Chrysaor, Premier UK and Premier’s international assets. Assets under development and near-term developments are included, but assets yet to receive FID, such as Premier’s Zama and Sea Lion discoveries, are excluded.

Chrysaor’s key UK assets are mature and its production profile is in decline, with output set to fall from nearly 190 000 boe/d in 2020 to 107 000 boe/d in 2025 and 45 000 boe/d in 2030. In the short term the addition of Premier will help offset the decline with its UK production increasing from 44 000 boe/d to 55 000 boe/d over the next two years, largely driven by the start-up of the Tolmount field. From 2023 onwards Premier’s UK and international production declines. This would be transformed if a fast-track development of Zama goes ahead (operator Talos is looking at a 2023 start-up date though this may be optimistic) – assuming that Harbour decides to keep the asset rather than sell it as Premier had intended to.

Harbour stated in the merger announcement that it intends to continue to reinvest in the North Sea, though it is not clear if this relates to further deals or for CAPEX in new projects. Chrysaor is investing to extend the life of the production hubs it previously acquired to ‘maximise economic recovery’ (and delay abandonment), key aims for the UK Government. Without further investment the Chrysaor / Premier newco production would fall by nearly 75% over the next ten years. The company will be a cash cow, with Premier’s UK tax losses offsetting Chrysaor’s UK tax liabilities. With UK tax being offset, the economics of new North Sea developments will also be enhanced which may be an incentive for the newco to invest further CAPEX in the UKCS.

It remains to be seen whether the newco’s free cash will be used to fund UK and/or international developments and/or corporate purposes such as paying down the newco’s US$3.2 billion net debt and funding dividend payments to Harbour and the other equity owners of the Chrysaor / Premeier newco. HitecVision, the Norwegian private equity company, has received more than US$2 billion in dividends from its 30.4% stake in Vår Energi in Norway since 2016, which may be a precedent for the Chrysaor / Premier newco.

Implications for the North Sea M&A market

The Chrysaor reverse takeover offer for Premier is an opportunistic deal, reflecting Premier’s increasingly urgent needs to refinance its debt and Chrysaor’s ability to react rapidly. The good fit of the assets and potential upside from reducing tax liabilities added to the deal momentum.

There are other companies burdened by debt such as and Enquest and Delek/Ithaca which may be receptive to a corporate deal. Private equity investors still have enthusiasm for investing in the North Sea. HitecVision, the Norwegian private equity group, announced this month that it had a fund of up to US$1.1 billion available to invest in its Norwegian upstream E&P company, Sval Energi, and its UK E&P company, NEO (which recently completed a US$635 million purchase of a package of UK assets from Total). HitecVision also has an equity stake in Vår Energi in Norway.

This latest deal does not necessarily herald an upsurge in M&A activity, as in the current market there are few cash buyers unless the assets provide a compelling strategic fit and/or they are being sold at cheap prices by distressed sellers.

The reaction of the market to the Chrysaor / Premier merged company will be watched with interest, particularly to see if it achieves the market cap. of at least US$3.4 billion at which point Premier’s existing shareholders will have broken–even from the deal. Harbour is restricted from selling its shares in the Chrysaor / Premier newco for 12 months from the date of completion but could then reduce its stake. If the Chrysaor / Premier newco is a market success, other private equity players, such as those invested in Neptune Energy, could look to exit through a listing (which last month stated that it was considering an IPO in 2021).

Private equity investment has been vital in forming and sustaining a new generation of E&P companies that have become increasingly important players in the North Sea. Whether equity investors and bondholders will again be attracted to the sector remains to be seen given their recent experiences with companies such as Premier and Hurricane not to mention concerns around the Energy Transition.

References

• 6 Chrysaor / Premier merger announcement
• 7 Chrysaor / Premier merger announcement
• 8 Chrysaor gained a 100% interest in the Solan licence in 2008. Premier acquired a 60% interest in Solan in 2011 for a US$10m up-front fee, a further US$10m on FID and a development carry. Premier acquired Chrysaor’s remaining 40% in Solan in 2015 for no consideration but an NPI and royalty to be paid once Premier’s US$530m development carry plus interest had been repaid.
• 9 Westwood Atlas for individual UK asset production profiles. Premier’s international production decline based on historical figures.

Read the article online at: https://www.oilfieldtechnology.com/special-reports/20102020/westwood-global-energy-group-comments-on-premier-oil-reverse-takeover-by-chrysaor--part-two/