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If the North Sea is revitalised, what are the best options for investors?

A flurry of asset acquisitions, investments and new field start-ups are all signs that the North Sea "continues to be revitalised”.
oil and gas operations
Ithaca agreed a US$2bn North Sea acquisition this week

This month, the UK Oil & Gas Authority handed out 37 new licence areas to a total of 30 operators.

It was evidence of that the UK offshore “continues to be revitalised”, according to Dr Nick Richardson, who heads the OGA’s exploration and new ventures unit.

He was especially encouraged by new prospects and play concepts in areas which have never before been licensed.

There’s no shortage deals either as ‘big oil’ sells out - typically to private equity and mid-tier independents.

Deals, deals, deals

Ithaca Energy’s recent US$2bn deal with Chevron, to acquire stakes in ten producing fields, was the latest transaction to put the spotlight on the North Sea.

In April, Chrysaor struck a deal to buy ConocoPhillips out of its North Sea business for US$2.68bn.

EnQuest Plc (LON:ENQ), meanwhile, has been building its business with new field start-ups and via the negotiating table – most recently consolidating its ownership of the Magnus field through a deal with BP.

New North Sea?

Stepping back, Ithaca, which was bought by Israeli group in 2017 for US$1.24bn is instructive of the how these ‘new’ North Sea businesses are being put together.

For a small cap firm the blueprint is grab a discovery, build a field for production (ideally with 15,000 to 20,000 bopd or more) and then get taken out for a premium price.

Larger independent E&Ps, meanwhile, pick up assets from both newly established small caps and large scale later life operations from major oil firms.

Mature basin

The basin is ‘mature’ and the big fields of the past are being managed towards end-of-life and in due course decommissioning.

Significantly, this comes against a backdrop of a broader trend of asset divestment among the so-called ‘supermajors’.

For the mid-tier acquirers it is also seen as a good outcome, especially for those carrying forward tax losses from their expensive field development projects.

It is the icing on the cake for them as these accrued benefits effectively enhance the economics of acquired aging assets.

Faroe Petroleum is geared more to Norwegian waters, but like Ithaca was acquired after it turned a promising asset base into a producing, cash generating business.

Diminishing stock market supply

One reason for the deal uptick is that there is diminishing supply.

Extraordinary assets will always find capital in almost all market conditions.

But, such opportunities are now the exception not the rule in the North Sea - the ‘best’ new oil ventures are now more likely seen further afield, in offshore frontiers in Africa and South America.

Who’s left

There are now fewer North Sea firms on the stock exchange than in the past and project that remain involve development and production scenarios, rather than big bang exploration.

i3 Energy Plc (LON:i3E) is typical. It is working to bring its Liberator oil field to production, in doing so creating a hub of multiple ‘satellite’ fields.

Success here will put the company on the map, as phase one is predicted to yield 20,000 bopd with ‘first oil’ targeted by mid-2020.

Explorer Jersey Oil & Gas Plc (LON:JOG), partnered with Equinor, is following up its initial success with the Verbier discovery well.

Though an appraisal programme earlier this year disappointed Verbier is still estimated to host some 25mln barrels, plus some as yet untested potential in possible extension areas.

Another ambitious North Sea oiler is Parkmead Group Plc (LON:PMG), which has built a portfolio via the acquisition of minority and non-operated stakes in new and existing projects.

Measured at the end of December, the company’s investments gave it around 650 bopd of net production.

The main thrust for growth is the Greater Perth Area  (GPA) development in the UK Moray Firth, and, the Platypus gas development in the UK’s southern North Sea area.

At GPA the emphasis is on securing access to infrastructure, to transport produced crude, meanwhile, Platypus is slated for ‘first gas’ in 2021.

Interestingly, the aforementioned Verbier project could provide synergies for Parkmead’s nearby Polecat and Marten assets (as all of them will require infrastructure options).

The larger groups

Larger firms EnQuest Plc (LON:ENQ), Cairn Energy PLC (LON:CNE) and Premier Oil PLC (LON:PMO) are all growing their production profiles in the region.

EnQuest and Cairn are partnered in the Kraken field, while Cairn and Premier are tied-up in the Catcher field – both of which came online in 2018 (last year, the former produced around 30,000 bopd and the later yielded an average of 43,000 bopd).

Catcher is now due to flow at an increased rate of around 66,000 bopd gross, and, Kraken is expected to deliver 30,000 to 35,000 bopd.

Premier also now aims to bring online the Tolmount by the end of 2020, with peak production pitched at 58,000 boepd gross.

What about Hurricane?

Hurricane is the exception to the North Sea rule for a number of reasons.

Firstly, and somewhat pedantically, it is not actually in the North Sea. Technically the assets - the Rona Ridge group of discoveries - are located  in the West of Shetland region of the UK Continental Self.

This observation is more than just pedantic though as this more remote and exposed offshore region is comparatively under explored compared to the drilled-out North Sea, and that’s partially so a large accumulation of crude remained untouched until now.

Beyond geography, Hurricane is also doing something new in this part of the world. It is unlocking a ‘fractured basement’ play.

This is basically where much older, deeper geology has been forced up (by either earthquake or other tectonic force) putting the hydrocarbon systems within reach of explorers.

In such a play the oil is not held within rock formations themselves, rather they are trapped in the cracks and gaps in between and around them.

Similar resources have been exploited elsewhere - in Yemen, Libya and Vietnam for example – and, over recent years Hurricane has brought the Lancaster field to the cusp of production.

Much achieved

Hurricane has had its sceptics. It still has a phase of de-risk and proof of concept ahead.

Gathering as data from an early production system is presently a priority.

Nonetheless, the company has already achieved an awful lot and just this week delivered ‘first oil’ from the Lancaster EPS.

Whilst Lancaster begins a ramp-up to a targeted 17,000 bopd, via the EPS, upcoming well results and progress towards the ‘full’ field development will likely create further value catalysts for the London-listed firm which is currently valued above £1.25bn.

The question, perhaps, for investors whether Hurricane will be left to continue this journey alone or whether as a fledged production and exploration business it will find itself among the next names to feature in the takeover stories.

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