Heritage Oil has struck an $850m (£545m) deal with Anglo-Dutch oil giant Shell and its partners to purchase a large non-operating interest in a group of producing oilfields in Nigeria, Africa’s leading oil producing nation, a move which will add further to Heritage's reputation for operating in some of the world's more demanding jurisdictions.
The ambitious acquisition will boost the junior oil and gas explorer’s net production profile from a paltry 650 barrels of oil per day (bopd) to more than 11,350 bopd, and increase its proved and probable oil reserves by an estimated 217m barrels of oil net to the company. The price appears right, too – Heritage is paying a headline price of $1.76 per barrel of reserves, compared with $5.73 per barrel paid in previous Nigerian transactions, according to the company.
The deal will see Heritage acquire a 45 per cent stake in a local Nigerian company, Shoreline Natural Resources, which is in turn buying a 45 per cent interest in the prolific OML 30 Block, with the remaining 55 per cent interest held by Nigeria’s national oil company.
Such assets come with significant operational and political risks attached – after all, they were on Shell’s sale list for a reason. The Nigerian government is struggling to cope with rampant oil theft from pipelines in the country – currently estimated at anywhere between 150,000 barrels a day to more than 400,000 barrels a day, or around $1bn of state revenues a month. Several sections of pipeline at the OML 30 Block suffered from vandalism during the militant period in the country from 2006 to 2009, which need to be repaired.
Then there is licensing risk, as the OML 30 lease expires in 2019 – Heritage expects it to be renewed. The Wall Street Journal also reported an analyst and former Shell employee in Nigeria as saying that one of the group’s biggest frustrations with the assets was a “crippling backlog of cash calls” from the Nigerian national oil company. Shell’s sale continues its strategy of moving away from onshore assets in Africa and into offshore projects, where its rigs are better insulated from oil theft, militancy, nationalisation and local constraints.
But Heritage is no stranger to these types of risk – it operates in challenging regions such as Libya, Kurdistan, Tanzania and Uganda. And Heritage chief executive Tony Buckingham’s previous experience as a former mercenary and security consultant in Africa should help.
And while Heritage believes it can get the most out of the underinvested assets through well workover programs, repairs and horizontal drilling, analysts caution that it will not be the operator of the block and will have to rely on local Nigerian partners for success.
To finance the purchase, Heritage has arranged a $550m bridge loan from Standard Bank Group, as well as a $370m rights issue underwritten by two investment banks. It has yet to disclose how much its Nigerian partner is paying up front for its share of the interest.
