Subjects: SVY, CSR
ARCM Question List #3: Premier Oil Becoming "Premier Gas" / Risk of Negative Economic Returns on the Shearwater Acquisition
LONDON, Jan. 29, 2020 /PRNewswire/ -- As detailed in ARCM's press release on 24 January 2020 (available here), and further to its statement on 27 January (available here), ARCM continues to pose questions to the Company relating to the proposed acquisitions, which ARCM believes will expose the Company and its business to significant incremental risks.
For the benefit of all stakeholders, we call upon the Company to provide full and transparent responses to these questions. In response to enquiries received from stakeholders, ARCM has also updated the FAQ section (available here) of the website in an effort to answer all of the questions received to date.
In Question List #2 published on 27 January (available here), ARCM questioned whether the NAVs presented by the Company for the Shearwater and Tolmount gas fields were based on realistic assumptions and what these NAVs would be at the current forward prices, which are 20-50% lower than the assumptions used by the CPRs.
In this third series of questions, ARCM's focus is on (i) the fact that these acquisitions will significantly increase the Company's exposure to the UK gas market, where the forward market is pricing in worsening supply/demand conditions; and (ii) the risk of negative economic returns on the Shearwater acquisition based on the forward curve.
Pro Forma Exposure to the UK Gas Market
- As indicated by the forward curves shown below, the UK gas market is faced with difficult supply/demand fundamentals. This dynamic is primarily driven by (1) the rapid growth in global LNG export capacity resulting in LNG oversupply and (2) Russian gas suppliers defending market share against LNG supply into Europe.
Source: Bloomberg on 24 January 2020.
- In order for stakeholders to be able to understand the incremental risks associated with the proposed acquisitions which significantly increase the Company's exposure to UK gas, we call on the Company's management to provide answers to the following questions:
- What percentage of its total production is expected to be gas in 2021-23 after these potential acquisitions and the full ramp up of Tolmount and Andrew LC?
- Specifically, what percentage of its total production will be UK gas in 2021-23?
- What are the Company's UK gas price assumptions used for planning and budgeting relative to the forward curve?
Risk of Negative Economic Returns on the Shearwater Acquisition
The Company's creditors are being asked to extend maturities by 2.5 years in order for the Company to pursue these high-risk acquisitions. It is important for the creditors to evaluate the risks associated with each of these assets based on the forward UK gas curve. As the first example, ARCM makes the following observations on the Shearwater acquisition based on the Company's 7 January presentation and RNS.
- As shown in the table on Page 12 of the Company's presentation on 7 January (available here), based on the $175 million bid price and 15 mmboe of 2P reserves, the Company is paying $11.7/boe for 2P UK gas and gas condensate reserves, before considering any decommissioning related liabilities.
- The Company, in its 7 January presentation and RNS, did not disclose the decommissioning liabilities associated with Shearwater. However, the total disclosed pre-tax amount for the proposed acquisitions is $600 million. Shearwater accounts for 26% of total 2P reserves of the proposed acquisitions. Without having any incremental data points, if Shearwater, say, accounts for 20-25% of the decommissioning liabilities, that would be $120-$150 million, or $8-10/boe based on 15 mmboe of 2P reserves.
- Although the Company did not disclose the operating cost estimate for Shearwater in its presentation, it disclosed that the "Andrew operating costs were $17/boe in 2019" and that "the combined opex of Andrew, Shearwater and Tolmount is expected to be less than US$20/boe for the period between 2019 and 2024".
- Even if one adopts a lower opex for Shearwater, say $15/boe, the annual spend should be higher once maintenance capex and overhead allocation are accounted for.
- Overall, based on the above, we are looking at an asset that is acquired for $11.7/boe (15.4p/therm) (based on 2P reserves), has annual run-rate costs in the $15-20/boe (19.8-26.4p/therm) range in addition to potentially $8-10/boe (10.6-13.2p/therm) of decommissioning liabilities. These figures have to be considered in the context of UK gas prices.
- Currently, the Calendar 2020 UK gas forward price is 28p/therm, the equivalent of $21/boe. Calendar 2021 UK gas forward price is 37p/therm, the equivalent of $28/boe and Calendar 2022 UK gas forward price is 41p/therm, the equivalent of $31/boe. Gas condensate would receive a premium to these prices.
Based on these figures and the forward curve it is very difficult to see how the Shearwater acquisition is in the best interest of creditors who are being asked to once again extend maturities. We, therefore, call on the Company to answer the following questions:
- Considering the significant acquisition cost and decommissioning liabilities, what is the Company's expected return on the Shearwater investment based on the current forward curve?
- What is the projected decommissioning expense associated with Shearwater?
- Would the current forward curve, which is much lower than the CPR estimates, impact the timing of the projected decommissioning?
Note: The price/boe to p/therm conversions above is based on GBP:USD exchange rate of 1:1.305765 as of 27th January 2019 and boe to therm conversion factor of 1:58
Photo - https://mma.prnewswire.com/media/1083376/UK_Gas_Forward_Price_Infographic.jpg
Greenbrook Communications
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+44(0)207-952-2000
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