Support for the Danish DUC

On Wednesday 21st September Lars Christian Lilleholt, the Danish energy minister said that the government is determined to find an economically viable solution that will allow the Trya complex to continue production. This follows Maersk Oil’s announcement in April that it would cease production at the Tyra complex if no solution to extend its economic life during 2016.

The Tyra complex is operated by Maersk Oil on behalf of the DUC, a partnership between A.P. Moller Maersk (31.2%), Shell (36.8%), Nordsøfonden (20%) and Chevron (12%). Tyra is Denmark’s largest gas accumulation and the facilities are the processing and export centre for all gas produced by the Danish Underground Consortium (“DUC”). More than 90% of Denmark’s gas production is processed through the facilities, including production from Norway’s Trym field.

The government’s announcement is potentially positive for the Trym partners (Bayerngas 50%, Faroe 50% operator). Trym was acquired by Faroe from DONG E&P in July 2016 as part of a wider package; the transaction is expected to close in the coming months. Faroe’s acquisition case assumed Trym would cease production in 2018, so any extension of the Tyra complex could allow Faroe to book additional reserves.

Danish North Sea - DUC Network (Northern Segment)
Source: Maersk Oil

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Canacol doesn’t lose sleep over oil prices

Canacol is distinct from its Colombian E&P peers‎, being a gas-weighted producer with operations focussed in the Lower Magdalena Basin. Its gas operations and gas offtake contracts mean that the company has a much lower exposure to oil prices. In the company's recent investor update, it noted that it would generate EBITDA of USD107 million if the oil price was zero! Given this special situation within the Colombian and wider international E&P universe, we look to dedicate a few articles looking at Canacol in more detail.

Canacol: Sensitivity to WTI
Source: Investor presentation

Canacol was initially established as a Latin American focussed E&P and listed on the Toronto stock exchange in 2009 through a reverse takeover. The company has somewhat haphazardly experimented with different strategies and now appears to have settled on one that works: gas production supplying the growing domestic market. As a result of its past, the company has now amassed a position of 23 blocks in the Magdalena, Llanos and Putumayo Basins as well as a service contract in Ecuador, through a series of acquisitions and licensing rounds. It also previously held assets in Brazil and Guyana which have now been sold off.

Key acquisitions in the company’s history include:

• Carrao Energy (November 2011) which came with LLA-23 and Middle Madalena blocks Santa Isabel, VMM-2 and VMM-3
• Shona Energy (December 2012) which had a 100% interest in Esperanza and production in four blocks across Colombia
• 100% interest in VIM-5 and VIM-9, acquired from OGX in December 2014

Esperanza and VIM-5 are now the key assets in the company’s portfolio.

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Shell Gulf of Mexico divestment

On 29^th August, Shell announced that it had agreed to sell 100% of its interests in the Gulf of Mexico Green Canyon Blocks 114, 158, 202 and 248 (the Brutus/Glider assets), to EnVen Energy Corporation for USD425 million in cash. These assets do not appear to form part of Shell's core strategy in the region, with recent activity focusing on the Mars/Vito/Na Kika areas to the east.

The Brutus/Glider assets include the Brutus Tension Leg Platform, and the Glider subsea production system, as well as the pipelines used to evacuate production from the platform. The assets have a combined current production of 25mboepd, although the Brutus platform has capacity to produce 130mboepd.

Given investors' key concern is around the company's debt levels (Shell has over USD75 billion in net debt following the acquisition of BG), and negative free cash flow at current oil price levels, the divestment is welcome and is a step towards the USD30 billion divestment programme mentioned last year.



Source: Shell

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Kurdistan consolidation? DNO's proposed offer for Gulf Keystone

On Friday 29^th July, DNO made a proposal to acquire Gulf Keystone for USD300 million in cash and shares. The tactics around the timing of this offer are unclear, given that Gulf Keystone are part way through a creditor restructuring. Negotiations during creditor processes are generally messy with the potential acquirer having to become involved in discussions with the debt holders, who hold significant power given their ability to "pull the plug" on the distressed company and/or dictate restructuring terms that lead to massive dilution of the existing shareholder base.

The offer of USD300 million, which comprises c.USD120 million in cash and the remainder in shares, represents:

• a 20% premium to the share price of $0.0109 at which, on 14^th July 2016, Gulf Keystone issued shares representing 5.6% of its share capital; and
• a 20% premium to the price at which Gulf Keystone intends to issue further shares. 

DNO further noted that the cash element of the offer would provide an early exit for noteholders and bondholders unable or unwilling to hold equity in DNO.

The acquisition of Gulf Keystone would create further scale and operational synergies for DNO in Kurdistan, and the enlarged entity would operate the Tawke and Shaikan oil fields, with current combined net production of c.89mbopd. Gulf Keystone holds a 58% stake in and operates the Shaikan oil field at a current level of ~40,000b/d, which is transported daily by road tanker to DNO's unloading and storage hub at Fish Khabur for onward pipeline transport to export markets.

For the past couple of years, Gulf Keystone's debt has dominated its story and a combination with DNO together with a clean balance sheet is likely to be viewed favourably by the KRG. However, it is noted that the heavy-oil Shaikan project is a high capex and low margin business that would generate a relatively low rate of return for DNO. As with Genel at Miran, DNO will likely need the support of a farminee to push ahead with the full field development.

