Amerisur makes a move

 

On 26 January 2016, Amerisur announced the acquisition of Platino Energy (Barbados) Ltd, a subsidiary of COG Energy, a private E&P with a focus on Colombia. The consideration for the transaction is USD7 million which we be paid entirely in Amerisur stock, through the issuance of 22.7 million new shares. A further payment of USD500,000 in cash will also be made in respect of fixed assets. As part of the deal, COG is entitled to a 2% overriding royalty if production in the acquired blocks exceeds 5,000bopd.

The transaction adds prospective acreage (190mmbbls unrisked resources) to Amerisur’s Putumayo Basin portfolio at a limited cost with drill ready prospects close to the company’s Platanillo field. Commitments are limited to USD12 million across the next three years. New production from the blocks would have access to Amerisur’s new pipeline to Ecuador, once completed.

The acquired assets include:

• PUT-8 (Amerisur 50%) immediately west of Platanillo with 45mmbbl in unrisked resources in similar structure
• Coati Block (Amerisur 100%) holds 79mmbbl unrisked resources and the Temblon field with long-term testing potential; the next exploration well is partly carried by Canacol (part of farm-in deal for 20%, excluding Temblon)
• Andaquies Block (Amerisur 100%)

The blocks have no or limited X-factors and are covered by 2D and 3D seismic. Drilling commitments include one exploration well on PUT-8 and the Andaquies Block by May 2017 (although some environmental licenses are still to be secured).

On the export pipeline, Amerisur continues to engage with the Ecuadorean authorities to secure the final EIA approval and complete construction of their strategic pipeline connection through Ecuador. This will reduce transportation costs and increase off take capacity.

Amerisur's acquired and existing acreage
Source: Broker research

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Gran Tierra strikes again

On 15th January, Gran Tierra announced the acquisition of PetroGranada’s interest in the highly prospective Putumayo-7 Block, southern Colombia. The acquisition increases the company’s interest in the block to 100% and adds two more drill ready prospects to the inventory of lower risk prospects established through the recently closed Petroamerica acquisition.

Gran Tierra will acquire all of the issued and outstanding shares of PetroGranada (which holds 50% in Putumayo-7) for USD19 million. In addition Gran Tierra  will pay a further USD4 million if the cumulative production from the block meet or exceed 8 MMbbls. The acquisition will be funded from the company’s existing cash resources; the USD200 million debt facility will remain undrawn.

The acquisition adds 1.9mmbbls 2P reserves  and further 50% working interest in the Putumayo-7 Block (GTE now has 100%). The block holds two drill ready prospects (Cumplidor is effectively an extension of the existing Quinde West discovery on the neighbouring Surotiente block). The company expects to drill the wells later this year. Wells in the region are low cost, at less than USD10 million each and the prospects lie close to existing infrastructure, enabling for fast monetisation.

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Statoil acquires stake in Lundin Petroleum

On 14th January, Statoil announced that it had acquired 37.1 million shares in Lundin Petroleum, corresponding to 11.9% of the company. Statoil says that it paid c.SEK4.6 billion for the shares, which equates to a price of SEK120/share or a 28% premium to the share price close as of yesterday at SEK97. Statoil purchased the shares over the past few weeks and says it is supportive of Lundin management, its board of directors and strategy, but there is currently no plan to increase its shareholding in the company.

Statoil says "this is a long term shareholding. The Norwegian Continental Shelf is the backbone of Statoil's business, and this transaction indirectly strengthens our total share of the value creation from core, high value assets on the NCS". Despite the longer term strategic rationale, the move is unexpected. Lundin is one of the more expensive E&P stocks and the transaction further increases Statoil’s exposure to the giant Johan Sverdrup development. Questions are now being asked by the market on whether Statoil can continue to pay its dividend.

From an E&P sector perspective, the move is encouraging as it demonstrates industry interest in the subsector, and the news should help shore-up Lundin’s share price. Nevertheless, corporate activity is likely to remain muted until the oil price starts to recover and confidence returns to the sector.

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PTTEP may pre-empt BG Bongkot process

On 12th January, it was reported that PTTEP, Thailand’s state owned oil company, is keen to acquire BG’s stake in Bongkot. The Bongkot area is located in the Malay Basin in the Gulf of Thailand and consists of various gas accumulations. It is currently owned by PTTEP (44.45% operator), Total (33.33%) and BG (22.22%). PTTEP’s potential desire to acquire this asset is in line with the strategy of Asian NOCs’ of security of supply. For BG, the disposal represents an exit of a non-core asset which supplies gas only to a domestic market and a tidy-up of the portfolio ahead of its merger with Shell.

