Shell/Chrysaor deal… raising the private equity stakes

While details on the Chrysaor/Shell deal are pretty thin on the ground, it clearly represents another material transaction for private-equity investors in the North Sea. Previous press reports were that Chrysaor was in competition with Ineos and fellow PE-backed Siccar Point to acquire the portfolio of assets that were put up for sale in late September 2016 as part of Shell’s $30bn divestment programme following the BG acquisition. As recently as October 2016, the for sale package was reported in the press to be valued at around $2.2bn so the $3.0bn that Chrysaor is paying (that could increase to $3.8bn) reflects a bullish view of the sector, albeit the asset package may have changed during negotiations and oil is $7-8bbl than at that time. In terms of materiality, the Chrysaor deal easily trumps Siccar Point’s acquisition of OMV UK announced in November 2016 for up to $1bn, further increasing the exposure of PE to the UK North Sea.

Chrysaor is taking on 110mboe/d of production (making it a top six UK producer) across 10 fields (three as operator, four predominantly gas/ condensate) with attractive operating costs of c $15/boe. 2P reserves have been independently assessed (with a supporting CPR) at 350mmboe net to Chrysaor. Importantly, the company is looking to maintain this reserves base through an ongoing growth strategy.

The base consideration for the deal is $3.0bn, of which $1.0bn is being invested by new Chrysaor investor, Harbour Energy (a vehicle funded by US PE giant EIG and the Noble Group), along with a syndicated $1.5bn RBL. Shell is providing junior debt financing for the transaction with a CFO adjustment when the deal completes later in 2017.

For a largely producing portfolio of assets, the implied $8.5/boe sales price appears to be favourable to Chrysaor. However, the company is also inheriting a significant decommissioning liability, Shell retaining only $1.0bn (nominal) of decomm costs that are expected to inflate to $3.9bn over the life of the assets. We do not have detailed field models on when these will be due but Chrysaor has stated “there are no material decommissioning costs expected in the near term”.

Contingent payments are also skewed towards Shell with $600m being paid by Chrysaor in the event of an oil price rally (full pay out at $95/bbl over the period 2018-2021), while Shell will only have to return a maximum $100m in the event oil prices drop stay below $47.5/bbl. Chrysaor also will have to pay an additional $180m “subject to the achievement of certain exploration milestones payable on production”.

The company statements make no mention of tax losses, and we would not expect Shell to have many associated with these assets, hence bolt-on capital projects are likely to be attractive to Chrysaor. It’s therefore not a surprise the company is aiming to extend production life in various ways, including enhanced recovery techniques, in-fill exploration, fallow field development, and bolt-on acquisitions. The company has already confirmed it expects to withdraw the cessation of production notification at the Armada hub, instead investing to extend the life of the hub. EIG/Harbour Energy have stated they are looking at this as being the first of several transactions in the region.

All told there is just not enough information in the company announcements to know long-term what the value potential is for Chrysaor investors, and it will ultimately dependent on a) the macro environment and b) the success the company has to grow the asset base, maintain production and reserves, and push out decommissioning costs.

At a corporate level, the Chrysaor board and management team look strong. In addition to existing Chrysaor CEO (Phil Kirk) and CFO (Andrew Osborne) the team has been bolstered by ex CEO/Chairman of Apache Energy, Steve Farris, and ex board and Exco director of Shell, Linda Cook, who is now Harbour CEO.

What additional support will be added through time we will wait to see, although Chrysaor has hardly had the most auspicious of starts in the North Sea. The company had to relinquish its direct interest in its only tangible asset, Solan, in 2015 in exchange for a royalty/net production interest that only kicks in (if ever) after repayment of a $530m loan to partner, Premier Oil. With Solan finally getting into production in April 2016, c $1bn over budget and two years late, Chrysaor and its investors will be hoping for a far smoother ride with the assets it is buying from Shell.