Encore Oil Pulls XEO Float

23rd May '11 by marben100

22 comments 16540 reads

The North Sea tax changes have forced Encore Oil (LON:EO) to pull the proposed flotation of its exploration assets into the spin-off company, XEO :

EnCore Oil (LSE: EO.) announces that, in light of current market conditions, exacerbated by the uncertain investment climate created following the recent tax changes, the Board has decided to cancel the flotation of XEO Exploration and the related offer to EnCore shareholders.

Having spoken to the company, I have established that the tax changes have destroyed investment demand for North Sea assets and made debt finance difficult for producers. Encore will focus its cash on Catcher and Cladhan but believes it will have enough in reserve to fulfil its DECC licence commitments (but not more) on the explo licences: Tudor Rose, Buffalo, Merrow, Spaniards and Hoylake.

Government policy remains under review and it is to be hoped that there will be some improvement in field allowances to come. In the meantime, many projects are going on hold, with consequent impacts on employment, training and prospects for what otherwise woud have been one of the few bright spots in a very bleak outlook for the UK economy.

I also learnt that the well permitting process has slowed, as an understandable consequence of concerns in the wake of the Macondo accident.

Mark

Unlock with Email

Unlock with Google

Already have an account?
Login here

mick

25th May '11

Hi Mark, post your chat with AB, I was wondering what is a realistic value per barrel for EO's reserves - do you think that we would still get $10 per barrel in a trade sale? Thanks

marben100

mick,

AB studiously refuses to talk about $/bbl values because there are so many factors that can influence them (not least being cricumstances of trade buyers) - and no NPV calculation can be done until FEED studies have been carried out.

FWIW, $10/bbl doesn't seem an unrealistic value to me, given the quality and scale of the discoveries. .

Cheers,

Mark

loglorry

26th May '11

Sorry to be such an optimist but I think $12 is quite possible if we see oil remain strong into 2012. I don't think we'll see a sale until more appraisal of Catcher area and Cladhan though so probably not until next year.

Log

Mark Simpson

I wouldn't say that no NPV calculation can be done just that they won't be that accurate. For example Nautical provided an NPV to support their placing last year:

http://www.investegate.co.uk/Article.aspx?id=201008110700138748Q

Initial analysis indicates that Catcher (including Catcher East) contains gross contingent resources of 71mmbo (net to Nautical 10.6mmbo) and has a management estimated net NPV(10) of £76 million at US$70 per barrel of oil. The surrounding prospects in the block, which have now been de-risked, could add significantly to this, making Catcher one of the largest oil discoveries in the North Sea in the past decade. The co-venturers are now acquiring a number of site surveys over potential drilling locations in Block 28/9 and are in discussions to secure a rig. If successful, drilling operations are likely to recommence as early as Autumn 2010. The programme will include three exploration wells targeting gross prospective resources of 86mmbo, which have a management estimated net NPV(10) of £122 million.

This works out as £7.17 or $11.62 @FX1.62 per bbl for Catcher and CE and £9.46/$15.32 per bbl for Varadero & Burgman (and therefore Carnaby, Rapide, Bonneville, Cougar, Rocket, Tiger & Vincent if they come in.)

OK these were before the recent tax changes but were at $70 long term oil price - below the level at which the extra tax will be removed so I think remain roughly valid through either the tax removal or a higher oil price.

It could be viewed that Nautical were being optimistic since they were looking to raise money at the time. However they have been consistently more conservative on recoverable oil estimates than EnCore and if they were really looking to 'promote' themselves they would have focussed on the headline big OIP figures suggested by the operator rather than NPV estimates based on much more conservative figures.

At the end of the day a competitive market will determine the $/bbl paid for EnCore's share of 28/9, but based on the above info I agree with the optimist, $12/bbl looks a more likely central case than $10/bbl to me.

Danger

Danger yes this is the usual argument made for $12. The tax has increased 24% I think but the oil price is much higher to compensate so I think I'm right in saying that netbacks are higher now than they were even given the tax situation. There are also losses in Encore to deduct as well. Having said all that who knows where the oil price and tax will be by the time the fields start producing. Goldman have a year end target of $130/bbl and I think Barcap and Morgan Stanley are around $120/bbl and $110/bbl respectively.

Recent NPV(10) calculations for XCite's Bently including new tax (but allowing for concessions for heavy oil) and including higher cappex/oppex and lower sale price of oil come in around $11/bbl.

It is all finger in the air stuff and no doubt AB is reluctant to give a hostage to fortune and when you get into the details I'm sure it all varies a lot.

