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North Sea M&A: Dealing with the ‘what ifs’ key to a smooth transaction

© Shutterstock / iQonceptMergers and Acquisitions
Mergers and Acquisitions

At the start of the new tax year, we explore the financial landscape of the energy sector.

Over the coming months we expect to see an increase in M&A activity – already in 2021 the deal value of North Sea E&P transactions has exceeded that of 2020. For opportunistic oil and gas-focused independents and private equity entrants, there are likely to be opportunities to undertake attractive deals in the year ahead across a range of assets, from exploration acreage and field developments to mature late-life assets.

As there are, generally speaking, fewer buyers now in the marketplace, cash-rich potential buyers are succeeding in obtaining more favourable transaction terms than has been the case over the past few years, in particular in areas related to consideration, decommissioning and ability to terminate prior to completion where there has been a material adverse change. The current mood is of increased optimism, certainly for buyers.

Majors and some independents continue to look to exit certain geographic areas, non-core assets or even the industry as a whole to further invest in core areas or the energy transition. In December 2020, SSE and Viaro Energy announced their agreement for Viaro to purchase, via its subsidiary RockRose Energy, all of SSE’s gas exploration and production assets, marking a step-away from E&P for SSE following a 10-year plus investment in the basin.

Some private equity entrants are looking to exit following their investment cycle but are not finding that easy in all cases, with listing increasingly not an option – the likes of Chrysaor resorted to a reverse takeover of Premier Oil, a listed entity in the UK, to achieve that aim. In October 2020, Harbour Energy and Premier announced that Premier would merge with Chrysaor Holdings, Harbour’s operating company, to form a combined group with production of more than 250,000 barrels of oil equivalent per day.

Norman Wisely

At the beginning of 2021, Neo Energy and HitecVision announced that Neo was to acquire a portfolio of non-operated assets in the central and northern North Sea from ExxonMobil and, more recently, Zennor Petroleum from Kerogen Capital; the latter is a private equity to private equity transaction – Neo at the start of their investment cycle, and Kerogen at the end. These acquisitions, worth around a combined $2 billion, will make Neo a major player in the North Sea. Also in early 2021, EnQuest announced its agreement to purchase Suncor Energy UK’s entire 26.69% non-operated equity interest in the Golden Eagle area, for $375 million.

Other divestment processes are back in full swing following a pausing in 2020. However, buyers and sellers will continue to find it hard to land valuations while there is a volatile oil price, which remains the case, notwithstanding some increased stability during the final quarter of 2020 and some increase so far in 2021. Contingent or deferred consideration structures are therefore increasingly normal to allow valuation gaps to be plugged – these structures mean that, if the company or asset being acquired does not make sufficient return over a specified period after completion of the sale, the buyer pays less. Where returns are good, they also allow the buyer to finance some of the price out of the benefits reaped. These structures can be simple, using oil price or production volumes as the contingent consideration measure, or much more complicated, such as net profit interest arrangements and royalty structures.  Each has been a key feature of the transactions mentioned above.  The other key feature in respect of mature fields tends to be a retention by seller of some level of responsibility for decommissioning.

The best advice for any party transacting in 2021 is to be prepared. The oil price volatility and Covid-19 have demonstrated there can be significant changes in the period during negotiation of any deal or in the sometimes lengthy period between signing and completion. Dealing with all possible scenarios will be key to a successful transaction. Does the buyer have the right to terminate the deal in the event of a material adverse event? What if co-venturers or third parties with consent rights do not approve the transaction? Dealing with the various ‘what ifs’ will give the parties increased certainty around when a deal should complete or when it will require to be restructured.

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