A North Sea stalwart’s act of surrender and a £1 billion waste to power plants deal involving a Scottish energy giant have in recent days highlighted the scale of the market shake-up triggered by the coronavirus crisis.
Last week Premier Oil agreed to an all-share merger with a rival, Chrysaor, that will result in the firm being swallowed up.
Founded in 1934, Premier Oil has become one of the biggest independents operating in the North Sea in recent years after developing big finds and hoovering up assets that big fish lost interest in.
In January it seemed to be full speed ahead for Premier as the company clinched a $625m (£475m) deal to buy BP’s interests in the giant Andrew and Shearwater fields.
This was set to continue a process that was set in train amid the downturn that hammered the North Sea following the sharp fall in the crude price between 2014 and 2016. A range of majors sold off North Sea assets in response.
Premier bought a chunky North Sea portfolio from German utility E.ON for $120m in 2016.
But within weeks of agreeing the Andrew deal in January it found everything was changing as the coronavirus outbreak turned into a pandemic.
Oil and gas prices plunged and a dissident holder of some of the bonds issued by debt-laden Premier said the deal with BP no longer made any commercial sense.
The holder concerned, Asia Research and Capital Management, also had a short position in Premier’s shares. This meant it benefited from a fall in the company’s share price.
Premier managed to secure a big reduction in the cash price payable for the BP assets, to $210m at completion.
While this seemed to mollify critical bondholders, Premier was left to finalise financing arrangements related to the deal against a very challenging backdrop.
Crude prices have rallied since April following the easing of some lockdown measures around the world. Major exporters led by Saudi Arabia agreed to drastic production cuts to support the market.
However, Brent crude is still only selling for around $42 per barrel compared with $70/bbl in January. Prices have come under renewed pressure in recent weeks as fears of a second wave of coronavirus mounted.
The International Energy Agency warned on Tuesday: “Oil remains vulnerable to the major economic uncertainties resulting from the pandemic.”
The Paris-based watchdog said the era of growth in global demand for oil will come to an end in the next decade with the coronavirus crisis set to leave scars on the energy system that that will last for years.
Premier is thought to have agreed to the merger with Chrysaor after first talking to its private equity-backed rival about debt funding, which it could have used to help refinance its bonds.
Premier’s decision to go much further and to agree to a merger may have been related to the fact that it had also proposed to ask investors to provide around $300m support by buying shares in the firm.
For them to agree to pump so much money into the business amid current market conditions would have involved a huge act of faith on their part.
It seems likely that Premier would have had to issue shares at a sizable discount to the company’s share price, which tumbled from 118p to 16p between January and the start of this month. Existing shareholders could have seen the valuation of their shares plunge and their holdings diluted.
The Chrysaor merger looks like a much easier exercise to complete.
Analysts reckon the deal agreed with Chrysaor valued Premier shares at a slight premium to the reduced price they had been trading at before it was announced.
However, shareholders in Premier may end up owning own just 5.5 per cent of the enlarged group, with creditors of the firm set to have around 10.5% . Chrysaor investors will have the remainder meaning the deal will qualify as reverse takeover.
The Harbour Energy private equity business which has backed Chrysaor is set to own up to 39% of the enlarged group. It will be led by Chrysaor’s chairman Linda Cook. Premier’s chief executive, Tony Durrant, will stand down at the end of the year.
The hope is the enlarged group, whose name is to be decided, will be strong enough to prosper even if market conditions remain challenging for years.It will produce around 250,000 barrels oil equivalent daily.
The deal signals that Harbour Energy sees long term potential in the North Sea – or that it felt the terms of the Premier deal made it too good to miss. It provided support for Chrysaor to buy North Sea portfolios from Shell and ConocoPhillips during the last downturn, for $3bn and $2.7bn respectively.
The implications of the Premier deal are sobering for any North Sea firms that do not have the balance sheet strength to be able to cope with a protracted slump.
Any that need to refinance borrowings will likely have a tough time agreeing terms with lenders.Equity markets may effectively be closed for most firms that want to raise cash.
Conversely those that do have strong balance sheets may be able to buy assets at much lower prices than sellers would have hoped for before the coronavirus crisis.
As Premier’s deal to buy the Andrew and Shearwater interests has now been scrapped BP must decide what it will do with them.
There will likely be more all share deals involving stock market-listed firms.
By contrast Scottish Hydroelectric owner SSE has provided proof of how keen firms are to invest in assets that could support the drive to reduce carbon emissions and to promote sustainability.
The Perth-based energy giant announced on Tuesday that it had agreed to sell its stakes in three big waste to power plants in Yorkshire to an infrastructure investment fund for almost £1bn in cash.
The company appeared delighted by the deal it struck with the European Diversified Infrastructure Fund. This is run by First Sentier investors, which has a base in Edinburgh.
The fund operates in a field that it is becoming increasingly crowded as investment firms capitalise on growing interest in the environmental, social and governance (ESG) agenda.
SSE thinks waste to power plants provide a valuable alternative to landfills but wants to focus investment on renewable energy assets and related networks.
It faces competition for investor interest from funds that have bought windfarms in Scotland. These include The Renewables Infrastructure Group which is keen to buy more assets in Scotland.
SSE has been trying to sell its portfolio of North Sea gas assets for months.
Source: Herald Scotland
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