Just as private equity's entrance into the US Lower 48 brought fresh impetus and renewed direction to exploration and production, it is transforming the competitive landscape offshore. In Brazil and the North Sea, Majors and large Independents are moving away from mature shallow-water fields to more lucrative deepwater assets, opening the space for smaller operators. In the Gulf of Mexico, a similar trend is emerging.
The nimble nature of private-equity backed firms could mean a quicker timeline for projects and more scope for innovation throughout these shallow-water and mature fields. Private-equity backed firms have aggressive growth targets, but can they unlock value, what are their exit strategies, and what can they learn from their counterparts across the world?
Capitalising on lower cost structures and focusing on quicker paybacks, these smaller, nimbler PE-backed outfits have shown an ability to turn discoveries into dollars at a faster clip than their peers.
Michael Murphy, Research Analyst
US Gulf of Mexico
With many companies chasing onshore shale and white hot prospects in Brazil and Mexico, a changing dynamic in the Gulf of Mexico has emerged with private equity-backed companies taking the lead. With the region shifting from a period of expansion to a period of capital restraint, private equity-sponsored companies – focused on investment discipline and efficiently commercialising prospects – have shown what it takes to compete.
Private equity-backed companies have shown a willingness to take a countercyclical investment approach in the Gulf of Mexico. Forecast development capital spend in the GoM is set to rise from a projected US$1 billion in 2018 to US$1.2 billion in 2020, a 20% increase. Meanwhile, Independents’ development capex is projected to decline over the same period, from US$1.4 billion in 2017 to US$1.0 billion in 2020.
Although the Majors represent the bulk of projected capital spend in the GoM for the foreseeable future, private equity-backed companies will play a larger role in the region long term. LLOG Exploration represents the largest proportion of projected private equity-backed activity, with higher complexity Lower Tertiary Buckskin expected to come online 2019, and the Khaleesi and Mormont fields in 2021.
The average time from discovery to first oil for PE-backed companies has been around three years for fields sanctioned since 2010. Many smaller players in the GoM have also been able to add production at a lower cost than their larger counterparts. In fact, the average full-cycle capex in the deepwater GoM now stands at around US$12 per barrel of oil equivalent (boe), about 40% lower than Independents.
However, the barriers to exit are significant – the buyer pool in deepwater is smaller and Wall Street is focused on tight oil and companies with large share buyback programs. PE-backed companies will need to consolidate and grow their reserve base to become more attractive. This will provide stronger exit opportunities for funds looking to monetise assets. The recent Talos-Stone reverse IPO and acquisition of Deep Gulf Energy by Kosmos demonstrate potential exit paths. Talos had to get creative to go public and Deep Gulf Energy's major investment started thirteen years ago – a long journey to monetization.
The North Sea
The UK and Norway upstream sectors have historically been dominated by the Majors, but lately the peer group is focusing its attention elsewhere. With North Sea investment by the Majors falling significantly since 2013, private equity–backed companies are entering the fray, drawn in by widespread cost reductions, particularly in supply chain. Europe has seen more and larger PR deals than anywhere outside the US in recent years, with funds mainly originating in the US where firms have proven expertise in acquiring and exploiting under-capitalised assets.
Will this change in corporate landscape be a positive one?
Over the past 24 months, a new wave of North Sea mid-caps — including Independents and private-equity (PE) backed companies — have entered the region. And PE companies in particular have grabbed the headlines, having facilitated US$12bn of M&A since 2014, and further war-chests approaching US$13 billion for future North Sea acquisitions.
PE strategies are also changing, stretching project horizons beyond the typical 3-5 year period before an asset is sold again. It is positive for the North Sea to have a new group of companies with plans to invest substantially in the region, but these companies will still face the same challenges as others: development risk, declining portfolios and a competitive M&A market.
However, the value proposition in the North Sea is strong. Both Norway and UK sit in our top 20 countries for remaining value, and recent M&A has allowed companies to get into assets with room for upside.. With a further 15 billion barrels of undeveloped resource in the UK and Norway, there is a huge opportunity for the new North Sea mid-caps.
Brazil's Campos Basin
Brazil’s Campos Basin is awaiting a similar resurgence in production according to our new report, "Brazil’s mature Campos Basin oil fields: decommission or redevelop?"
Today, Santos is the top producing basin in Brazil, accounting for 50% of the country's oil and gas production. For nearly four decades prior, with Petrobras at the helm, the Campos Basin held this top spot. Over the past decade however, as the basin has matured, investments by the NOC have decreased prompting a drop in drilling activity and production decline rates in the double digits.
Without further investment, most fields in the basin will be decommissioned by 2025 at a cost of US$8 billion. However, investing the US$8 billion in the redevelopment of these mature fields, starting in 2019, could add 230,000 boe/d by 2025 and postpone 60% of the decommissioning costs to post-2030.
The Majors and large independents aren’t the only ones who stand to benefit from the redevelopment of these mature fields.
The Campos basin's smaller shallow-water resource opportunities, which are too small for Petrobras or the Majors, present a great opportunity for small-cap operators.
Luiz Hayum, research analyst with Wood Mackenzie's Latin America upstream oil and gas team and lead author of the report
Brazil's under-capitalised assets are drawing private-equity interest consistent with the patterns in the Gulf of Mexico and the North Sea. Several PE-backed companies are currently negotiating with Petrobras the acquisition of its Campos basin shallow-water assets. And we expect Petrobras to create more opportunities for small-caps in shallow-water assets through its divestment plan.
There is considerable upside for the Brazilian government if operators pursue the redevelopment path vs. decommissioning. According the analysis, redevelopment of the Campos basin's mature fields could generate US$3 billion of additional royalty collected and generate 30,000 additional jobs by 2025. Elsewhere in Brazil, a small-cap's revitalization of the Polvo field has reduced operational costs by 62%.