Total acquires Maersk Oil & gas to reduce Middle-east country exposure

On August 8th, Total announced the acquisition of the Exploration and Production company Maersk Oil & Gas, a wholly owned subsidiary of the Danish transport and logistics company A.P. Møller – Mærsk A/S, in a share and debt transaction.

Companies overview

Total SA was founded on March 28, 1924 and is headquartered in Courbevoie, France. Total SA explores, develops, produces and markets oil and gas. It is also engaged in trading and shipping of crude oil and petroleum products. The Upstream segment includes the activities of oil and gas exploration & production. The Refining & Chemicals segment encompasses refining, petrochemicals and specialty chemicals operations. This segment also includes the activities of trading & shipping. The Marketing & Services segment includes worldwide supply and marketing activities in the oil products and services field as well as the activity of New Energies.

Maersk Oil & Gas was established in 1962 when Maersk Group was awarded a concession for oil and gas exploration and production in the Danish sector of the North Sea. Maersk Oil is an international oil and gas company with operated production of 550,000 barrels of oil equivalent per day. Production comes from Denmark, the UK, Qatar, Kazakhstan, the US Gulf of Mexico, Algeria and Brazil.

Structure of the Deal

Concerning the terms of the deal, Total has agreed to buy oil exploration and production assets from AP Moller-Maersk for a total of $7.45bn. The former will assume 100% of equity over subsidiary Maersk Oil & Gas A/S and the acquisition will be paid in stock fully, with a new issue of 97.5 million shares giving Maersk’s parent group a 3.75% stake in Total. Furthermore, included in the price tag, Total will also receive $2.5bn in short-term debt from the acquisition to fund the remainder of the deal as well as taking on responsibilities of decommissioning Maersk’s older assets, which is likely to cost around $2.9bn.

Subsequent to the transaction, Total will receive the following assets: around 1 bn boe of 2P/2C reserves, more than 80% of which in the North Sea and an addition of 160 kboe/d of mainly liquids production in 2018, acquired at an average price of 46 k$/boepd, offering high margins with an estimated free cash flow break-even of less than $30 per barrel and expected to grow to more than 200 kboe/d by the early 2020’s. The transaction is believed to be immediately accretive to Total’s both earnings and cash flow per share. In the North Sea, Total will now operate with a 49.99% stake the Culzean gas field, near the firm’s operated Elgin-Franklin hub, and receive 8.44% stake in the giant Johan Sverdrup oil development off Norway. In the US Gulf of Mexico, Total will gain interest in the Jack development of the Wilcox formation; the French company will also gain other assets in Algeria, Angola, Brazil, Kazakhstan, Kenya, and the Kurdistan region of Iraq.

Raymond James analysts mentioned the value of the deal appeared fair with Total paying $13.4 per barrel of reserves – in line with what Royal Dutch/Shell paid to acquire its rival BG in the biggest oil transaction of the past decade in 2015.

Drivers of the Deal

The deal ranks among the largest that a super-major has done since oil prices crashed in 2014. Total will pay Maersk with $4.95 billion of its own shares and assume $2.5 billion of the Copenhagen-based company’s debt. The full transaction value of $7.45 billion is above what some analysts were expecting and Maersk shares jumped 5.7% after the announcement. The acquisition improves Total’s near-term growth outlook – it provides Total with an immediate 6% production increase and strengthen near-term growth.

Total is making acquisitions to grow production, taking advantage of a plunge in company valuations, the cost of drilling and other equipment during the three-year industry downturn. Thus, the Maersk assets will boost the French giant’s business in the North Sea, adding to deals earlier this year that expanded its presence in Uganda and Brazil. Total had proposed the deal to Maersk as an alternative to floating the business. For Total, the deal is first and foremost about consolidation in the North Sea. Cost synergies should add value, with the North Sea a key area of overlap. The deal will also reduce Total’s weighting towards areas of high country risk, such as Iran and Qatar.

The combination with Maersk Oil gives Total about 1 bn barrels of oil equivalent of proven and probable reserves, about 80% of which are in the North Sea. It will add output of about 160,000 barrels a day of oil equivalent to the French group next year, rising to 200,000 a day by 2020. This would strengthen Total’s operations in the North Sea and raise its total output to 3 million barrels per day by 2019. Total expects to generate synergies of more than $400 million a year starting in 2020, in particular by combining the two companies’ North Sea assets.

The acquisition also strengthens Total’s North Sea exposure, through Maersk’s core positions in the UK, Norway and Denmark. Total gains access to the prized Johan Sverdrup discovery (8.44%) and the UK’s largest gas development, Culzean (49.99%). Both are currently under development and are expected to come on stream towards 2020.

Total will update its company-wide cost-savings plan in mid-September, while the deal hasn’t changed Total’s forecast for capital expenditure of $15 billion to $17 billion next year. The deal could see some job cuts particularly in Britain where there are overlaps, which could make additional cost savings of about $200 million per year.