Introduction
Premier Oil Plc is going to be acquired by Chrysaor Holdings Ltd via a reverse takeover. The resulting entity will be the largest listed independent oil and gas company in the UK North Sea, pumping 250,000+ barrels of oil equivalent per day.
The acquisition represents the start of a new chapter for Premier Oil, one of the biggest legacy independent oil explorers based in the UK. Indeed, after being under financial distress for many years, Premier Oil has finally bowed to pressure from creditors, with CEO Tony Durrant stepping down from its role.
Concerning Governance, Chrysaor’s current shareholders will own the majority stake (77%), while the remaining 23% stake will be held by Harbour Energy, an investment subsidiary of PE group EIG Global Energy Partners.
Companies Overview
Premier OIL PLC
Premier Oil plc is an independent oil company based in the UK, listed on the London Stock Exchange and operating in the oil and gas industries with license interests in the UK, Asia, Africa and Mexico. Its 2019 Revenue is $1,584.7 million, and the market cap equals $247.025 million.
Premier Oil’s business plan is limited to the ‘upstream’ sector of the oil and gas industry – the exploitation of the abovementioned raw materials – and licensing or acquiring high-quality assets based on the current market conditions. The exploration activity is focused on under-explored emerging plays in proven hydrocarbon provinces. After the discovery and development of the necessary resources, Premier Oil’s activity is aimed to right-size its assets to match with its risk appetite and financial circumstances.
Chrysaor Holdings LTD
Established in 2007, Chrysaor represents one of the UK’s leading independent North Sea oil and gas groups. Annually generating $1+ billion per year of free cashflow, Chrysaor operates in a wide range of segments, from Exploration to Production and partially overlapping with Premier Oil’s operations.
Moreover, to face the current and future challenges about carbon emission reduction, Chrysaor has adopted 3 different methodologies:
- Invest in low/zero-carbon energy supplies.
- Approach hydrocarbons production in the most environmentally sustainable and efficient way.
- Invest in hydrogen production along with removing and offsetting emissions through carbon capture and storage (CCS).
Industry Overview
As discussed in the Pioneer-Parsley acquisition article, the sector is in full-on merger mode given the benefits of being a large firm within the energy sector. Oil companies are still recovering from the Covid-induced negative and low oil prices that dominated 2020. Firms are consolidating in order to turn around from this crisis. Chrysaor had losses of around US$980 million, while Premier Oil took a US$1.3 billion loss (both are pre-tax) in 2020. These numbers demonstrate the hardship that oil firms have recently experienced. A lot of the losses are explained by asset impairment charges which are due to overvalued operating equipment acquired pre-Covid. Not only did income become an issue, but also equity and debt markets were hard hit. Interest rates increased as oil prices declined, preventing investment, and stock prices crumbled – see Premier’s stock chart below. A 75% drop with not much of a recovery…
Larger companies experience lower overhead costs, increased bargaining power with suppliers but also, crucially, greater access to the debt market. Many companies are having to contend with falling production for the first time because they lack the financial resources to drill the new wells needed to offset production declines in older wells. Many oil producers are realizing the benefits of being large, and this is demonstrated in the M&A Energy sector’s deal flow, which is nearing record highs. Chrysaor and Premier Oil are set to become the largest oil and gas business on the London Stock Exchange after the merger, and the increased company size will help with refinancing, scaling, cost synergies and diversification.
Long term, reducing carbon emissions is a major factor driving the need for significant operational improvements. Investors are more attentive to environmental issues; the price of renewable energies is falling, and more and more countries are imposing carbon taxes on businesses. The covid-19 crisis is accelerating what was already shaping up to be one of the industry’s most transformative moments – the transition to sustainable energy. While oil prices have recovered significantly (see figure below), the hard reality is that oil demand will be less than previously anticipated given CO2 regulations and higher demand for renewables. Secondly, as many oil firms look to gain back profit after facing losses, there will be immense competition from the big players, hence we are seeing so much consolidation within the space.
