Saudi Arabia - joining the dots

A series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy

AIM - Assets In Market

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Iran negotiations - is the end nigh?

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Yemen: The Islamic Chessboard?

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Acquisition Criteria

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Valuation Series

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Monday 19 December 2016

BP Christmas shopping

BP has announced a series of high profile acquisitions in the past few weeks. The deals are in line with BP's longer term strategy of building in regions where they can gain "scale and materiality", although the company has moved more quickly than expected based on OGInsight's recent conversation with them, where BP said they were in divestment and portfolio rationalisation mode. This potentially signals a view of an improving oil price environment and willingness to move from balance sheet conservatism to growth.

At the end of November, BP acquired a 10% interest in Zohr from Eni. Since then, BP has announced two further acquisitions:

ADCO Concession

BP announced over the weekend that it had secured a 10% stake in the Abu Dhabi’s multi-billion barrel resource ADCO concession. BP previously held 9.5% in the concession prior to the expiry of its licence in January 2014. Other holders of the concession are currently Total (10%), INPEX (5%) and GS Energy (3%).

The concession is for 40 years and will add 1.8bnboe of 2P reserves to BP (net). The agreement includes various fields in the country with a total resource base estimated at c.20bnboe and represents a long term, low decline, sizeable resource for BP. The timing of the transaction will allow BP to book the reserves for the year end.

BP will pay a signature bonus of $2.2bn for its 10% stake, in line with the bonuses paid by other participants. However, the key noticeable difference is that BP will be paying in shares and will be issuing 393 million shares at £4.47 or a 9% discount, equating to 2% of its stock. The shares will be held by Mubudala and signals flexibility on the part of Abu Dhabi to secure a deal in a tough environment.

Mauritania and Senegal with Kosmos Energy

On 19th December, BP announced that it had reached agreement with Kosmos Energy to acquire an operated interest in the Tortue field and surrounding blocks offshore Mauritania and Senegal. This will comprise of a 62% operated interest in C-6, C-8, C-12 and C-13 on the Mauritania side and 32.5% interest in Saint-Louis Profond and Cayar Profond on the Senegal side.

As part of the deal, BP will pay USD162 million upon closing of the transaction, appraisal carry of USD221 million and development carry of USD533 million bring total consideration to USD916 million. BP will also pay a contingent bonus of up to USD2/bbl for up to 1bnbbl of liquids structured as a royalty, should liquids be discovered. Kosmos will continue as exploration operator of the blocks.

The blocks contain the Tortue field, which is estimated to hold 15tcf of gas resources with potential for 1bnbbl of liquids. Project sanction is expected to be in 2018 with the most likely development scenario being a phased near-shore FLNG development.

Greater Tortue Area
Source: Kosmos Energy

Monday 12 December 2016

Eni: Bringing in successive partners for Zohr


On 28th November, Eni announced the divestment a 10% interest in Zohr to BP for USD375 million plus pro-rata reimbursement of past costs (c.USD150 million net), bringing total consideration to USD525 million. BP also has an option to acquire an additional 5% interest on the same terms before the end of 2017.

On 12th December, Eni announced that it had divested a further 30% interest in Zohr to Rosneft for USD1.125 billion and USD450 million of back costs - i.e. on substantially the same terms as BP. Rosneft also has an option to acquire an additional 5% interest on the same terms.

The transactions reduce Eni's exposure to the Zohr development by 40% from 100% to 60%; this could fall to 50% if BP and Rosneft exercise their options for additional interests. The divestment will also reduce Eni's capex by c.USD900 million in 2017 ahead of first gas at the end of 2017. A similar capex saving is expected to be made in 2018.

Eni has successfully demonstrated its ability to monetise large resource finds. The farm-out significantly derisks the upcoming development and it is promising to see buyers for good quality assets despite the current oil price environment.

Tuesday 6 December 2016

TransGlobe: Branching out...back to roots

This week saw Canadian listed, Egyptian focussed TransGlobe ‎announce an acquisition of producing assets in Western Canada. The company will be paying USD80 million to Bellatrix Exploration for Cardium light oil and Mannville liquid-rich gas acreage in the Harmattan Area. The portfolio comes with 21mmboe of 2P reserves and 3,100boepd of production.

The acquisition is a shift away from the company's ‎historic strategy of being an Egyptian focussed player. However this had been pre-announced with TransGlobe stating earlier this year that it was seeking to diversify its asset base with more exposure to OECD. Although shareholders would have initially invested in TransGlobe for the attractive story at the time of low risk, onshore exploration and production in the Middle East, the company has failed to deliver that story for a variety of reasons and this acquisition appears to be a sensible first step in redefining the company.

Having lost its position in Yemen followed by a series of disappointments in Egypt, TransGlobe has fallen short of its aspirations which would have seen Egyptian production of c.20mbopd today instead of the current c.13mbopd. The Arab Spring which began at the end of 2010 coupled with the more recent spread of Islamic State has deterred investor interest from the Middle East. For TransGlobe specifically, the lack of a stable government in Egypt until the arrival of President Sisi and a ballooning budget deficit hampered TransGlobe's efforts to progress its portfolio in the country as well as being paid for its production by EGPC.

While production cash flow should help strengthen the company's financial position, the mix of Canadian and Egyptian cash flow presents an eclectic mix of assets and it will be interesting to see how TransGlobe will continue to transform over time.

Sunday 4 December 2016

International Petroleum Investment Company: A fresh start

IPIC has been on a journey to rebuild its business following the extraordinary downfall of Khadem al-Qubaisi, the company’s managing director who was made to step down in April 2015. In the months that followed, there was a major shakeup across all levels of the organisation including in the portfolio companies, with many of the roles previously held by al-Qubaisi reassigned to new officers. At the time, IPIC did not release any statements around al-Qubaisi’s dismissal, but in the months that followed, there was increasing newsflow in the media around alleged embezzlement of funds from business dealings between IPIC and 1MDB, a Malaysian sovereign wealth fund. Al-Qubaisi was arrested in August 2016.

OGInsights spoke with representatives of IPIC to find out more about the restructuring within IPIC. Suhail Mohammed Faraj Al Mazroui, the UAE energy minister, now heads IPIC with the group split into two divisions: Upstream and Downstream & Diversified.

The Upstream division is headed by Alyazia Ali Al Kuwaiti and includes the holdings in CEPSA, OMV and Oil Search.

Downstream & Diversified is headed by Saeed Mohamed Al Mehairbi  and includes the holdings in Nova Chemicals and Borealis and various business interests previously held by Aabar (including real estate and private jet businesses).

The IPIC team also act as source deals for Qatar Abu Dhabi Investment Company (“QADIC”), which is a joint Qatar and Abu Dhabi fund. The fund has a size of USD2 billion and aims to target investments with a link to IPIC’s downstream holdings. However, IPIC and QADIC will be cautious with making new investments given the recent tumult and will have plenty to focus on managing its existing portfolio.

In the upstream space IPIC will continue to look for acquisitions, which will be routed through CEPSA or OMV. IPIC aims to maintain a balanced portfolio with existing or near-term production / cash flow and keen to avoid heavy capex commitments. Africa remains a keen focus area (excluding Nigeria) as is Latin America, which will neatly complement the CEPSA portfolio.

In the downstream space, North American chemicals and fertiliser businesses are of interest. In Europe, only specialty chemicals are seen as a good fit (i.e. with Borealis).