Equalising the buyer and seller: Shell and Chrysaor's oil price contingent payment structure

After a tumultuous period of oil prices with investment decisions and M&A transactions put on hold, the outlook is beginning to stabilise in 2017. With more comfort on the near term trajectory of oil prices, the corporate mind-set is shifting from balance sheet management to strategic re-focussing and growth.

Nevertheless, buyer-seller price expectation gaps still remain and a way to bridge this gap is the use of oil price contingent payments in a transaction. The last time this mechanism was seen in a major market deal was Seplat’s acquisition of Chevron’s assets in Nigeria in 2015. Today, this novel structure was seen again in Chrysaor’s acquisition of Shell’s North Sea portfolio, with an additional twist.

In the Chrysaor acquisition, the terms were as follows - Chrysaor would make payments to Shell of up to USD600 million split over the 2018-2021 period:

• First payment to be made if Brent rises above USD60/bbl in 2018 and 2019
• Second payment to be made if brent rises above USD70/bbl in 2020 and 2021
• Full payout of the USD600 million is made if Brent reaches USD95/bbl anytime in the 2018-2021 period

However, Chrysaor also managed to secure downside protection on its acquisition should oil prices fall. The transaction allows for Shell to make a payment to Chrysaor of up to USD25 million a year (totaling USD100 million) between 2018-21 should Brent fall in the range of USD47.5–52.5/bbl. Full payout of the USD25 million is made in each year if Brent falls below USD47.5/bbl.

The above structure strikes a balance in providing Shell protection from selling the assets too cheaply in a rising oil price environment and Chrysaor overpaying should oil prices fall. Given the structure of the mechanism, it is clear that the contingent consideration is based on near term rather than long term oil price performance with the size of the payments reflecting the impact on near term production cash flows depending on the direction of the oil price. The long stop date of 2021 is relatively long for an M&A transaction, but suitable for a transaction of this nature where oil prices behavior is exhibited over a longer period of time. While longer periods in which contingent payments are active are normally more beneficial to the seller, the mirroring contingent payment from Shell to Chrysaor in this instance puts both the buyer and seller on equal footing.

Read More

Chrysaor future: Acquisition of Shell North Sea portfolio

On 31st January, Chrysaor announced that it had agreed to acquire a portfolio of North Sea assets from Shell for USD3 billion. The transaction is expected to close in H2 2017 and will transform Chrysaor into one of the largest North Sea focussed E&P companies, who will adopt 400 staff from Shell as part of the deal.

The full-cycle portfolio, which comprises exploration, near-term development and production, produced 115mboepd in 2016 and 350mmboe of 2P reserves. Chrysaor has already identified a number of growth opportunities in the portfolio including incremental recovery to extend field life and intends to implement a programme of near field drilling around key hubs.

The acquisition will be funded by:

• USD1.5 billion bank debt
• USD1 billion investment from Harbour Energy
• USD0.5 billion from existing company and shareholder funds and a financing package provided by Shell

An important component of the deal is that Shell will retain a decommissioning liability of USD1 billion, in a which mirrors EnQuest’s recent acquisition of BP’s North Sea assets. The decommissioning costs associated with the portfolio are currently expected at USD2.9 billion (2016 real terms) and USD3.9 billion in nominal terms. There are no material decommissioning costs in the near term, however, Chrysaor has provided security for its exposure to the liability through letters of credit from part of its bank credit lines (on top of the USD1.5 billion bank debt). (Further discussion in our Siccar Point article).

Harbour Energy is a private equity vehicle backed by EIG Global Energy Partners and led by Linda Cook as CEO. Ms Cook was previously at Shell for 29 years where she was in charge of Shell’s gas and renewables business. She left in 2014 after losing out to Peter Voser for the spot of Chief Executive of Shell. She will now act as Chairwoman of Chrysaor.

The transaction also allows for USD780 million in contingent payments, comprising USD180 million for future exploration success and USD600 million for higher oil prices.

The list of assets acquired are as follows:

Read More