Deal structure
London-listed Premier Oil was initially planning to refinance the borrowings and raise money from shareholders to fund the acquisition of North Sea assets from British Petroleum (BP). Given current market conditions, the all-share deal offered by Chrysaor represented a less risky and much more profitable venture.
The purpose of the transaction is mainly for Chrysaor to go public and gain synergies while Premier needs the funds to pay back debt. The merger will result in a new name for the company, ‘‘Harbour Energy’’ (given Harbour is the energy-focused private equity firm) and shares will start trading in London on April 1. Harbour is Chrysaor’s largest shareholder, and they will own 39% of the group1.
Chrysaor was already on an M&A spree in the past, having acquired a big North Sea portfolio from Shell for $3bn in 2017 and a portfolio from US giant ConocoPhillips for $2.7bn in 2019. This is explained by Chrysaor’s private equity ownership by Harbour. After the merger, Chrysaor will have the majority (77%) holding. In addition, the company will experience a reverse takeover (i.e. a privately held company goes public without listing) through the merger with Premier, which is a huge benefit to avoid listing procedures – similar idea to SPACs.
Regarding Premier’s current outstanding debt (which a lot of oil firms currently have), US$2.7 billion of gross debt will be repaid and cancelled on completion. As stated in a press release, “A cash payment of US$1.232 billion will be made to financial creditors of Premier and its subsidiaries (together, the “Premier Group”) and Premier Group’s cross-currency hedge counterparties (the “Existing Creditors”); Premier’s approximately US$400million of letters of credit will be refinanced; Existing Creditors will also receive shares in the Combined Group.”
Deal drivers
COVID-19 severely impacted oil prices. Depressed prices eroded Premier’s profit margins, leaving the company to deal with an extensive debt burden. The debt portion of Premier’s £2.2bn enterprise value characterizes the deal more as a debt workout rather than an equity takeover. Creditors of the company would be repaid between 60 and 75 cents on the dollar as equity owners in the newly combined company. The debt problems would be diluted as the combined company’s net debt will amount to 1.5x EBITDA.
Accounting for tax losses in this deal also plays a crucial role. Premier’s tax loss credit, keeping track of a $4.1bn tax shield, was a key element in attracting Harbour Energy (the PE owner of the acquirer).
The Boards of Directors of the two companies believe the negotiation will:
• Create the North Sea’s largest oil and gas producer, the companies combined will fabricate 200,000-220,000 barrels of oil equivalent per day, topping majors in the basin. Moreover, it will generate an increase in revenues as in energy output and it will lead to sector-leading strategies able to reduce the carbon footprint of their operation.
• Significant scale and diversification, because of the material-operated and non-operated cash generative production hubs located in the UK North Sea.
• Strong and sustainable financing structure, despite the environment characterized by a low commodity price. The expected net debt will be roughly $3.2 bn. Premier’s listing will offer added capital raising options.
• Solid platform for future growth, thanks to the ability to fund and create value from its development portfolio and worldwide exploration projects.
• Cost and tax synergies, united with the use of Premier’s tax losses will lead to an unlocked value for shareholders.
• Potential to offer a significant dividend.
• Management substitution, Chrysaor owners are going to run the new company.
Conclusion
Although the deal may seem one-sided for Chrysaor, Premier does not have many options, as creditors have rejected an earlier restructuring expected to involve a $500m rights issue. With these choices, investors would have had to pay for an out-of-the-money call option on oil prices. Consequently, both parties should be satisfied.
We also need to be aware of the fact that the sector is characterised by an uncertain outlook. Leading oil and gas companies aim to sell later parts of their portfolios to get ready for a shift towards renewable energies. Smaller exploration and production companies want to sell assets or partner with investors, and especially because of the high and increasing debt.
References: Ft.com, Chrysaor corporate site, Premier Oil corporate site, oedigital.com, oilprice.com, harbourenergy.com, bloomberg.com, heraldscotland.com.
Authors:
Bocconi Students M&A Circle 
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