Taq Taq Tumble

At the end of October, we raised the prospect of a potential downgrade at Taq Taq following a disappointing production update from Genel.

On 24^th January, Genel provided updated guidance of 24-31mbopd production average for the field in 2017, down from 60.2mbopd in 2016. The declining production from the field has already been well publicised, however the scale of the fall was unexpected.

A new field development plan and reserves estimates are being currently being prepared and expected to be published within the coming months. Capital investment to stem the decline is expected, however given the low level of the FY2017 production guidance, this spend could be some way off.

On a more positive note, production from the DNO-operated Tawke field is budgeted to increase to 115mbopd from 107mbopd (2016).

On the Miran and Bina Bawi gas fields, Genel continues to seek a partner to help develop the resources, but management expect to recognise an impairment charge on this asset in the 2016 year end results.

Despite the issues facing Genel, the company still holds a large resource and remains one of the largest Kurdistan focussed E&Ps. The gas resource provides significant upside with ample demand once local geopolitics allows for its development.

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BP Christmas shopping

BP has announced a series of high profile acquisitions in the past few weeks. The deals are in line with BP's longer term strategy of building in regions where they can gain "scale and materiality", although the company has moved more quickly than expected based on OGInsight's recent conversation with them, where BP said they were in divestment and portfolio rationalisation mode. This potentially signals a view of an improving oil price environment and willingness to move from balance sheet conservatism to growth.

At the end of November, BP acquired a 10% interest in Zohr from Eni. Since then, BP has announced two further acquisitions:

ADCO Concession

BP announced over the weekend that it had secured a 10% stake in the Abu Dhabi’s multi-billion barrel resource ADCO concession. BP previously held 9.5% in the concession prior to the expiry of its licence in January 2014. Other holders of the concession are currently Total (10%), INPEX (5%) and GS Energy (3%).

The concession is for 40 years and will add 1.8bnboe of 2P reserves to BP (net). The agreement includes various fields in the country with a total resource base estimated at c.20bnboe and represents a long term, low decline, sizeable resource for BP. The timing of the transaction will allow BP to book the reserves for the year end.

BP will pay a signature bonus of $2.2bn for its 10% stake, in line with the bonuses paid by other participants. However, the key noticeable difference is that BP will be paying in shares and will be issuing 393 million shares at £4.47 or a 9% discount, equating to 2% of its stock. The shares will be held by Mubudala and signals flexibility on the part of Abu Dhabi to secure a deal in a tough environment.

Mauritania and Senegal with Kosmos Energy

On 19^th December, BP announced that it had reached agreement with Kosmos Energy to acquire an operated interest in the Tortue field and surrounding blocks offshore Mauritania and Senegal. This will comprise of a 62% operated interest in C-6, C-8, C-12 and C-13 on the Mauritania side and 32.5% interest in Saint-Louis Profond and Cayar Profond on the Senegal side.

As part of the deal, BP will pay USD162 million upon closing of the transaction, appraisal carry of USD221 million and development carry of USD533 million bring total consideration to USD916 million. BP will also pay a contingent bonus of up to USD2/bbl for up to 1bnbbl of liquids structured as a royalty, should liquids be discovered. Kosmos will continue as exploration operator of the blocks.

The blocks contain the Tortue field, which is estimated to hold 15tcf of gas resources with potential for 1bnbbl of liquids. Project sanction is expected to be in 2018 with the most likely development scenario being a phased near-shore FLNG development.

Greater Tortue Area
Source: Kosmos Energy

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Eni: Bringing in successive partners for Zohr

On 28^th November, Eni announced the divestment a 10% interest in Zohr to BP for USD375 million plus pro-rata reimbursement of past costs (c.USD150 million net), bringing total consideration to USD525 million. BP also has an option to acquire an additional 5% interest on the same terms before the end of 2017.

On 12^th December, Eni announced that it had divested a further 30% interest in Zohr to Rosneft for USD1.125 billion and USD450 million of back costs - i.e. on substantially the same terms as BP. Rosneft also has an option to acquire an additional 5% interest on the same terms.

The transactions reduce Eni's exposure to the Zohr development by 40% from 100% to 60%; this could fall to 50% if BP and Rosneft exercise their options for additional interests. The divestment will also reduce Eni's capex by c.USD900 million in 2017 ahead of first gas at the end of 2017. A similar capex saving is expected to be made in 2018.

Eni has successfully demonstrated its ability to monetise large resource finds. The farm-out significantly derisks the upcoming development and it is promising to see buyers for good quality assets despite the current oil price environment.

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TransGlobe: Branching out...back to roots

This week saw Canadian listed, Egyptian focussed TransGlobe ‎announce an acquisition of producing assets in Western Canada. The company will be paying USD80 million to Bellatrix Exploration for Cardium light oil and Mannville liquid-rich gas acreage in the Harmattan Area. The portfolio comes with 21mmboe of 2P reserves and 3,100boepd of production.

The acquisition is a shift away from the company's ‎historic strategy of being an Egyptian focussed player. However this had been pre-announced with TransGlobe stating earlier this year that it was seeking to diversify its asset base with more exposure to OECD. Although shareholders would have initially invested in TransGlobe for the attractive story at the time of low risk, onshore exploration and production in the Middle East, the company has failed to deliver that story for a variety of reasons and this acquisition appears to be a sensible first step in redefining the company.

