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.

Rigzone