Sterling sells out to Oranje-Nassau Energie

Sterling Resources has announced it has entered into an agreement to sell its SRUK Holdings subsidiary to Oranje-Nassau Energie for a net consideration of USD113 million, assuming the bonds are fully redeemed and the super senior revolving credit facility is cancelled. Sterling anticipates a completion date of 15th May.

Following Sterling’s recapitalization in May 2016, the board of continued to review and pursue various M&A opportunities to rebuild the business. Sterling considered a number of opportunities and alternatives, including mergers with a variety of potential counterparties. Ultimately, this process culminated with the board of Sterling recommending the sale of SRUK Holdings to Oranje-Nassau. Once the transaction is approved by shareholders, Sterling will no longer have

any business operations and it currently intends to undertake a voluntary winding-up, with the distribution of all net proceeds of the transaction to shareholders. The shares of Sterling are expected to cease trading and be delisted from the TSX-V following the final distribution.

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More success at Jacana

GeoPark today announced the successful drilling and testing of the Jacana-11 appraisal well on block LLA-34. The well, located 2.5km southwest of Jacana-6 and extends the Tigana/Jacana oilfield to the south-west edge of the block. The well reached TD of 11,618ft and did not encounter the oil-water contact.

Jacana-11 tested at c.2,100b/d (18.7 API, <1% water cut) with an ESP from the Guadalupe formation, and the well is already in production.

The Jacana Sur-2 well is the next well scheduled to be drilled and is targeting a further extension of the field in the northwest direction.

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BP continues foray into clean energy and US gas supply

BP has agreed to acquire Clean Energy Fuels Corp's biomethane production assets for USD155 million, expanding BP's gas supply portfolio in the US. BP will take over Clean Energy Fuels Corp's existing and two new biomethane production sites as well as supply contracts from third parties. As part of the deal, the Clean Energy will also signed a long-term agreement to purchase biomethane from BP.

Press release:

CHICAGO, Ill. and NEWPORT BEACH, Calif. – BP p.l.c. (NYSE: BP) and Clean Energy Fuels Corp. (Nasdaq: CLNE) today announced that BP will acquire the upstream portion of Clean Energy’s renewable natural gas business and sign a long-term supply contract with Clean Energy to support the firm’s continuing downstream renewable natural gas business. The deal enables both companies to accelerate the growth in renewable natural gas supply and meet the growing demand of the natural gas vehicle fuel market.

Renewable natural gas fuel, or biomethane, is produced entirely from organic waste.  As a fuel for natural gas vehicle fleets, including heavy-duty trucks, it is estimated to result in 70 percent lower greenhouse gas emissions than from equivalent gasoline or diesel fueled vehicles.

Under terms of the agreement, BP will pay $155 million for Clean Energy’s existing biomethane production facilities, its share of two new facilities and its existing third party supply contracts for renewable natural gas. Closing the transaction is subject to regulatory approval. Clean Energy will continue to have access to a secure and expanding supply to sell to the growing customer base of its Redeem™-branded renewable natural gas fuel through a long-term supply contract with BP.

“Demand for renewable natural gas is growing quickly and BP is pleased to expand our supply capability in this area,” said Alan Haywood, chief executive officer of BP’s supply and trading business. “BP is committed to supporting developments towards a lower carbon future and, working with Clean Energy, we believe we will be well-positioned to participate in the growth of this lower carbon fuel in the U.S.”

Clean Energy, in turn, will be able to expand its Redeem customer base at its North American network of natural gas fueling stations, allowing customers to take advantage of the ease and affordability of switching to a fuel that is both renewable and can significantly reduce greenhouse gas emissions compared with diesel.

“We started our Redeem fueling business from scratch less than four years ago and have grown it into a significant enterprise,” said Andrew Littlefair, Clean Energy’s president and chief executive officer. “This transaction will help to take it to the next level. BP’s investment in and focus on renewable natural gas supply will ensure that Clean Energy can meet the growing demand of our customers for low carbon, renewable fuel.”

Clean Energy will buy renewable natural gas fuel from BP and collect royalties on gas purchased from BP and sold as Redeem at it stations. This royalty payment is in addition to any payment under BP’s contractual obligation.

