A Chrysaor sounds like a fantasy monster, rather than a sizeable North Sea oil and gas producer, but for Premier Oil (PMO) shareholders it has offered a way out of a dark forest of debt.
Investors who held on to Premier following its collapse in valuation last year will see their holdings shrink even further, as existing shareholders will be left with around 5 per cent of the new Harbour Energy.
Chrysaor is effectively paying for a listing by covering Premier’s debts of $2.7bn (£1.97bn), while also giving itself four years of tax-free production because of Premier’s $4bn in UK tax losses. Through this deal Premier’s ‘stakeholders’, a combination of shareholders and creditors, will hold 39 per cent of the new entity.
The mechanics of the deal are complicated, given the ownership structure of the existing Harbour Energy – owned by Chrysaor but managed by EIG Global Energy Partners – and the need to shift the Chrysaor assets into the Premier listing. EIG will be both a major shareholder in Harbour and will provide the chairman, in the form of Blair Thomas.
The result is that London will have a £3bn-£4bn new energy player, as per Jefferies analyst Mark Wilson’s valuation forecast, which makes it the largest independent oil and gas company on the exchange. The combined company will have production of around 200,000 barrels of oil equivalent a day (boepd), at a cash break-even of $33 per barrel of oil equivalent (boe).
The current state of play is that Premier still needs official sign-off from its bondholders and other creditors. A 22 February meeting will confirm support from 75 per cent of creditors (by value), which the company says has been reached through binding support letters. The next milestone will be the ‘restructuring plan sanction’ in March and the new entity would start trading by the end of the quarter.
It’s not clear how much free float there will be, but incoming Harbour chief executive Linda Cook told an investor briefing in December that the company could “fill the void” between the majors, juniors focused on exploration and producers that are “subscale, or have too much debt”. EIG will be a major shareholder and its chief executive, Blair Thomas, will take control of the board meetings.
The company said there would be a “robust agreement” governing EIG’s control of the company, to protect minor shareholders.
Chrysaor was a relatively closed book until this deal, as a private company, so what can investors expect from this new company?
The assets
Chrysaor’s last company-shifting deal was its $3bn acquisition of a package of Royal Dutch Shell (RDSB) assets in the North Sea in 2017. This added over 100,000 barrels of oil equivalent per day (boepd) to its production, giving it a sizeable chunk of the UK’s oil and gas production. This deal also gave it the Harbour/EIG/Chrysaor structure, as Harbour equity-funded the deal and gave itself a 90 per cent holding in Chrysaor.
Premier was in the process of doing a similarly company-changing deal with BP (BP.) when the oil price – and its shares – crashed and made its play to grow, while overloaded with debt, impossible to pull off.
The company held on to this acquisition for a while, even with its plans to raise hundreds of millions of pounds from shareholders, which would have been hugely dilutionary even before the shares fell from 100p to below 20p. Adding to the drama was the intervention by creditor and short-position-holder Asia RCM, which challenged the BP plan in court. ARCM has backed the Chrysaor deal.
Its 2020 production therefore stayed at 78,000 boepd, slightly down on the 80,000 boepd performance in 2019. Premier’s major operated assets include the Tolmount and Catcher fields, while Chrysaor’s biggest operated contribution to the tie-up is the J-AREA and AELE hubs, both around 30,000 boepd net to Chysaor. Gas production is expected to start this year at Tolmount.
Pro-forma Ebitdax (earnings before interest, tax, depreciation and amortisation and exploration expense) for 2019 was around $3bn. The oil price crash knocked this off in 2020, but gas production kept the first half’s pro-forma Ebitdax at around $1.2bn. Now oil prices are back at $60 a barrel, reaching the 2019 combined cash profit level is possible. This Ebitdax figure is important because of a debt covenant that limits net debt to three times Ebitdax. With net debt at $3.2bn once the takeover is done, Jefferies forecasts Ebitdax of $2.2bn in 2021 and around $2bn for the following three years.
There aren’t many direct competitors at the 200,000 boepd level. Aker BP (Nor:AKRBP) produces a similar amount, with a valuation of $9bn compared to Jefferies’ forecast of $5bn for Harbour, so offers some comparison.
One industry valuation metric – enterprise value per barrel of 2P, or proven and probable reserves – sees Aker BP at $15 a barrel and Harbour at $13 a barrel, according to Jefferies’s forecast opening share price of 30p. This is not far off smaller producer Tullow Oil (TLW), for example, which is valued at $12 a barrel using the EV/2P metric.
Once the first-half results are out, the costs and margins of the new company will be much clearer.
The usual extras
Chrysaor and Premier have pledged to get to net zero carbon emissions by 2035 through investing in carbon capture and storage technology (CCS) in the north of England and Scotland. This was a previous Premier goal, covering scope 1 and 2 emissions.
The vast majority of carbon emissions from fossil fuels come from refining and burning the final products, rather than the extraction. Cook stated in the December briefing that the company would start with emissions from operated assets, offsetting them where necessary, and also working on reducing emissions at non-operated assets.
All will, of course, be revealed in time, as the company comes together. It is split around 50:50 in terms of oil and gas production and has a major hedging programme, so it is insulated if the current oil recovery doesn’t last, and if it does, then even better for the new Harbour. It will immediately be one to watch in the FTSE 250 and as Cook says, it could be just what some oil and gas bulls are looking for. Analysts see a dividend being paid out as soon as 2022 as well, even with more acquisitions possible. It certainly looks like an improvement on Premier.
