In the current oil price environment, buyer-seller alignment
on valuation is likely to be an issue with differences driven by view on the
oil price outlook. A number of transactions have stalled or been pulled over
the last year. One possible way to bridge this gap is to have a contingent consideration
element that is contingent on the recovery of the oil price; the seller benefits
from recovery in the oil price if it believes a recovery is forthcoming and the
buyer can base upfront payment on a lower price deck and avoid overpaying in
the event oil prices do not recover.
Contingent consideration based on the oil price has not been
common given Brent has been relatively stable in the ~$100/bbl range in the
past few years. Seplat, in its acquisition of Chevron’s assets in Nigeria, is
the only recent example of a buyer which has adopted such a payment structure. When
structuring such a mechanism, close attention should be paid to a number of key
elements:
- Amount: Based on the valuation difference under the two oil price decks, subject to negotiation
- Trigger: Trigger needs to be defined clearly (e.g. oil price refers to realised price or Brent) and responsibilities for monitoring the trigger and notification of the counterparty needs to be set out. In the case of the Seplat transaction, the trigger was oil prices averaging USD90/bbl or above for 12 consecutive months
- Long stop date: Period needs to be sufficiently long and in a timeframe where oil price could realistically recover. A longer period is generally more favourable for the seller and less favourable for the buyer as it gives more time for the trigger to be satisfied. Seplat and Chevron agreed a period of five years in the recent transaction
Seplat / Chevron
Transaction Overview
On 5 February 2015, Seplat announced the completion of the
acquisition of a 40% WI in OML 53 and 22.5% WI in OML 55 onshore Nigeria from
Chevron. Seplat paid USD387mm upfront with a USD39mm (9% of the total potential
consideration) contingent payment on oil prices averaging USD90/bbl or above
for 12 consecutive months over the next five years.
OML 53 contains the Jisike oil field which produces at
2,000bbl/d (gross). The block also contains the undeveloped Ohaji South gas and
condensate field which could utilise the existing facilities which have
capacity of 12,000bbl/d and 8mmcf/d; total net resources of 151mmboe.
OML 55 is located in the swamp to shallow water areas of the
Niger Delta and contains five producing fields; current gross production of
8,000bbl/d; total net resources of 46mmboe with further oil and gas potential
identified on the block.
The transaction fits with Seplat’s strategy of securing,
commercialising and monetising natural gas in the Niger Delta with a view to
supplying the rapidly growing domestic market. For Chevron, it reduces exposure
to the Nigerian onshore which has been affected by bunkering in recent years
and further refocuses its portfolio towards North America and the Gulf of
Mexico.
