Bumper Start to Year for UK Upstream M&A: WoodMac

The spate of UK upstream acquisitions (M&A) has already yielded $2.27bn this year, overtaking last year's total, according to calculations by Wood Mackenzie published March 9. It said the most recent two acquisitions, involving newcomer Waldorf Production and NEO on the buy side from sellers Cairn Energy and Kerogen Capital respectively, continue what has been "a blockbuster start to the year" and make the UK "one of the hottest markets globally."

The consultancy put the deals down to the attractiveness of the country’s relatively low headline tax rate, which enables assets to generate significant free cash flow at current prices. "We estimate up to another $5bn worth of assets could change hands this year. The list of UK sellers is broad. The supermajor sell-off will continue and other private equity-backed vehicles may look to follow Zennor-backer Kerogen’s lead and monetise their investments,” it said.

Kerogen was nearing the end of its five-year investment cycle and had recently sold its stake in Energean, so there was no surprise about the Zennor sale, it said.

“The sale to HitecVision-backed NEO energy is effectively private equity (PE) selling to PE but at completely different ends of the cycle. It marks NEO’s second acquisition from HitecVision’s recently closed North Sea opportunity fund and its third in total, following the UK asset acquisitions from Total and ExxonMobil.

“This latest transaction takes production to 80,000 barrels of oil equivalent/day, catapulting it into the fifth biggest producer on the shelf, behind just Total, BP, Chrysaor (soon to be Harbour Energy) and Shell.

“Cairn Energy has had a history of selling down assets and building up new core areas. The sale of UK assets to Waldorf Energy, on the same day it announces an entry into Egypt, is very much on brand.

“The deals will help shift its hydrocarbon split towards gas while retaining its balance sheet strength, which was bolstered by last year’s sale of Sangomar in Senegal. Newcomer Waldorf Production will be looking to replicate the growth of some other PE-backed players that have shaken up the shelf in recent years. These latest deals suggest a(nother) passing of the torch,” it concluded.

Changing the backdrop

Kerogen, like a number of other private equity companies in the mid-2010s, entered the UK and Norwegian sectors of the North Sea as the incumbents were downsizing, or even, in the case of French Engie, quitting upstream gas altogether. Commodity prices were still low but the new investors saw ways to make money from operations, given their lower overhead and inhouse expertise. Zennor's CEO Martin Rowe is a former Arco exploration executive familiar with the UK continental shelf and he together with his team will become part of NEO.

But getting out again with a profit to show for it has not been so easy, as financing oil and gas projects is becoming harder, owing to environmental pressures. In a world now heading towards net-zero carbon and tighter offshore regulations governing flaring and methane leaks, institutional investors see better prospects from green energy. And some incumbents still see value in the UK as well: ExxonMobil for example is holding on to its Southern Basin gas assets.