Private equity’s lean machines are demanding a shake-up of traditional legal service delivery – particularly in the margin-sensitive oil and gas sector. Stuart Carter, head of oil and gas at Fieldfisher, looks at how law firms are responding to the market’s changing needs.
Private Equity (PE) tends to run investments on five-to-10 year cycles.
Recent reports that a raft of PE fund managers are seeking to churn their stakes in UKCS-based E&Ps is as much about timing as it is about the health of the investments.
Neither the UKCS’ oil and gas sector nor the UK government should expect the industry’s remaining super-majors, or new PE entrants, to pick up these investments.
The focus of many potentially eligible PE firms (those with the deepest pockets and delicate risk appetites) remains in the US onshore sector and they are unlikely to be tempted by what the UKCS has to offer.
The super-majors, meanwhile, have been rationalising their portfolios since the oil crash of 2014/2015 and have yet to signal any change in strategy.
By process of elimination, the most likely buyers for these investments are already established on the UKCS and may include existing PE-backed E&Ps or cash generating mid-cap players – all of which have “dry powder” on which to draw.
Given that these businesses are mostly in production, any shortfall in acquisition finance may be made up by the debt market.
The introduction of ‘transferable tax history’, allowing tax losses to be transferred along with assets to new owners, and an increasingly robust approach by the UKCS regulator – the Oil & Gas Authority (OGA), which is determined to make a success of its “Maximising Economic Recovery “(MER) initiative, will help to de-risk 2C contingent reserves and offer tangible upside to any deal.
But given that there are now so many assets available on the UKCS, as super-majors continue to break up licence packages and divest non-core fields, it seems inevitable that not all will find buyers.
Current owners may remain in place right up to final decommissioning, when the assets might eventually be flipped to companies specialising in winding down declining fields.
Advising on change
With the prospect of much greater activity on the UKCS, traditional legal support models that help companies structure deals in the sector will need to evolve to keep up.
Companies have tended to draw legal support from in-house teams, law firms and/or specialist consultants.
PE-backed companies which have invested in the UKCS over the last decade have tended to run lean in-house teams but have nevertheless avoided outsourcing advisory work – an approach which has caused problems for some.
Law firms have had to become extremely competitive to secure work against other firms and more flexible consultants.
Some firms have responded to these market dynamics by developing hybrid models to provide companies with access to experienced consultants at market rates, underwritten by the quality guarantee offered by a full-service international law firm.
This new kind of model, which has been developed in response to the changing profiles and budgets of modern oil and gas businesses, gives companies a choice of approved experts who have been headhunted, vetted and trained by a recognised law firm.
Bi-laterally, these experts agree terms – scope, duration, etc. – but are then retained by the company through the law firm’s portal and, in the process, benefit from the firm’s professional indemnity insurance.
All three parties benefit from such relationships and this model has proved an early success with clients seeking to maximise their cost-benefit returns.
How long the UKCS remains profitable is in the hands of nimble E&Ps and developers of the latest technology.
However, the onus is on the legal profession to support the sector professionally and flexibly, and look after their day-to-day business needs at economical rates, leaving companies free focus on doing creative, value-accretive deals for the long-term future of the shelf.
Stuart Carter is a partner and Head of Oil and Gas at Fieldfisher.