CNOOCNexen on the prowl

Last week, we met with the CNOOCNexen corporate team to discuss their thinking in the current low oil price environment and the possibility of using the opportunity to make acquisitions.

At the beginning of 2015, CNOOCNexen expected oil prices to settle at c.USD60/bbl and the second drop in June came as a surprise. Similar to the view held by many oil companies, the oil price is now lower for longer than originally anticipated. CNOOCNexen anticipates oil prices in 2016 to be similar to 2015 levels.

The company’s UK portfolio, which mainly comprise of its 43.21% interest in Buzzard and 36.54% interest in Golden Eagle, is in a relatively good place with operating costs of below USD20/bbl. While the UK operations are not making a fortune at current oil prices, it is keeping its head above water which is more than what can be said for many North Sea fields.

M&A remains on the radar with Beijing head office looking for opportunities in the UK, Brazil, West Africa and Southeast Asia. In fact, the UK North Sea has been cited as one of the top desired areas for further investment and growth. Corporate and farm-in opportunities at all stages of the lifecycle from exploration through to production are of interest. CNOOCNexen did not disclose their oil price assumptions for evaluating acquisitions, but noted that they are beginning to see convergence between buyers and sellers in the market. In terms of acquisition size, USD5 billion would be the top end of what could be do-able. However, CNOOCNexen are still waiting for some stability in oil prices and cost indices before they can feel comfortable with valuations internally and start to make moves.

In the UK North Sea, acquisitions would be to “keep the engine running” rather than building a new business. CNOOCNexen are looking for assets where there is scope for upside and their team could add value; in this regard, assets which have demonstrated reserves creep are of interest such as Apache’s Beryl field and Shell’s Pierce field. Upcoming disposals from the majors, whether piecemeal or as a portfolio, are opportunities coming to market that CNOOCNexen are keeping a close eye on. Development assets are not ruled out given the current North Sea portfolio is in a tax paying position and development expenditure could be used to offset against profits. CNOOCNexen are now beginning to explore heavy oil opportunities as the size of the resource and progress in developing technology to exploit heavy oil (such as by the likes of Statoil) means it can no longer be ignored as a strategy. 

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Premier Oil exits Norway

Premier Oil Norwegian operation
Source: Premier Oil

On 16 November 2015, Premier Oil announced that it had agreed to sell its Norwegian business to Det Norske for USD120 million. The Norwegian business consists of the Premier Oil Norges subsidiary and includes the Vette development, adjacent Mackerel and Herring discoveries, a non-operated stake in Froy and seven exploration licences.

The transaction is expected to close before year end and proceeds will be used pay down debt. The exit of the business will give rise to a G&A saving of c.USD20 million p.a. as well as remove capital requirements for the Vette development that was progressing towards sanction.

For Premier Oil, the sale is in line with the company’s ongoing portfolio management strategy and is an important step to managing the high debt levels.

For Det Norske, the acquired business will bolster its Norwegian portfolio and Det Norske will be able to offset its production against the tax losses in Premier Oil Norges (from spend on Vette and Froy) which stood at USD146 million as at mid-2015. Det Norske will fund the acquisition from internal cash resources.

Tony Durrant, CEO of Premier Oil commented:

“We are pleased to have reached agreement to sell our Norwegian business to Det norske, one of our long term partners in Norway. Our team in Norway has done an excellent job in bringing the Vette project close to a sanction decision in a low oil price environment. The transaction will realise immediate value from the project as part of our strategy of active management of our portfolio.”

Karl Johnny Hersvik, CEO of Det Norske commented:

“Following the recent closing of the Svenska transaction, the acquisition of Premier is another bolt-on acquisition that further underlines our firm belief in and commitment to the Norwegian Continental Shelf.”

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Petroamerica’s call for cash

A sign of the times, another independent raises funding as the low oil price environment continues to hit small producers hard. On 27th October 2015, Petroamerica became the next in line to ask for cash, raising USD20 million in debentures. The expensive cost of the debt at 13.5% reflects the high risk which investors are attributing to the sector, and also that of Petroamerica. The USD20 million will consist of two USD10 million tranches, with the first expected to close on or around 16 November 2015, and the second six months later.

This fund raise comes shortly after the acquisition of PetroNova and raises the question of whether Petroamerica acquired more than it could take on. A review of the PetroNova asset base suggests that the acquisition appears sensible – the CPO-7 and CPO-13 blocks provide existing production with commitment wells not required to be drilled until July 2016 and July 2017 respectively, the Tinigua block has attractive fiscal terms (0% X-factor) although a commitment well is also required by July 2016 and Petroamerica’s Put-2 position is consolidated to 100%.

Petroamerica - PetroNova combined portfolio
Source: Petroamerica

In hindsight, it can be seen that Petroamerica’s woes stem from pre-PetroNova. At the end of 2014, the company had seven exploration wells and seismic commitments and balance sheet cash of USD73 million, out of which the redemption of a c.USD40 million debenture would be required (essentially leaving the company with c.USD33 million to fund its activities). The exploration portfolio is clearly one for a USD100/bbl oil price environment where production cash flows would have funded drilling. However, at current low oil prices, Petroamerica has been loss making – balance sheet cash as at the end of June 2015 was USD23 million; netbacks fell to USD9.1/bbl for the six months ended 30 June 2015 compared with USD54.2/bbl for the same period last year. The company has spent minimal capex in 2015 to date, conserving precious cash and only spending what it needs to maintain or manage production at its producing assets (Los Ocarros and Sur Oriente).

Some of the exploration commitment deadlines have now passed without being met (no drilling has been reported to date), yet no licences appear to have been relinquished. It is expected that Petroamerica are negotiating hard with the ANH to extend these deadlines; most likely, other cash-strapped Colombian E&Ps are doing the same. Petroamerica should be able to keep the lights on for now with the new USD20 million funding going towards satisfying the commitments. However, unless Petroamerica makes a significant discovery which it can bring onstream quickly, it will be stuck between a rock and a hard place as it continues to battle a declining production base, dwindling cash flows and a shrinking cash balance. It would not be a surprise if the company brings in partners to help with some of its commitments or raises more financing. In the meantime, Petroamerica’s case is not unique and there remains a long line of E&Ps that need more cash.

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