Has M&A created value in the North Sea?
Since the turn of the decade, it’s been a frenetic period for M&A in the North Sea. Against a backdrop of oil price volatility and a dramatically changing corporate landscape, activity reached record levels. But have acquisitions created value so far?
Wood Mackenzie recently analysed 55 of the largest North Sea deals announced between 2012 and 2018 from today’s vantage point to quantify underlying value creation.
The headline results make uncomfortable reading for buyers. The aggregate purchase price was US$52 billion. Today, we value these deals at just US$43 billion. Of the 55 deals, only 18 have made a positive return.
Two factors have had the biggest impact on value destruction: asset under-performance (post-deal) and oil and gas price movements.
When to act?
Neivan Boroujerdi, principal analyst, North Sea upstream said: “Value destruction was at its worst between 2012 and 2014: a period where most buyers will have assumed higher oil and gas prices than have since been realised.
"Conversely, the opportunists that were willing to pull the trigger at the bottom of the market in 2015 and 2016 have benefited from the uptick in prices that followed.”
He added: “But it’s too simplistic to say that ‘winners’ and ‘losers’ were determined by whether they lucked out on the commodity price bet. Regardless of the cycle, there were other factors at play.”
Keys to success
The critical determinants of success, he said, included knowing the region and the assets, and having a value creation strategy in place.
“Asset maturity was crucial,” he added. “Pre-production assets almost exclusively destroyed value, while producing assets generally made a positive return.
“Operatorship is also a factor in value creation. And those operators who took an ‘acquire-and-exploit’ approach – taking on under-loved assets, reducing costs and increasing investment – have seen results. Fundamentally, operatorship allowed incumbents more control over targeting upside.”
Mr Boroujerdi said: “Private equity is the big winner on paper, but an exit route looks more complicated than it did a few years ago.
“So what does this tell the next wave of buyers? Being on the right side of the oil price bet is important, but in the absence of a crystal ball, there are others.
“While having operatorship tends to give a better return, this could be the time to align with some of the new operators with big investment plans. Pre-production assets are often the most exciting and tick the box in terms of growth. But they are uncertain, so risk them accordingly.”
He added: “You need to know what your exit strategy is too. Private equity-backed companies look to be the big winners so far.
“On paper things look good, but the real work is still to come – both in terms of fulfilling development plans and eventually monetising investments. Particularly with uncertainty over investor appetite for putting new money into oil and gas.
“Ultimately,” Mr Boroujerdi said, “our analysis warns that firms shouldn’t let over-arching corporate goals erode value.”