Having lost its position in Yemen followed by a series of disappointments in Egypt, TransGlobe has fallen short of its aspirations which would have seen Egyptian production of c.20mbopd today instead of the current c.13mbopd. The Arab Spring which began at the end of 2010 coupled with the more recent spread of Islamic State has deterred investor interest from the Middle East. For TransGlobe specifically, the lack of a stable government in Egypt until the arrival of President Sisi and a ballooning budget deficit hampered TransGlobe's efforts to progress its portfolio in the country as well as being paid for its production by EGPC.

While production cash flow should help strengthen the company's financial position, the mix of Canadian and Egyptian cash flow presents an eclectic mix of assets and it will be interesting to see how TransGlobe will continue to transform over time.

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International Petroleum Investment Company: A fresh start

IPIC has been on a journey to rebuild its business following the extraordinary downfall of Khadem al-Qubaisi, the company’s managing director who was made to step down in April 2015. In the months that followed, there was a major shakeup across all levels of the organisation including in the portfolio companies, with many of the roles previously held by al-Qubaisi reassigned to new officers. At the time, IPIC did not release any statements around al-Qubaisi’s dismissal, but in the months that followed, there was increasing newsflow in the media around alleged embezzlement of funds from business dealings between IPIC and 1MDB, a Malaysian sovereign wealth fund. Al-Qubaisi was arrested in August 2016.

OGInsights spoke with representatives of IPIC to find out more about the restructuring within IPIC. Suhail Mohammed Faraj Al Mazroui, the UAE energy minister, now heads IPIC with the group split into two divisions: Upstream and Downstream & Diversified.

The Upstream division is headed by Alyazia Ali Al Kuwaiti and includes the holdings in CEPSA, OMV and Oil Search.

Downstream & Diversified is headed by Saeed Mohamed Al Mehairbi  and includes the holdings in Nova Chemicals and Borealis and various business interests previously held by Aabar (including real estate and private jet businesses).

The IPIC team also act as source deals for Qatar Abu Dhabi Investment Company (“QADIC”), which is a joint Qatar and Abu Dhabi fund. The fund has a size of USD2 billion and aims to target investments with a link to IPIC’s downstream holdings. However, IPIC and QADIC will be cautious with making new investments given the recent tumult and will have plenty to focus on managing its existing portfolio.

In the upstream space IPIC will continue to look for acquisitions, which will be routed through CEPSA or OMV. IPIC aims to maintain a balanced portfolio with existing or near-term production / cash flow and keen to avoid heavy capex commitments. Africa remains a keen focus area (excluding Nigeria) as is Latin America, which will neatly complement the CEPSA portfolio.

In the downstream space, North American chemicals and fertiliser businesses are of interest. In Europe, only specialty chemicals are seen as a good fit (i.e. with Borealis).

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Oda to Joy!

On 30^th November, Centrica announced that it had submitted the Plan for Development and Operation (PDO) for the Oda field to the Norwegian Ministry of Petroleum and Energy. Oda, previously called Butch, is owned by the following partners:

• Centrica (40% operator)
• Suncor (30%)
• Aker BP (15%)
• Faroe (15%)

Oda is an oil field, discovered in 2011 and lies in the Norwegian North Sea. The field will be developed as a subsea tie-back to the Ula patform, located c.13km away. The field will be developed with two production wells and one water injection well. Oil will be onward transported via the Norpipe system to the Teeside Terminal in the UK. The gas will be sold to Ula for injection to improve recovery in the Ula reservoir.

Ula is located in shallow water depths (66m) and is good quality reservoir with light oil. The development is planned to cost c.USD640 million, with first oil in 2019. The field has reserves of 42mmboe and plateau production is planned to reach 35mboepd.

Ula Area
Source: Faroe Petroleum September 2016 investor presentation

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Siccar Point is building up its business

OGInsights recently caught up with the Siccar Point team following its successful acquisition of the OMV North Sea business, which includes an 11.8% stake in the flagship Schiehallion oil field. Together with the acquisition of a stake in the Mariner field earlier this year, Siccar Point has now built up a North Sea business of relevant scale.

Siccar Point is a North Sea focussed E&P, with financial backing from Blackstone, Blue Water Energy and GIC. It was set up in 2014 and after extensive screening of the North Sea over the past two years, the team are pleased to have finally closed a couple of transactions – the team have looked at over 50 potentially acquisitions including, not surprisingly, the ConocoPhillips and Shell North Sea assets.

The minority, non-operated stake (8.9%) in Mariner was acquired from JX Nippon with expectations of first oil in 2018. However, it was clear that this was only a first step to building a bigger North Sea business, which a small stake in a single asset is not. In that regard, the OMV package came along at an opportune time.

Having looked at the Shell North Sea assets, Siccar Point and its owners/financiers believed it was best to pass on the opportunity. As well as being a large portfolio for someone the size of Siccar Point, the substantial number of gas assets and attempt to package in the stranded Corrib asset offshore Ireland, made it strategically less attractive. The decommissioning liability that would come along with the Shell portfolio was also challenging. The OMV portfolio, which came with a smaller number of long life assets was therefore much more desirable.

The financing of North Sea assets has been an ongoing challenge for vehicles such as Siccar Point which are backed by private equity money. The business model requires for acquisitions to be financed with substantial amounts of debt, and in most cases, the amount of debt that can be raised is based on the amount of reserves. However, the UK has a regulatory regime which requires operators to provide financial guarantees (generally in the form of letters of credit) for decommissioning liabilities – these are now coming to the forefront of attention given the maturity of the North Sea and imminent or near-term cessation of production across the basin. These guarantees consume much of the debt capacity and therefore require larger cash or “equity cheques” to be fronted by acquirers. Ultimately the OMV North Sea portfolio was one that worked well for Siccar Point in terms of size and ability to finance.

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