North Sea oil and gas industry ripe for M&A activity but constrained by lack of cash
The North Sea is ripe for takeovers with multiple oil and gas assets up for grabs, but the lack of finances and willpower means few players will be able to benefit.
Alex Smith, equity research analyst at Investec, told City A.M. that multiple entities were looking to leave British waters, with major oil and gas giants already exiting the basin, meaning there was an opportunity for incumbent operators to snap up assets and consolidate their market positions.
However, there was a lack of funds available for many companies, reducing investor appetite and leaving only a few oil and gas producers in a position to take advantage of the uncertainty – combined with dwindling external investment from private equity groups.
He said: “The list of list of entities buying assets is shrinking: the majors are out of the North Sea, the top producer Harbour Energy has claimed they will not be adding assets and private equity appetite is diminishing.”
This follows the introduction of the now-toughened Energy Profits Levy, which combined with corporation tax imposes a 75 per cent tax rate on domestic producers.
With the government extending its lifespan until 2028 and Labour unlikely to reverse the levy if it enters office – this has cooled investor sentiment towards an already declining basin.
“Overall, I don’t expect there to be a frenzy of activity but there are definitely assets up for grabs and with very few capable buyers suggests those with appetite should do well in this market,” he said.
Smith pointed to Serica Energy as one of the few cash powered North Sea producers which had the capability to take on unwanted assets from departing companies.
He said: “The list of capable operators with appetite for deals is shrinking. Serica sits quite nicely, with a robust balance sheet, a capable operator with strong track record.”
This follows Serica boss Mitch Flegg confirming to CityAM last week that his company remains open to takeover opportunities.
Brindex, the industry body representing independent producers played down the prospect of a spree of deals – with investor sentiment resolutely gloomy.
Chair Robin Allen said: “Globally there are always sellers and buyers for oil and gas assets; however, in the UK, given the current punitive fiscal regime and some negative signalling from some sections of the Labour Party, buyers have a significantly reduced appetite for anything in the UK unless it is for a complimentary asset to an existing UK portfolio.”
Industry sources told CityAM any bump up in mergers and acquisitions will simply be case of operators consolidating positions in a declining North Sea basin, rather than rejuvenating the industry with increased production.
Companies were also looking for ways to immediately bolster cash flows with investors hungry for buybacks and special dividends.
“If you take the view that there won’t be much development of new projects, as you do not want to take the risk of a huge long time lag between committing capital and generating revenue, your only option is buying production,” one source said.
This meant there was more of a likelihood of small players teaming up than large amounts of capital committed to big developments such as Rosebank and Cambo – which awaits final approval.
Examples include gradual increases in market share from Serica which snapped up Tailwind earlier this year and Neo buying shared stakes in new projects.
Earlier this year, the North Sea Transition Authority calculated a sharp drop in predicted capital expenditure from 2019 to 2028, easing from £5.42bn to £2.5bn over the ten-year window, with decomissioning costs also rising from £1.39bn to £2.0bn.