Private equity is not a major player in oil and gas yet, but recent entries could signal a shift in the funding of companies and projects, a corporate lawyer has said.
Philip Mace, a specialist in oil and gas transactions at Clyde & Co, said private-equity-backed acquisitions were a positive development for the North Sea.
But Mr Mace said it was “unrealistic” to view those funds as the “absolute solution” to the sector’s liquidity issues because they are driven by the need to get a quick return on their investments.
Conditions for North Sea mergers and acquisitions (M&A) have improved this year thanks to higher crude prices, lower operating costs, and the need for some companies to sell assets to reduce debts.
The valuation gap between buyer and seller for assets has also narrowed.
But the oil and gas sector’s limited access to traditional forms of finance, bank loans, for example, has played a big part in opening the door to equity funds with vast reserves.
Recent high profile private-equity backed deals include Chrysaor’s £3billion purchase of Shell’s interests in nine fields and a 10% stake in Schiehallion, west of Shetland, and Siccar Point Energy’s swoop for the UK assets of Austrian company OMV.
Mr Mace said 2017 had been very positive for the North Sea in terms of M&A activity − private-equity backed or otherwise.
He was impressed by the creativity of a number of transactions to have been agreed so far this year, in particular, EnQuest’s deal with BP for 25% of the Magnus field and the operatorship of the Sullom Voe terminal in Shetland.
He described the deal as one of most innovative in the UK oil and gas sector as significant assets were transferred with no up-front payment.
Both parties agreed instead that the deal would be funded using cash flow from the assets.
“That deal showed great courage from both companies and it was rightly heralded as showing the way to transfer and reinvigorate mature assets,” Mr Mace said at Clyde & Co’s Essential Oil and Gas Legal Update seminar at the Marcliffe Hotel in Aberdeen.
He also said the use of contingent payments to mitigate risks for buyers was “quite new” for the sector.
Contingent payments may be linked to future oil prices, as with Chrysaor’s agreement with Shell, and new discoveries, for example.
But Mr Mace said such clauses could become problematic.
“Payments linked to new discoveries might be difficult to police,” he said. “In other sectors those clauses do give rise to disputes if it’s not clear when a payment is due.”
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