Southeast Asia M&A environment
The Southeast Asian M&A market has historically accounted for a small portion of global M&A activity (c.7% by deal value and volume between 2009 – 2014); this is largely due to the relative sporadicity of assets that come to market. High quality assets that become available generally garner strong interest from regional players seeking to consolidate around existing positions and competencies in a part of the world which has experienced strong energy demand growth over the last decade (c.3.5% p.a. since 2000 according to the IEA).

The region is dominated by majors, select large-cap E&Ps and regional NOCs and independents. A number of North American players have recently made divestments in the region as part of wider international retrenchment plans (e.g. Hess, ConocoPhillips) – asset sales have generally been met with strong interest. Recent international new entrants include Ophir Energy (acquired Salamander Energy, RBC acted as a joint financial advisor to Ophir) and CEPSA (acquired Coastal Energy).

In the current oil price environment, gas assets with long term gas sales agreements are viewed as particularly attractive, although may not fit the strategy of players (particularly NOCs) seeking oil-weighted production exposure and more flexible supply or off-take. Although oil-weighted assets are a clearly stated preference, assets with strong production cash flows, such as BG Bongkot are also of interest irrespective of the oil/gas weighting.

Thailand is seen as an attractive area for upstream investment, despite the high level of government take. The country is a net importer of hydrocarbons with the domestic supply shortfall expected to increase as a result of continued economic growth. Economic growth supported by government spending on large infrastructure projects and improvement in political stability, whilst gas demand growth driven by switch to gas-fired power plants. The basins are established and proven with further exploration potential and licensing rounds are held regularly.

BG Bongkot sale process
Feedback from various industry players on the BG Bongkot sale process indicates that there is select interest. It is understood that the Chinese NOCs have entered the process, however the opportunity has only attracted weak interest internally; their ability to be competitive in a time critical auction situation is also questionable given increased internal procedures now required following corruption probes. Other regional players, including local NOCs, see limited strategic rationale in acquiring a domestic supply asset and some have limited financial capacity; Indonesian focused players see more compelling opportunities in their home market which are currently live or upcoming (e.g. ConocoPhillips’ interest in South Natuna Sea Block B).

PTTEP’s pre-emption has already been flagged as a key concern by a number of potentially interested parties which is likely to have discouraged some companies from participating in the process. PTTEP’s pre-emption is a key risk given its active strategy to secure supply in the region (as demonstrated by recent acquisitions of Hess’ assets in Thailand and Indonesia) and its strong balance sheet position. PTTEP pursue an active M&A strategy with 10 acquisitions made globally since 2010 and with a total disclosed deal value of ~$6bn. The state company generally acquires acreage in Thailand through licence awards, but will consider M&A for strategic assets that come to market; in 2014, PTTEP acquired Hess’ 35% in Sinphahorm and 15% in Pailin gas fields in which PTTEP was an existing partner in both.

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Kurdistan producers receive fourth consecutive payment from the KRG

Tawke processing facilities
Source: KRG

On 6^th January, DNO and Genel announced that partners of the DNO-operated Tawke field have received a gross payment of USD30 million from the Kurdistan Regional Government for oil exported through the Kurdistan Region of Iraq-Turkey pipeline. This represents the fourth export payment by the KRG since payments recommenced in September.

On 5^th January, Genel also confirmed that the Taq Taq field partners had received a gross payment of USD30 million from the KRG for oil exported through the Kurdistan Region of Iraq-Turkey pipeline with Genel’s share of the payment being USD16.5 million.

It is interesting to note that payments to the oil companies have remained flat (at USD75 million per month) during the past four months, despite a collapse in the oil price from c.USD50/bbl at the start of September to c.USD36/bbl at the end of December 2015. This means that the international oil companies' share of Kurdistan's oil revenues is slowly creeping up.

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Saudi Arabia: fissures within

King Salman

The lack of agreement between members at the 168^th OPEC meeting on 4^th December means that Saudi Arabia can continue to pursue its strategy of maintaining market share over price for a little longer. In fact, recent production figures show that Saudi Arabia is pumping record amounts of crude this year, a sign of its commitment to this strategy.