In my view Encore should focus on appraising the 28/9 block as there is no doubt more to come and then put it on the block to fund the other explo assets. That should keep them busy for a couple of years at least.

Log

Dammit. I'm sure I saw a recent chart of actual sale prices for undeveloped fields on the UKCS over the last few years - which showed that nothing had sold for more than $10/bbl, but I can't find it. That figure was before the recent tax changes but is why I'm cautious. You have to be wary of prices for developed assets (where CAPEX has already been sunk and oil/gas is already flowing), e.g. a large part of Dana's portfolio, vs "greenfield" acreage requiring significant CAPEX. When it comes to NPV calculations, don't forget that a buyer is unlikely to be willing to pay the full NPV but will want some sort of discount (or significant explo upside) to make the purchase worthwhile.

Cheers,

Mark I totally agree the mix of gas/oil is important and the all the other factors like how much has been spent, how expensive to extract, how close to infrastructure, recovery costs, tax offset, decomissioning, length of field life, etc. etc.

I also agree completely that a bidder won't pay full NPV10 and will want some upside for themselves or else why bother developing the field. Just look at Soco for example and TGT. Clearly the NPV10 value of TGT is very high but the market certainly isn't putting a value on Soco stock anywhere close to that.

On a more positive note the NPV values for NOCs are a bit more attractive as they can usually discount cashflows at a lower rate (due to their ability to borrow cheaply) and doing things like NPV6 calculations can make a massive difference. Hence for a well funded NOC the upside can come from there.

Log

Ah - found that chart I was looking for (thanks uncommon13!):

Based on that, $10+ /bbl looks like quite an "aggressive" sale price assumption.

27th May '11

Thanks Mark, an interesting graph.

A couple of observations:

1. it seems that the spread of prices goes up as the oil price goes up - presumably the upper end is fully developed light oil and the lower end undeveloped gas. Catcher & Cladhan will be towards the upper range - undeveloped but large-scale.

2. Steady oil price changes change the value per boe paid whereas rapid changes in the POO are ignored by deal makers.

3. Tax rates and availability of credit seem to have a bigger impact on deal prices than the POO.

4. Any idea what the deals were done at $15/bbl in late 2005 when the POO was c$60?

Availability of credit is one of the keys here I think. Although I agree an acquirer won't simply pay NPV10 per barrel this has to influence the price paid because the selling company has to be tempted to part with the asset rather than develop it themselves. I know its not in their strategy but if EnCore could raise combined debt & equity finance with a WACC of say 15% then it would be a better deal for shareholders for them to develop 28/9 than accept an offer in the region of $8-9/bbl.

This must put a lower limit on the asset value with scope for larger companies to generate their return via a lower WACC. A deal in the range $10-12/bbl would still be win-win for both EnCore and the acquirer as they both get a higher return than EnCore developing themselves.

Danger

davjo

Any idea what the deals were done at $15/bbl in late 2005 when the POO was c$60?

I suspect Buzzard deals were around that time....the biggest for years!

Availability of credit is one of the keys here I think

Possibly. IIRC, one or two of the Buzzard deals involved hedging two or three years forward production, which suggests banks involvement. I also seem to recall that the reserve assessments made by the two main buyers, differed somewhat. I think one of them explained this by dedicating a sum for future upside expectation. Don't think I've seen such a thing since.

I suspect Buzzard deals were around that time....the biggest for years!

Yes you are probably right. IIRC Edinburgh Oil & Gas sold their Buzzard stake in 2005, although not sure what price/bbl was achieved.

If $15/bbl was achieved for Buzzard it shows that scale does matter for individual fields. Obviously 28/9 isn't in that scale but I'd still expect it to push the upper end of the valuation envelope due to its large, shallow accumulations close to existing infrastructure.

JAK108

Good, stuff, cheers.

IIRC Edinburgh Oil & Gas sold their Buzzard stake in 2005, although not sure what price/bbl was achieved.

Yep, 29 April 2005
http://www.investegate.co.uk/article.aspx?id=200504290700377022L
Acquisition value the entire existing issued ordinary share capital of EOG at approximately £132.8 million......

As at 31 December 2004, the Company had independently estimated reserves of 27.5 million barrels of oil relating to its 5.16 per cent. interest in Buzzard

Which, ignoring the piddling non-Buzzard assets, equates to £4.83/bbl undeveloped. IIRC, £/$ was around £1:$1.90, so $9.17/bbl.

