A WAVE of mergers, acquisitions and asset sales looks set to sweep across the North Sea after Aim-quoted Valiant joined Lochard Energy on the takeover market last week.
Tax changes, and the difficulty in raising funds to see new fields through to production, are among the reasons cited for smaller companies seeking partners, while years of high oil prices have left larger firms with substantial war chests.
Already some of the biggest fish in North Sea oil are circling minnow Lochard Energy – which is headquartered in Australia but whose main asset is a stake in the Athena field in UK waters – after it put itself up for sale.
Premier Oil, Centrica, EnQuest and Cairn Energy have all been touted as possible bidders, along with state controlled firms such as Norway’s Statoil and the Korea National Oil Corporation, which bought Aberdeen-based producer Dana for £1.8 billion in 2010.
Marc Kimsey, senior trader at Accendo Markets, said that at around 7p a share and having lost around 40 per cent of its market value since May, the firm should find a choice of suitors, especially since the recent ousting of its chief executive ended a protracted and costly lawsuit. He said: “Discounted price, free of baggage and in an M&A hotspot, offers to come? You bet.”
However, he said Lochard may not be in the strongest bargaining position when it comes to setting a price.
“Many private investors are calling for premiums several times that of the current value, they will have to rein in their targets. It’s unrealistic to expect shareholders of potential suitors to ‘OK’ a 300 per cent premium.”
However, those who accumulated in recent weeks at around 7p or 8p “shouldn’t be disappointed”.
Henry Dixon, manager of the Matterley Undervalued Assets Fund, also believes that the advantage may be with the buyers, since a rise in taxes on production has meant scale is all important. He says smaller players are realising this by putting themselves up for sale.
He added: “In the tough funding environment we are in, companies with new discoveries are struggling to finance them to production. To my mind, therefore, it is a buyers’ rather than a sellers’ market and we’re supportive of the current strategy of consolidation being employed by Enquest.”
Valiant, which is considering selling itself or disposing of assets, may ultimately decide that it is better to turn buyer and bulk up its own operations instead. Its shares rose only modestly on the announcement, and broker Peel Hunt downgraded it to “hold” on Friday, saying its value was fair at around £180 million.
Among larger players who have recently bulked up their business in the North Sea recently are Parkmead, which took over Deo, and Edinburgh-based Cairn Energy, which bought Nautical Petroleum. Cairn said following the acquisition it was satisfied with its business in the region, and has since looked to explore further afield with a farm-in off the Morocco coast. However, the company’s huge cash pile from the partial sale of its Indian venture mean it is still being linked to more UK acquisitions.
The complex system of taxes on different kinds of fields, depending on whether they are “mature” or not, and allowances on decommissioning costs and harder-to-reach oil reserves can also favour larger companies, as they are best able to structure activities in a way that optimises the tax-breaks. With an effective tax rate of 81 per cent on some oil production, that is unlikely to change with new allowance for “brownfield” operations unveiled on Friday.
Even Aberdeen’s Xcite Energy, which has successfully raised money this summer to fund its operations, has been unable to shake off rumours that it will take a partner in its Bentley field. Norway’s Statoil is cited as the obvious candidate, as it operates a similar field nearby.
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