Path lies clear for North Sea mergers

City Editor

Monday 18 March 2013

AFTER Ithaca Energy saw off its hedge fund foes last week, the way is cleared for its recommended takeover of Valiant Petroleum and the addition of a new mid-market player to the UK oil scene.

platform: Recent merger activity could herald more consolidation of the UK oil industry. Picture: Angela Catlin

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TIM SHARP CITY EDITOR

In the eyes of some industry actors, this could mark an acceleration of the long-awaited consolidation of the UK oil industry where 90 different companies boast oil and gas interests.

Aberdeen-headquartered Ithaca's announcement of its £203 million bid for Valiant prompted a brief skirmish with a few investors, who were keen to see Ithaca itself sold.

After the vanquishing of the activists, the path is open, subject to a vote of Valiant shareholders, for a merger which will create a firm that in scale will sit in between North Sea-focused EnQuest and wide-ranging Premier Oil.The deal is a rare example of one junior oil company buying another when we have become used in recent years to hungry majors buying up production, whether Scottish Gas owner Centrica picking up Venture Production or Korea National Oil Corporation acquiring Dana Petroleum.For Ithaca, the deal ends its reliance on a small number of fields, doubling production to 14,000 to 16,000 barrels of oil per day in 2013, rising to 27,000 in 2014. It will be a company with reserves in production and development virtually in balance and cash flow financing most development, helped by $500m (£332m) tax losses acquired with Valiant.As a larger entity, it is more likely to get access to larger and more lucrative deals, such as divestments by the oil giants.Whether the deal is beneficial for the North Sea oil industry is harder to unravel. Ithaca won't continue Valiant's exploration in UK waters and will reduce its stakes in Valiant's UK assets.Instead, encouraged by tax breaks, it will focus on building its Norwegian interests. But there are wider implications that are positive. The deal could signal a loosening of banks' purse strings. Ithaca obtained bridging finance from France's BNP Paribas, Scotia Bank of Canada and Bank of America Merrill Lynch, all major institutions. And while some in the City grumbled that the price was rich, the banks charged Ithaca just 1% above the London Interbank Offered Rate for the two-year facility.Experts believe that with up to 24 billion barrels of oil equivalent still to be recovered from the UK continental shelf, more deals are bound to come.Robert Aitken, oil and gas specialist in PricewaterhouseCoopers' Aberdeen office, said: "Exploration and production assets in the North Sea continue to have appeal to potential acquirers. "Investment activity has benefited from recent fiscal stability, particularly after clarity over tax incentives and relief for decommissioning costs."Energy consultancy Wood Mackenzie recently predicted continued strong M&A activity in the UK North Sea after the total value of deals hit a 10-year high of $10bn (£6.25bn) in 2012. Industry sources talk of potential targets including Bridge Energy, which succeeded in beefing up reserves by 22% last year, and Faroe Petroleum, which has long been talked of as a bid prospect, even as it eyes up takeover opportunities itself.Mr Aitken said: "Over 90 entities held oilfield asset interests in the UK at the end of 2012, and while many of these may be small-scale participating interests, over 40 entities held 25% stakes or more in individual UK producing assets. There is more room for consolidation amongst those with existing production."

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Path lies clear for North Sea mergers

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