I found some other posts of mine relating to Buzzard $/bbl values in the preceding 12 months covering the Petro-Canada/Nexen purchases, which may be of interest, including some hedging prices relating to the acquisitions :-

http://boards.fool.co.uk/sirl-ive-taken-a-look-from-a-slightly-different-8885847.aspx
http://boards.fool.co.uk/nsea-reserves-s-per-barrel-8687646.aspx
http://boards.fool.co.uk/poo-dont-you-hate-it-when-you-paste-in-the-8902854.aspx

The EOG $/bbl price looks a decent comparitor once adjusted for higher oilprice and subsequent tax hikes. For me, I think $10/bbl is a fairly solid base price in the current environment. Reluctant to think higher though.

cubasteve

29th May '11

I have held Encore for about 9 months , sold just before the drop at £1.20p . But i bought back in too soon at 89p . I'm sure this will be a good buy , just not today . The markets didn't like the break up idea , nor did i . A bit of drilling and hitting oil and we will have above £1.30 . Cuba Steve

30th May '11

Mark,

Nice graph but where did it come from. There isn't much context to it and so I'm wondering if there is any data to support it e.g. citing which transactions it was derived from.

Clearly it was published by Antrim but where they bragging about how cheap they got the 2P boe for from Premier or was it a sale to Premier? Also it specifically says boe - were the transactions gas or both gas/oil etc. ? Is this cash deals only or cash/stock deals?

I note that on 3/11/2010 ( but this is not on the graph )

the purchase price equates, adjusted for tax, to paying US$11.2 per barrel of 2P reserves
http://www.enquest.com/FullPageWithoutTouts.aspx?m=67&amid=1522

I'm very sceptical of this graph without some specific data to support it to be honest.

Log

Log,

It came from this post by uncommon13. Clearly it does include gas transactions - but is supposed to show upper and lower bounds of prices paid (in the orange area), covering both oil and gas.

I don't understand the "adjusted for tax" factor in the Enquest deal you mention. I think you have the wrong link in your post (leads to the IMS). Details of the deal are here: http://www.investegate.co.uk/Article.aspx?id=201105100700132424G

Enquest... will acquire a further 32% interest in return for carrying Fairfield for certain development costs, up to a maximum of £34.85 million. The Crawford field and Porter had gross 2P reserves of 26.8 MMboe as determined at the end of 2010.

I make that 8.6mmboe for £34.85m = $6.06/boe?

I'm happy to go with Davjo on this and stick with $10/bbl as a realistic valuation for both Catcher and Cladhan and remain sceptical of higher numbers (but will be very happy if a higher number is achieved!). That still leads me to conlude that Encore is trading below fair value of already discovered resources and other assets, which I put at around 75p - with still significant potential further upside at Cladhan & Catcher.

Mark I'm going crazy I'm sure I found the text I pasted on the link I also pasted but going back now I can't find it. Not sure what tax-adjusted means either though! Maybe they factor in the tax-losses they are acquiring too. I hope they don't just gross up the price paid by the tax rate as that would be a bit daft!

Anyway I can't find that quote again.

$10-12 seems right to me though for C&C. All depends a lot on how big they end up being due to economies of scale.

As you say 75p core for C&C for Encore with possibly another 5-10p or so for Egdon/Cash and other assets.

Log

ohisay

the purchase price equates, adjusted for tax, to paying US$11.2 per barrel of 2P reserves

Log - wasn't that the Stratic purchase?

http://www.energy-pedia.com/article.aspx?articleid=142875

EnQuest has acquired Stratic in a transaction recommended by Stratic’s Board
the acquisition increases EnQuest’s North Sea 2P reserves by 7.27MMboe
at the time of the announcement in August, the purchase price equated, adjusted for tax, to paying US$11.2 per barrel of 2P reserves
the acquisition consolidates EnQuest’s 27.7% position in West Don with an additional 17.25% working interest
it provides EnQuest with a substantial 19% interest in the Crawford field development

uncommon13

31st May '11

The graph came from this web page on Antrim Energy's website:
http://www.antrimenergy.com/operations.php/premier

I have emailed the company to ask for any raw data related to the graph but I believe this information won't be forthcoming from the company..

Thanks uncommon!

Woudl also be very useful to know what a purchase price adjusted for tax means as clearly it is quite different from $6boe in the Stratic/Enquest deal.

Log

Encore Oil pulls XEO Float

Unlock the rest of this article with a 14 day trial

About the Author

Marben100

22 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...