Producer Premier Oil PLC backed out of its agreement to purchase aging North Sea upstream assets from BP PLC, and the London-based oil major may not be in a rush to find a new buyer given the currently depressed market environment, analysts said.
Even assuming a rebound in commodity prices as well as the injection of fresh capital, it will still remain a challenging time for the completion of asset deals, energy consultancy Enervus said in an Oct. 5 summary of its third-quarter upstream M&A report.
"For the remainder of 2020, there is the potential for additional corporate deals; however, the market for asset deals is likely to remain sluggish," Enverus senior M&A analyst Andrew Dittmar said. "Gas plays seem poised to draw more attention for asset acquisitions than their oilier counterparts as there is more optimism around the outlook for gas pricing."
Following the epic oil price crash earlier this year, Premier, which has agreed to an all-stock merger through a reverse takeover by private equity-backed Chrysaor Holdings Ltd., found it difficult to obtain financing for the proposed deal with BP, prompting the supermajor to reduce its asking price to $210 million in July.
BP is now assessing what might come next for the North Sea assets. "We will be considering our options for the future of the assets," BP spokesperson Rita Brown said in an Oct. 6 email.
During BP Week in September, CFO Murray Auchincloss said that since the company has completed a sizable chunk of its divestment plan, it will be "focused on value" going forward and can ultimately wait for commodity prices to rebound further before winding up the program by the middle of the decade.
"We are not in a rush and we will wait for competitive pricing," Auchincloss said.
However, BP will also need to amplify upstream divestitures as it sheds its most carbon-intensive holdings and accelerates its transition into an integrated energy company. BP executives spent three days in September explaining how the oil major will reinvent itself without sacrificing returns by expanding into renewable energy through structured financing, using its trading arm to optimize output, and selling off stakes in various higher-cost projects.
Scooping up what the majors have deemed noncore infrastructure between the U.K., Denmark and Norway, smaller producers have been moving into the North Sea, hoping to extract the remaining reserves from the older assets. Apart from Chrysaor, other potential buyers for BP's assets could include NEO E&P Ltd., EnQuest PLC, and Tailwind Energy Ltd., all of which have reportedly shown interest in some of Exxon Mobil Corp.'s operations in the region.
The sale of BP's North Sea holdings figures into BP's larger goal of selling off around 600,000 boe/d and divesting a total of $25 billion in non-core assets by 2025.
"We have already completed or agreed to transactions approaching half of this total," Brown said, pointing to the $5.6 billion sale of the company's Alaska business and the pending $5 billion sale of its petrochemicals business, which is expected to be completed by the end of this year.
BP expects to reach about $15 billion in assets sales by the middle of 2021 after hiking its previous plan to divest $10 billion worth of assets over 2019 and 2020.
Most of the proceeds from BP's divestitures are expected to be used by the company to help pay down its massive debt and reduce gearing — a ratio of debt to equity. With debt rising in the first quarter to its highest level in several years, BP in August opted to cut the dividend for the first time in ten years, a move that, combined with the proceeds from its divestment program, is expected to help to reduce net debt to about $35 billion.