However, with oil prices reaching recent lows of c.USD40/bbl and little sign of a recovery anytime soon, questions are being raised on whether this was the right strategy to pursue. The country’s 2015 budget was based on an oil price of USD90/bbl, but with the ongoing war in Yemen and King Salman handing out money to stave off public discontent, the fiscal breakeven oil price is now approaching USD110/bbl, almost triple of where Brent is currently hovering.

Members of the royal family have begun questioning King Salman and his son, Prince Mohammad bin Salman’s, ability to run the kingdom, culminating with letters written by an anonymous Saudi prince calling for a coup against the King – these letters were published in The Guardian newspaper in September 2015. The letters assert that King Salman and his son are pursuing dangerous policies that will lead to the kingdom’s ruin. Apparently the call for the change in leadership has widespread support from within the royal family and wider Saudi society, although few will publicly acknowledge this given the history of harsh crackdowns on any dissenters.

Aside from scepticism over oil policy, the Saudi intervention in the Yemeni conflict has also become a serious source of unease inside and outside the palace walls. Prince Mohammed bin Salman, who is in his early 30s, and has been educated domestically with limited military training is viewed as lacking the necessary experience in running the country’s defences. His unofficial nickname, “Reckless”, reflects an increasingly held view that he rushed into Yemen without a well thought-out strategy and the war is now consuming a significant part of Saudi’s budget with no end to the conflict in sight.

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The Egyptian gas landscape

The Egyptian gas sector has historically suffered from underinvestment and the country has experienced a domestic supply shortfall since the beginning of 2015. Subsidised gas pricing encouraged strong demand growth during the 1990s and 2000s and at the same time, declining gas reserves in the onshore and the high cost of offshore gas developments have resulted in investment being diverted away from gas to onshore oil.

The state of the gas market has led to two major concerns for the government: (i) the energy subsidies have become habitual and a key contributor to the fiscal deficit which is unsustainable at current levels; and (ii) persistent energy shortages and brownouts have been a cause of public discontent in recent years at a time when the government is trying to restore stability post the Arab Spring. President Sisi and his administration are keen to entirely phase out energy subsidies in an attempt to tackle the fiscal deficit, encourage more responsible energy use and reinvigorate investment in gas development. The move, which should lead to gas pricing increasing over time, is welcomed by international investors and the E&P industry.

In 2015, Egypt became a net gas importer in the face of a domestic supply shortfall. This followed the diversion of LNG export volumes to the domestic market with the Gas Natural operated Damietta plant and BG operated ELNG plant being placed into force majeure in 2013 and 2014 respectively. During 2015, two LNG regasification facilities were installed at the Port of Sokhna and multi-year supply deals were concluded with LNG sellers; the lease of a third regasification unit is under consideration. Discussions are also ongoing to import gas from Israel by pipeline to supply industrial customers and the grid.

LNG imports are an expensive source of gas supply and the government is keen to boost domestic production and reduce dependence on imports. The government has envisaged a gas supply shortfall for a number of years and has agreed to increase the gas pricing or improve fiscal terms for a number of developments since 2008; the pace of these revisions has increased in recent years. In 2015, Dea agreed a new gas price of USD3.5/mcf, BG and Eni agreed up to USD6.06/mcf for new phases of offshore developments and Apache’s shale gas production will receive USD5.45/mcf.

In July 2015, Eni made the Zohr discovery which is estimated to hold 30tcf of gas in place. The large resource base has the scope to help Egypt regain gas self-sufficiency (potentially with a return to gas exports), although in the near term, the country remains in a gas shortage and reliant on imports. Zohr’s ability to effectively address Egypt’s future gas shortfall could potentially limit the liberalisation of gas pricing. Despite the discovery being in deepwater (~1,500m) and 200km offshore, initial estimates suggest that a gas price of USD4.5/mcf could result in a 15%+ IRR for the project due to the large volumes and low operating costs once onstream. However, with the government’s plan to remove subsidies and IOCs’ desire to maximise gas pricing for developments/production, the outlook for the Egyptian gas sector appears positive. In the near term, costlier gas developments may be delayed or their ability to achieve higher gas pricing may be impacted by more favourable Zohr economics, however domestic gas pricing has the potential to increase significantly from current levels of USD2.73/mcf.

Egypt gas supply excess / (deficit)
Source: Wood Mackenzie, BMI research, BP Statistical Review of the World, EIA, OGInsights

Egypt gas pricing for producers
Source: Wood Mackenzie

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