Oil price war may trap private-equity firms in North Sea

The last time crude prices crashed in 2014, the North Sea looked like a treasure trove for private equity looking to buy cheap assets, build them up and sell for a profit. Now, just as these firms are seeking an exit, the oil-price war might leave them trapped

Private equity-backed companies made significant inroads into the region over the past decade, scooping up assets as Big Oil retreated from the aging fields. While BP Plc was the U.K.’s largest producer back in 2009, newcomer Chrysaor Holdings Ltd. now holds the top spot, according to Wood Mackenzie Ltd.

But their typical timetable of turnaround and sale within five to seven years is seriously under threat. Many investors look set be stuck with assets far longer than anticipated, and in much tougher conditions.

“A traditional exit for private equity is not straightforward” in today’s market, said Paul Markwell, vice president of upstream oil and gas at consultant IHS Markit. Even before this week’s historic price slump, concerns about the value of oil assets in a carbon-constrained world were making it harder to find large groups of shareholders willing to support initial public offerings, he said.

The world is awash with crude as the coronavirus wipes out demand growth just as Saudi Arabia and Russia embark on a destructive price war. Deals were already drying up in the fourth quarter, with the value of mergers and acquisitions in the U.K. down more than 30% from the 12-month average to $1.75 billion, according to GlobalData.

Since then, a barrel of crude has lost almost half its value and is now languishing in the $30s.

Deal Pulled

Blackstone Group Inc., one of the largest private equity firms, has already pulled the sale of North Sea oil producer Siccar Point Energy Ltd., according to people familiar with the matter. It had received final bids in January from companies including Chrysaor and Chinese oil major Cnooc Ltd., but decided to suspend the process until the market improves.

Europe’s IPO pipeline could run dry as two of the largest offerings that were expected this year now look doubtful. Wintershall Dea GmbH, which had said it would be “IPO-ready” by the summer, is having a rethink, according to people familiar with the plan. Exploration and production company Neptune Energy Group Ltd., backed by Carlyle Group Inc., CVC Capital Partners and a Chinese sovereign fund, is also reconsidering its timeline for selling shares.

In addition to Siccar Point, other deals are looking difficult. Interest in acquiring Spirit Energy, Centrica Plc’s exploration and production unit, has been tepid, according to people with knowledge of the matter.

In Norway’s sector of the North Sea, the picture is just as gloomy. Private equity fund HitecVision AS scrapped plans to sell a slate of oil-service companies, instead combining them in a new entity. And Espen Westeren, a former associate of billionaire John Fredriksen, closed his hedge fund, conceding that his bet on a rebound in the price of hydrocarbon assets had faltered.

Delayed Returns

As long as the coronavirus pandemic and the Saudi-Russia price war persist, the North Sea’s private equity players have two options.

“Private equity may have to learn to live with longer investment cycles,” according to IHS Markit’s Markwell. The door to listings may reopen, but companies will have to keep IPO opportunities in the background for now.

Retaining North Sea fields for longer than planned may not just delay the desired return on investment, it could bring operational complications. The region is full of fields nearing the end of their life that will one day have to be decommissioned. By the middle of this decade, companies will be spending more on removing redundant oil and gas facilities than developing new fields, according to an analysis from Wood Mackenzie.

Cherry Picking

If holding onto assets isn’t an appealing choice there are still buyers around — at a low enough price.

“There’s been a glut of assets for sale,” said Andrew Austin, chief executive officer of North Sea E&P company RockRose Energy Plc, which specializes in acquiring and running assets at very low costs. “Companies like us can cherry pick because of the strength of the balance sheet.”

The company pumps about 20,000 barrels equivalent of oil and gas a day, built up from numerous acquisitions of assets from companies including Idemitsu Kosan Co. and Marathon Oil U.K. RockRose, named after a plant that thrives in harsh environments, sees “significant” free cash flow still to be extracted from the North Sea, Austin said.

There’s also Longboat Energy Plc, run by the former management team of Faroe Petroleum Plc, which says it’s poised and ready to scoop up “distressed” assets.

“We are well placed to exploit existing as well as new opportunities arising from falling oil prices,” Longboat CEO Helge Hammer said in a statement. “We expect transaction valuations to decrease.”

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