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Gulf Keystone debt restructuring

On 14^th July, Gulf Keystone announced the terms of its proposed balance sheet restructuring, marking the culmination of months of discussions with the company's debt holders. The restructuring, if approved by shareholders, will be implemented by way of a debt-for-equity swap and will see existing shareholders significantly diluted.

The company has c.USD600 million of debt, comprising USD335 million of Convertible Bonds and USD266 million of Notes. The restructuring proposes:

• USD335 million of Convertible Bonds: Complete equitisation
• USD266 million of Notes: Refinanced with USD100 million of new notes (the "Reinstated Notes") and through equitisation

Pro forma capital structure

Post transaction, balance sheet debt will be reduced from c.USD600 million to USD100 million. As part of the restructuring, it is envisaged that an USD25 million equity raise be launched as an open offer to the existing shareholders, equating to 10% of the restructured entity if fully subscribed.

Existing shareholders will be significantly diluted and will hold 5% of the company post transaction (pre-open offer) and 14.5% of the company if they fully subscribe to the open offer. Convertible bondholders will represent 20% of the company and the current noteholders will hold 65.5% of the company.

Pro forma ownership

The restructuring is subject to shareholder approval and will be implemented through a UK scheme of arrangement. The board of Gulf Keystone has recommended that shareholders support the transaction, failing which, the company is expected to enter into a formal insolvency and liquidation process.

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Brasse - Brage's younger sibling

On 11^th July, Faroe announced the completion of a successful side-track appraisal well on the Brasse discovery in PL740 (50% WI) in the Norwegian North Sea and revised volume estimates for the discovery.

The objective of the Brasse side-track well was to appraise the south-eastern part of the structure previously identified by the main discovery well. The side-track reached a depth of c.2,530m and encountered a 25m gross oil column and a 6m gross gas column. The side-tack encountered oil and gas in good quality Jurassic reservoir sandstones, similar to those seen in the main well.

Total gross volumes of recoverable hydrocarbons are now estimated to be 28 – 54mmbbl of oil and 89 – 158bcf gas (43 – 80mmboe in aggregate, which compares with pre-drill estimate of 14 – 33mmbbl). The reservoir is of good quality and believed to be analogous to the effective reservoir at the Brage producing oil field in which Faroe has a 14.3% interest.

The Brasse discovery is located within tie-back distance to existing infrastructure with available capacity. It is c.15km to the south of the Brage field platform, c.15km east of the Oseberg Sør field platform, and c.15km to the south east of the Oseberg field platform. Faroe and its partner, Point Resources (50% WI), will now begin assessing options for monetising this discovery.

Brasse area map

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Det Norske-BP: the Norwegian megaforce

On 10th June, Det Norske announced that it will merge with BP Norge through a share purchase transaction to create the leading independent E&P company on the Norwegian Continental Shelf. The company will be renamed Aker BP, with Aker and BP as main industrial shareholders holding 40% and 30% of the company respectively; the remaining 30% in Aker BP will be held by Det Norske’s other current shareholders. Note that Aker is currently Det Norske’s main shareholder with a 49.99% of the company. The effective date of the transaction is 1st January 2016 and it is expected to close at the end of 2016, subject to approval by the relevant authorities.

For some time, BP have been looking to sell down their Norwegian position but having been unable to do so for cash, it is interesting to note that they have now accepted shares and follows the trend of Statoil’s recent acquisition of a shareholding in Lundin. The BP branding on the name of the new company now suggests that they may see themselves as longer term players in the Norwegian Continental Shelf.

Det Norske will issue 135.1million new shares at a price of NOK80/share to BP as consideration for all the shares in BP Norge. BP Norge will subsequently be a wholly owned subsidiary of Det Norske. Concurrently, Aker will acquire 33.8million of these shares from BP at the same share price to achieve the agreed-upon ownership structure. The acquisition of BP Norge includes the assets, a tax loss of USD267million and a net cash position of USD178million. All of BP Norge's roughly 850 employees will transfer to the combined organization upon completion of the deal.

Aker BP will hold a portfolio of 97 licences on the Norwegian Continental Shelf, of which 46 are operated. The combined company will have an estimated 723mmboe 2P reserves, with joint production of c120mboepd, with scope to organically double production to more than 250mboepd by the early 2020s. Aker BP will benefit from the combined strength of Det Norske's efficient, streamlined operating model and BP's long experience in Norwegian offshore operations, asset knowledge, technical skills and international experience. Det Norske and BP believe the larger independent company will be able to actively pursue M&A opportunities on the NCS.

Øyvind Eriksen, chairman of the board of directors of Det Norske commented: "Aker BP will leverage on Det Norske's efficient operations, BP's international capabilities and Aker's 175 years of industrial experience. Together, we are establishing a strong platform for creating value for our shareholders through our unique industrial capabilities, a world-class asset base, and financial robustness."

BP group chief executive Bob Dudley commented: "BP and Aker have matured a close collaboration through decades, and we are pleased to take advantage of the industrial expertise of both companies to create a large independent E&P company. The Norwegian Continental Shelf represents a significant opportunity going forward and we are looking forward to working together with Aker to unlock the long term value of the company through growth and efficient operations. This innovative deal demonstrates how we can adapt our business model with strong and talented partners to remain competitive and grow where we see long-term benefit for our shareholders."

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