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LONDON (Alliance News) - Premier Oil PLC confirmed media reports Wednesday, revealing plans to acquire all of the assets held by UK energy provider E.ON in the UK North Sea, which will help boost production by up to a fifth in 2016.
The company had its shares temporarily suspended from trading earlier Wednesday ahead of the deal, which was then reported by The Financial Times, before the producer and explorer confirmed it will acquire assets in the Central North Sea, West of the Shetlands and in the Southern Gas basin.
Premier Oil is to pay a net consideration of USD120.0 million for the assets, funded from its existing resources, which the company hopes will add immediate cash generative production and add stable gas revenues from the UK, rebalancing its portfolio.
Premier Oil also said the deal will realise tax synergies on its current USD3.50 billion UK tax loss position.
"We are pleased to have agreed this value accretive deal as we continue to execute our strategy of focusing the portfolio on our core regions. Having recently completed the sale of our Norwegian assets for USD120.0 million, this transaction allows us to further consolidate our interests in the UK North Sea where any acquisitions are immediately value enhancing as a result of our existing UK tax position," said Premier Oil Chief Executive Tony Durrant.
The assets look set to contribute a material amount of production to the company's portfolio, adding an additional 15,000 barrels of oil equivalent per day. Including the new assets, Premier Oil is expecting production to average between 65,000 to 70,000 barrels a day in 2016, compared to 57,600 barrels in 2015.
That production in 2015 was sold for an average of USD57.6 per barrel, which was significantly down from USD98.2 per barrel in 2014. That will lead to total revenue for 2015 coming in at USD1.10 billion, which would be down from USD1.60 billion a year earlier.
The EON assets will make the UK Premier Oil's largest contributor to production by geography in 2016, overtaking Vietnam. Other production comes from Indonesia, Pakistan and in Mauritania.
Overall, the E.ON assets will add 64.0 million barrels to Premier Oil's net reserves and contingent resources, coming from the Elgin-Franklin, Huntington, Babbage and Tolmount fields.
Premier Oil will operate all of the fields except for Elgin-Franklin, which will continue to be operated by Total. It has acquired a 5.2% in the Elgin-Franklin field, a 25% stake in the Huntington field, a 47% stake in the Babbage field and a 50% stake in the Tolmount field.
Elgin-Franklin is the most notable field, producing around 114,000 barrels per day with extremely low operating costs relative to other fields in the North Sea. However, the Huntington field acquisition is also significant as Premier will wholly-own the field following the deal, with the field currently producing 15,000 barrels a day.
The Babbage field is currently producing from five wells, but no figure was provided, whilst the Tolmount field homes "one of the largest discoveries" in the Southern gas basin, it said.
Importantly, the production from the new assets already carries a valuable hedging portfolio, with 32% of estimated gas production from the fields in 2016 hedged at around 63.0 pence per therm and a third of estimated liquid production at USD97 per barrel. In 2017, around a fifth of gas production is hedged at 57.0p per therm.
Premier Oil is also expecting the acquisition to be materially covenant accretive, expected to add USD500.0 million of headroom at current oil and gas prices. The company expects a "rapid payback" of only two years, and the assets also carry USD250.0 million of historical tax payments which is accessible and able to offset against future decommissioning expenditure.
Premier Oil will now need to seek approval from shareholders and other parties to complete the deal.
In a separate statement, Premier Oil said one of its main development projects in the North Sea, the Solan field, continues to progress but said first oil has been pushed back a smidgen to February due to bad weather. The other North Sea project, the Catcher field, remains on schedule and on budget.
Rockhopper Exploration PLC, one of its partners on the Sea Lion project offshore the Falkland Islands, released a statement Wednesday that estimated the project would now produce more oil than originally planned over a longer period of time than first thought. Premier Oil confirmed the statement later Wednesday.
Premier Oil also provided a cost update, stating it has lowered administrative and operating costs by 25% in 2015 and plans to make further cuts in 2016. Full year operating costs in 2015 averaged USD16 per barrel, which represents a USD100.0 million reduction year-on-year.
"In 2016 it is anticipated that further savings in underlying operating costs of 5% to 10% can be achieved. Gross general and administrative costs for 2015 were approximately USD230.0 million, a reduction of over USD75.0 million year-on-year, and these are expected to be a further 10% lower in 2016," said Premier.
Capital spending in 2015 amounted to USD845.0 million for development and USD190.0 million for exploration, with overall capital spending in 2016 to be slashed by a third. Development expenditure in 2016 to total around USD700.0 million.
"Capital expenditure guidance for 2016 is higher than that provided in our Trading Update in November (of) USD650.0 million, due to additional deferral of costs from 2015 to 2016 and the impact of the weather delays on Solan first oil," said the company.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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