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Africa Oil - slowly progressing

Africa Oil published its 2016 financials last night - the USD850 million company (market capitalisation) ended the year with cash-in-hand of USD463 million.

The release included few updates – G&A was down c.50% year-on-year as a result of lower equity-based payments and the impact of the weak Canadian dollar on head office salaries, and the company reported a small USD6.5 million write off on its Ethiopian assets.

Attention remains focused on the Lokichar Basin development - preparations for FEED are underway, the pipeline Joint Development Agreement is currently in the final stages of negotiation. Separately the conclusion of the Maersk carry, an additional USD75 million of development carry may become available to Africa Oil upon confirmation of existing resources.

During Q4 2016, the company elected to relinquish its 15% working interest in the South Omo Block in Ethiopia, resulting in the USD6.5 million impairment charge mentioned above. Africa Oil’s joint venture partners in the Rift Basin Area of Ethiopia and Block 9 in Kenya have provided notification of their intent to withdraw from the joint venture; the company’s working interest in the blocks will therefore increase to 100%. These licences are due to expire in February and June 2017, respectively.

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Kosmos exploration - 2017 rising stars

With a strong balance sheet, cash flow generation in Ghana and exploration/development carry provided by BP through the recent Mauritania and Senegal deal, Kosmos is well positioned to
focus on its 2017+ exploration drilling plans, which will "test some of the largest prospects identified by the industry".

Despite its current gassy position in West Africa, management emphasises its confidence in finding higher value liquids: "Updated hydrocarbon charge model explains results to date and predicts phase - we believe there is a strong chance of finding oil or liquid-rich gas on the outboard basin floor fan fairways".

The high-graded 2017 prospect portfolio comprises:

Yakaar Prospect (Senegal): 15tcfe + 0.75-1.5bnbbl (gross unrisked) prospect located down-dip of the Teranga-1 gas discovery – combination structural-stratigraphic trap, well-defined on 3D with AVO support

Requin Prospect (Mauritania): 5–10tcfe + 0.25-1.1bnbbl (gross unrisked) prospect located outboard of the Tortue gas discovery – combination structural-stratigraphic trap, defined on 2D, 3D seismic currently being processed

Lamantin Prospect (Mauritania): 2-3bnboe (gross unrisked) prospect located in the north of the region – combination structural-stratigraphic trap with flat spot, defined on 2D, 3D interpretation currently in progress.

Requin Tigre Prospect (Senegal): 60tcfe + 3-6bnbbl (gross unrisked) resource potential located outboard of the Tortue gas discovery – combination structural-stratigraphic trap, defined on 3D seismic with AVO support and flat spot, awaiting final volumes to complete prospect evaluation and confirm well location

In terms of upcoming funding, the insurance payments should continue to cover the ongoing costs associated with the Jubilee repair. Continued TEN development drilling in 2018+ should help boost production and cash flow from Ghana. In addition the Atwood Achiever drilling contract expires in November this year and partner BP is set to provide in excess of USD900 million of cash and carry.

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Premier refinancing terms agreed

Following an extensive negotiation process, the terms around the refinancing of Premier Oil’s debt have been agreed. This will be followed by “lock-ups” with lenders in February and final implementation by the end of May.

On 3rd February, Premier Oil announced that it had agreed with key members of the “Private Lending” group on the refinancing terms. The terms include:

• Retaining the existing USD3.9 billion facilities with maturity extended to May 2021
• Covenants relaxed to 7.5x in 2017, 5x by end 2018 and returning to 3x by 2019
• Covenant net debt (including Letter-of-Credit) to be less than USD2.95 billion by end 2018

This terms will now be circulated to credit committees for approval, including RCF, term loan, Schuldschein and private placement noteholders), with lock-up agreements expected by the end of the month. The amended terms will also be presented to the public bondholders, with negotiations with convertible bondholders also close to a conclusion.

As a way to reduce increased interest payments under the new terms, Premier Oil will issue equity warrants for up to 90 million new shares (15% of issued shares) at 42.75p/share. This could be worth around USD50 million, although there is an option for lenders to take up synthetic warrants as a deferred fee of comparable value, reducing warrants issued.

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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.

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