ONS 2018: Private equity start-ups are ‘shaking up’ North Sea, Woodmac report

Chrysaor bought Shell's interests in the Everest field last year.
The £175m sector deal could return up to £110bn for the UK economy by 2035, according to the SAC

Private equity start-ups are causing a stir in the North Sea, a new report said.

Energy consultancy Wood Mackenzie (Woodmac) said the eight players would produce 550,000 barrels of oil equivalent in the region this year.

It identified Azinor Catalyst, Chrysaor, Neptune Energy, Siccar Point, Var Energy, Verus Petroleum, Wellesley Petroleum and  Zennor Petroleum as the most notable “new kids on the blocks”.

Using mainly US private equity investment, commitments of £7.7 billion have helped fuel £9.3bn in M&A in the North Sea since 2014.

Another £10.5 billion could be invested in the North Sea, based on disclosed funding, WoodMac claim.

The report said they have adopted an ‘acquire and exploit’ approach, taking on under-capitalised assets and exploiting upside by optimising production and lowering costs.

Or, they have gone for ‘lease and drill’, a largely exploration-focused strategy, targeting appraisal upside and development in a low-cost environment.

Neivan Boroujerdi, senior research analyst at Woodmac, said: “Regardless of the chosen strategy, private equity companies eventually need to achieve a successful exit. There are a number of options. Some may choose a secondary private equity or trade sale.

“For larger companies, an IPO is most likely, given the corporate landscape and lack of major buyers. For a successful IPO, companies need have a strong growth story – both volume and value – that will underpin future returns, as well as a clear and differentiated investment thesis, and a proven track record. Most companies still have work to do.

“While private equity-backed companies will invest more than US$10 billion in development capital over the next five years, this needs to increase to meet ambitious growth plans.  However, PE-backed firms face the same growth challenges as other companies active in the North Sea: development risk, declining portfolios and a competitive M&A market.”

The research, carried out by Mr Boroujerdi and Greig Aitken, director, M&A research, found that firms with a “visible growth story”, “differentiated thesis” and proven track record will be crucial to the future of the North Sea is it is to achieve the same level of investment.

Mr Boroujerdi added: “Other than relying on increases in oil prices, not every company can win in such an environment. But the upstream industry is certainly winning.

“The influx of private equity investment has sparked a new momentum in the North Sea, revitalising assets, extending the life of fields and igniting animal spirits.”