Private equity 'game changer' for North Sea M&A

Out-Law News | 22 Feb 2019 | 2:44 pm | 2 min. read

Private equity has been a game changer for North Sea dealmaking, disrupting the traditional ways of conducting mergers and acquisitions (M&A) in the region, according to experts at Pinsent Masons, the law firm behind

The Financial Times has reported on the "changing face of the North Sea" (registration required), highlighting $12 billion worth of North Sea acquisitions by private equity firms since the November 2016 purchase by Siccar Point Energy of up to $1bn worth of assets from OMV, the Austrian oil and gas company.

Corporate law expert Brian Thumath said that the report reflected what Pinsent Masons was seeing in the North Sea. He said that, as well as "changing the landscape of M&A", private equity money was also being used to fund capital expenditure on new exploration and development post acquisition with existing asset holders now getting to grips with PE backed entities as their co-venturers.

"As a firm, we are seeing a number of deals in the North Sea currently where private equity is leading the charge from an M&A perspective  and this is impacting on deal financing, structuring and execution," he said.

"The continued lack of access to the capital markets for existing listed exploration and production companies makes large ticket M&A funding difficult for independent non-major oil companies. Private equity has access to the funds required to execute the deals and is coming in to buy these portfolios that are for sale," he said.

"This is backed by the composition of the bidder groups for the live portfolio sales being conducted by the majors in the North Sea, with private equity backed E & P companies comprising a significant proportion of the active suitors in these processes. By competing with more traditional buyers, private equity-backed entities are changing the nature of M&A and in particular competitive processes," Thumath said.

"Existing companies, particularly the major oil and gas companies, are having to continuously educate themselves as to how PE-backed companies do business, their sources of capital and the alternative financing structures that private equity uses. This is still new to a lot of majors, and when they sell and the buyers are PE-backed, the majors need to continue to get to grips with this. Sellers are no longer being asked to 'compare apples with apples' when reviewing bids across PE backed companies and established listed bidders."

"Financing structures to deal with decommissioning in particular are continuing to evolve as private equity works with majors and independents to structure their deals to provide for future decommissioning obligations on mature assets," he said.

Thumath said that, for the sector, it would be interesting to see how private equity investors would go on to achieve an exit within the traditional five to seven year period common to private equity as their E & P investments matured. This could be through an initial public offering (IPO) for the larger companies; or by onward sale of portfolios to traditional oil companies or secondary investments by other private equity firms, he said.

Wood Mackenzie, the consultancy, is estimating a further $13bn worth of private equity investment into North Sea oil and gas, according to the Financial Times.