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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Barents Sea licence awards

The Norwegian Ministry of Petroleum and Energy has issued ten new production licences in the Barents Sea as part of Norway’s 23rd licencing round, following applications made by 26 companies in January. This is the first time since 1994 that new exploration acreage has been made available to the industry in the southeastern Barents Sea. 

From the International E&P names:

• Lundin has been awarded interests in five licences (three as operator)
• Det Norske has been awarded interests in three licences (one as operator)
• Tullow has been awarded an interest in one licence (non-operated)
• Cairn (through its Capricorn Norge subsidiary) has been awarded three licences (one as operator)

The companies have committed to binding work programmes that primarily include a drill or drop decision to be made within two years.

Barents Sea licence areas
Source: NPD

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Statoil acquires a further stake in Lundin Petroleum

On 14^th 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.

This article was originally posted on 14^th January 2016 and has since been updated

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.

**Update**
On 3rd May, Statoil and Lundin announced than it had acquired an additional 15% in  Edvard Grieg (licence PL388) from Statoil in exchange for issuing 31.3million shares to Statoil worth USD578million. The transaction is expected to close on 30^th June 2016, pending regulatory approvals.

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Ophir's Fortuna farm-out terminated

On 29^th April 2016, Ophir announced that it had terminated its Fortuna farm-out discussions with Schlumberger. Back in January, Ophir announced that it had entered into a non-binding Heads of Terms Agreement with Schlumberger for upstream participation in the Fortuna FLNG development that would result in the oilfield service company carrying Ophir to first oil. However, the two companies have been unable to complete the transaction on the terms agreed and discussions have been terminated.

Ophir’s management must now demonstrate its continued confidence in its ability to attract an alternative partner for the FLNG project. Although development costs have continued to fall as studies continue, reservations still exist about any plans for Ophir to self-fund and sole risk this development.

Having completed the upstream FEED studies, gross upstream capex requirement from FID to first gas has been reduced again, to USD450-500million from USD600million. Ophir continues to progress the project, and fully-termed LNG sales agreements are nearing completion. Offtake selection has progressed to a decision between three alternative solutions. But given additional time is required to fully develop these options to binding agreements, FID has been pushed back to Q4 2016 with first gas now forecast for 2020.

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Gran Tierra the Consolidator

On 30 March, Gran Tierra announced the private offering of USD100 million convertible notes which successfully closed on 6 April. The new funds will allow Gran Tierra to accelerate its exploration programme and places the company in a strong position to act as consolidator in Colombia.

Gran Tierra completed two acquisitions in Q1 2016, building out its portfolio particularly in the Putumayo Basin of southern Colombia and supplementing its interests in the Costayaco and Moqueta fields. With development drilling on Costayaco and Moqueta due to end through Q1 2016, the company will be starting its 2016 exploration campaign shortly, commencing on the newly acquired PUT-7 block. The newly acquired assets provide ample opportunities to accelerate reserves and production growth through the drill bit.

Through a combination of acquisitions and re-investment in the core producing fields, the company is expected to increase production by c.20% from 2015 levels of 23mboepd to c.28mboepd in 2016. The company retains a strong balance sheet with c.USD180 million of cash following the recent fund raise. The company’s cash position, together with operating cash flow of c.USD100 million (if Brent averages USD40/bbl in 2016) is more than sufficient to fund its 2016 base capex budget of USD107 million and its discretionary budget of an additional USD61 million.

The peace process between the Colombian Government and the FARC is expected to conclude shortly and it is anticipated that southern Colombia, historically an area of focus for the FARC, should benefit from greater stability.

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Further payments by the KRG

DNO and Genel Energy announced on 22 March that the Tawke and Taq Taq participants have been paid by the Kurdistan Regional Government (“KRG”) for oil sales during February. News of another month of payment should help boost sentiment.

Given that the export pipeline was out of service during the second half of February, sales at Taq Taq and Tawke were down materially month-on-month at 62,091bopd and 73,124bopd, respectively. Sales into the local market from both fields were, however, invoiced at the wellhead export netback price, in line with the payment mechanism announced by the KRG on 1 February; this process helped limit the month-on-month reduction in revenues. Flows into the export pipeline resumed on 11 March.

Genel, as operator of Taq Taq received USD12.6 million for oil exports, down from January’s USD16.3million. An additional USD2.5 million payment has been made towards recovery of the receivable, down from USD3.2 million.

DNO, as operator of Tawke has reported receipt of USD11.29 million for exports, down from USD17.99 million in January. An additional USD2.17 million has been paid for past deliveries, down from USD3.46 million in January.

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Troubles at Jubilee

Jubilee FPSO

On 18^th February, Tullow and Kosmos warned of a potential maintenance issue with the Jubilee FPSO’s turret. At this stage oil production and gas export is continuing as normal but the vessel is now set to be held in position by tugs rather than weathervane. The implications are that the turret may require maintenance that results in unscheduled shut-in and additional costs to rectify the issue. The length of any repair work is not yet known. Jubilee is forecast to contribute nearly half of Tullow’s H1 2016 production, and all of Kosmos’ H1 2016 production.

Following a recent inspection of the turret area of the Jubilee FPSO by SOFEC, the original turret manufacturer, a potential issue was identified with the turret bearing. As a precautionary measure, additional operating procedures to monitor the turret bearing and reduce the degree of rotation of the vessel are being put in place. SOFEC will now undertake further offshore examinations.

New field start-up have been a cause of concern for investors, as a number of recent offshore projects have cost more and taken longer to deliver. However, the news is a reminder of the risks of the focussed nature of E&P portfolios – many of the international E&P companies are dependent upon a single asset, and even the largest companies – including Tullow and Lundin (Edvard Grieg) remain heavily depend on just a couple of assets.

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