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The Herald / Rigzone: The Time is Right for the Majors to Seek Bigger Fish

There is plenty of optimism among the deal-making community in the upstream oil and gas sector. Much is in the pipeline and some deals and refinancing initiatives are already in the public domain.

Stephen Phillips, head of banking at Dundas and Wilson, points out that Melrose Resources, the Edinburgh oil and gas exploration company, with interests in Egypt, Bulgaria, France and the US, successfully carried out a GBP300m refinancing via a syndicate of banks led by Bank of Scotland.

As Phillips observes, the price of oil might have come down from the highs of a year ago, but in comparison to the days when the price was languishing at less than US$10 a barrel, the current price looks good. One of the stumbling blocks in the deals being done is the still-unresolved issue of abandonment.

“If the majors sell their assets to smaller players who turn out to be unable to meet abandonment costs, the majors can still be on the hook.

“So this creates another factor in deals for smaller companies. Part of the facilities provided by the banks will be letters of credit issued as part of the facility provided to the company by the bank, ” he explains.

These letters of credit, underwritten by the banks, have proved to be a very good way, so far, for the sector to get around the issue of the costs associated with abandonment. The device has freed up the majors to focus their attention on bigger reserves in deeper waters and has enabled some passing of assets to smaller players.

Phillips’ colleague, Doug Crawford, says that a number of the deals in the pipeline right now are coming from investors in service companies who are looking for a chance to take their profits while the price is high.

“So many of the service companies were underperforming while the price of oil was low, and oil companies were cutting back on maintenance. Now everyone is in maintenance overdrive and the service companies are doing very well.

“It is a good time for investors to exit,” he says. This in turn is creating a good market for merger and acquisition activity. Among the deals done in this sector were the Dutch oil services company Fugro’s acquisition of the Aberdeen-based, remotely operated vehicle specialist ROVTEC.

In another deal, M-I SWACO, a Smith Schlumberger company, acquired Specialised Petroleum Services when venture capitalist 3i decided to exit, along with the SPS founders and other shareholders.

The purchase price for the company was approximately GBP80m. 3i had been a major stakeholder in the company from 1999, which had enabled SPS to strengthen its global market footprint and expand its product and service offerings. SPS has developed into a world leader in wellbore cleanup tools and services. M-I SWACO is the largest provider of completion and reservoir drill-in fluids in the world, so the two solutions are highly complementary and enable SWACO to offer an integrated solution to its customers.

Bank of Scotland was involved in the Tullow Oil acquisition of the Australian E&P company Hardman Resources, for GBP580m in the third quarter last year.

The deal doubled Tullow’s exploration acreage and was prompted by a strong overlap between the two companies’ operations in Uganda and Mauritania. The deal was said to be “full priced” at the time, if not over-priced, but Tullow had the cash in its pocket, thanks to the high oil and gas prices prevailing at the time, supported by increased production from its North Sea gas field.

Alasdair Gardner, head of oil and gas at Bank of Scotland, says that the bank had supported Tullow Oil with a US$1-billion facility to enable the Hardman deal to take place.

“We have a number of inhouse petroleum engineers to help us evaluate deals that involve assets in far-flung corners of the world,” he says. “On the Egyptian deal with Melrose Resources, for example, one of our engineers went over to talk to engineers on the Egyptian field.”

Gardner points out that the bank has its people continually traveling to meet with clients around the world’s oil provinces, to discuss their strategic needs and objectives.

“The great thing is that we work with our clients so that our interests and theirs are aligned and we both understand the different risks involved in operating in the various provinces around the world,” he says. “One of the key things we have to offer is an integrated package of funding solutions.”

Gardner’s colleague, Damian McGann, head of corporate at the bank’s Aberdeen office, says that the bank is currently looking at several transactions in the service sector at the moment that are of a fair size.

“There is a healthy level of activity at the moment with a lot of interesting deals in process,” he comments.

The information and views expressed in these reports do not necessarily represent those of The Herald

(C) 2007 The Herald. via ProQuest Information and Learning Company; All Rights Reserved

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