Need for growth could be ‘catalyst’ for North Sea deals

Chris Sim, managing director of investment banking at Investec, pictured at AJL, Aberdeen.
Picture by Jim Irvine
Chris Sim, managing director of investment banking at Investec, pictured at AJL, Aberdeen. Picture by Jim Irvine

The need for newer North Sea players to grow could be a “catalyst” for more M&A deals this year, according to an investment banker.

Chris Sim is managing director of investment banking at financial services firm Investec.

Mr Sim said the North Sea has been going through a “transformation” with the arrival of private equity-backed firms like Neptune Energy, Chrysaor and Verus Petroleum, to name a few.

Other new entrants in recent years have also included the likes of Siccar Point Energy, Zennor and Verus Petroleum and Tailwind, backed by commodity trading firm Mercuria.

Earlier this year trade body Oil and Gas UK predicted deal activity in 2019 would be “dampened” due to oil price volatility, as well as other factors like increased optimism from exploration firms.

At the end of last year the oil price fell by more than 40% in less than three months to just over $50 a barrel, which has since rebounded.

Mr Sim agreed this was “difficult” for many firms who became more cautious, but said there is still potential for deal activity.

He said: “You’ve got a number of emerging companies – how do they grow, particularly when they are producing less than 10,000 barrels a day?

“We’ve definitely seen there is a number who have their own organic plans to grow but there is probably a limit to how far that will take them from the existing asset base.

“In the end they will need more scale which makes some form of M&A more likely.

“They’ve got their own challenges in some cases due to the maturity of some of the assets.

“In some of the production profiles we’ve seen, production starts to tail-off and they need to move their portfolios to the next level.

“Unless they go into an exploration phase, asset consolidation and project development are the most likely ways to grow especially when you consider that capital for exploration-only is tough to source.”

Mr Sim added that he expects private equity firms to be “very selective” when it comes to exploration, only funding the best prospects.

This comes at a time when a number of packages from large independent firms are reportedly up for sale, including those of Chevron and ConocoPhillips.

Despite months passing since these were reported to be for sale, Mr Sim said eventually they will have to go through.

He said: “You have to think at some point they need to still transact.

“If you’re a vendor, you’re  going, ‘well I don’t want to leave value on the table’, but at some point, with these larger oil companies, there’s been a strategic decision to exit from certain assets.

“The large independents want to recycle capital in other parts of the world or new developments – how long do they keep holding on? At what point do they go ‘well actually, I’m prepared to show some flexibility on price because an exit is required on’?

“Which, to be honest, you saw with Shell and Chrysaor where they needed to make asset disposals, especially post the acquisition of BG Group.”

 

 

 

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