Acquisition Overview
Aker BP has agreed to take over the petroleum operations of Swedish Lundin Energy, a firm responsible for the largest North Sea oil find to take place in decades. This joint venture between the biggest industrial company in Norway and BP the oil major is set to issue $11.8 bn in shares and pay $2.2bn in cash to purchase the main activities of Lundin. Key facets of this transaction’s rationale include the desire to compete with rivals (especially Equinor), to raise the company’s financial resilience and bolster the firm’s investment case.
Deal Structure
After $11.7bn worth of new shares are issued to finance the transaction (along with a cash consideration), Aker will own 21% of the combined entity, with BP holding 16%, the Lundin family 14%, and other shareholders owning 49%.
Aker BP Overview
Aker BP is a Norwegian oil development and exploration firm, with a focus on petroleum resources in the Continental Shelf Of Norway. The 21-year-old company generated $2.13 bn in earnings (EBITDA) in 2020 and has 1735 employees. The company is majority owned by Aker ASA (37.14%), with BP also owning a 27.85% share. The Fornebu-headquartered company also produced 223.1 thousand oil barrels per day in 2020.
Lundin Energy Overview
Lundin Energy is a Sweden-based independent oil-and-gas production and exploration firm listed on the Stockholm stock exchange. The firm (previously known as Lundin Petroleum) was formed in 2001 through Canadian Talisman Energy takeover of Lundin Oil AB. The Stockhold-stock-exchange-listed company has over one billion barrels in resources in reserves, and had a headcount of 448 at the conclusion of 2020.
Industry Insight
There are arguably three key trends of note in the oil-and-gas industry.
First, is that a higher price of oil is set to expedite energy-transition imperatives. As oil reaches $80 per barrel, it arguably escapes the so-called corridor of uncertainty of $40-60 and arguably will mean firms exercise less capital discipline as they focus on core operations rather than new sustainability linked opportunities, with potential to slow the energy transition. However, there is reason to suggest that high prices will in fact have the opposite effect. Indeed, 76% of US oil-and-gas executives surveyed by Deloitte suggest that prices above $60 will be conducive for their companies’ transition to cleaner fuels, as the additional revenues generated create a source of funding for net-zero commitments, with potential to drive investment into riskier and more-expensive green solutions such as carbon capture, utilisation and storage.
Furthermore, environmental, social and governance (ESG) factors are set to play a more prominent role in the mergers-and-acquisitions landscape, although there are hindrances to their integration. Such a trend is bolstered by the broader idea that limited visibility into the carbon profiles and assets of targets is a growingly considered factor in M&A transactions. Indeed, firms which aim to attain net-zero targets are either seeking to acquire low-carbon assets, with a potential portfolio restructuring arguably due to take place in the oil-and-gas sector as M&A activity is no longer to be only financially accretive but also meet a range of ESG goals. However, certain factors may limit a greater role of ESG factors in the M&A due-diligence process. A lack of standardardised reporting practice is the most prominent, with the range of standards set by organisations such as the Sustainable Accounting Standards Board (SASB) and the Task Force for Climate Related Financial Disclosures (TCFD) potentially preventing firms in having the clarity as to which frameworks to follow. As a result, ESG consideration may be more limited than it could be.
Lastly, a key trend is the reconfiguration or so-called future proofing of business models to be suitable for the new-energy era. This broadening decarbonisation mandate across the oil-and-gas and energy industries, as well as the oilfield service (OFS) sector is particularly notable. The oilfield servicer Halliburton and Baker Hughes, for example, are partnering with startups and academic institutions through the Baker Hughes Energy Innovation Centre and Halliburton Labs to expedite the development of energy-efficient technologies for industrial applications. Said theme also extends to the upstream sector, and is driving efforts to reduce emissions. Signatories of the Global Methane Pledge at COP 26, for instance, have agreed to implement fines, penalties and regulations linked to emissions of the greenhouse gas, potentially fostering policy to incentivise the reduction of greenhouse-gas emissions from upstream operations.
Strategic rationale
Three themes are arguably driving the transaction.
A primary factor is the aim of Aker BP to rival its competitors. In particular, the joint venture aims to compete with the larger state-controlled Norwegian Equinor, which is a particularly lucrative strategy as Norway is the most-active nation in western Europe in oil-and-gas markets. Indeed, with its access to Norwegian and North-Sea fields and potential for petroleum exploration in the Arctic, as well as various policy-linked exploration incentives, gaining a more-established competitive foundation in this sector is set to be conducive for higher profits. Gaining production capacity will notably aid Aker to achieve its goal. The production of 400,000 barrels of oil per day and potential to raise its output further will enable the combined entity to become the second-largest producer in Norway as well as the second-biggest owner of the Johan Sverdrup field.
Furthermore, another facet of this deal’s strategic rationale is linked to boltering Aker BP’s investment case. Indeed, the company’s chief Karl Johnny Hersvik’s comment that the transaction would create an entity with ‘... high dividend capacity combined with a strong investment-grade credit rating’ , may reflect the wider idea that the combination creates a company with a more robust free-cash-flow-generating capacity for the coming decade. Furthermore, The potential to raise dividend capacity is another factor contributing to this transaction. Indeed, following the transaction, Aker BP is set to augment its dividend by a total of 14%, with the intention to raise it by at least a further 5% each year from then, likely due to the wider resource base of production capacity acquired through the transaction. The potential for synergy generation should also be noted. In particular, the fact that operational synergies may amount to $200m per annum through savings on exploration costs and organisational optimisation may attest to the idea that the transaction will foster top-line profit growth.
Lastly, the transaction is set to raise both the financial and environmental resilience of the combined entity, a key aspect of the transaction’s strategic rationale. The fact that the deal is set to create an enhanced balance sheet with an investment-grade credit profile may contribute to driving shareholder returns in the short term, of particular importance for stockholders given the relatively unimpressive 50% appreciation over the past five years. Furthermore, acquiring the assets of Lundin will enable Aker BP to be more environmentally resilient. Indeed, the combined entity is set to have one of the lowest carbon intensities of any other production and exploration firm globally. In practice, this means the combined entity’s business model will be more future-proofed and thus aligned with Norway’s 2030 climate-neutrality aim.
Long-Term Prospects
A key secular prospect of the transaction is the potential to create a Nordic energy specialist of scale, though the extent of this may depend on the nature of the combined entity’s management team. For instance, although Lundin’s executive-management team is set to ‘remain available’ to advise the new entity for a period of three months, a true determinant of whether the transaction will be accretive for shareholders may be whether this collaboration is set to continue and thus best enables the new company to leverage its network of oil projects.
Written by Alexander McFadzean, Somerville College.
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