Weekly Update: Premier makes opportunistic grab for Encore Oil

Eoin Coyne
Evaluate Energy

Premier Oil made a timely offer for fellow North Sea exploration company Encore Oil this week, for a consideration of $325 million (net of cash held by Encore). The offer per share, which has been recommended by the board, is for either £0.70 in cash or 0.2067 shares of Premier Oil, representing a 55% premium on the day prior closing price. The fact that the share price of Encore Oil has since risen to over £0.75 per share would usually indicate that an offer is expected. In this instance however, due to the highly volatile equity markets, it may be more the case that holding stock in Encore Oil acts as an effective hedge, where the holder can elect to receive stock should the price of Premier Oil rise, or elect to receive cash should the oil sector falters any further.

The timing of the deal means that even with a 55% premium, the offer is still less than half of the trading price of Encore Oil earlier in the year, which hit a year high of £1.51 in February. Despite this, there are numerous positives for the Encore shareholders, one being that they can elect to receive Premier Oil stock as consideration. This will allow them to benefit from the assumed upswing in the near future in the oil sector valuations, a belief that is likely to be held by most Encore shareholder who have held onto their stock despite the sustained price drop since April. Also they will see a faster pace of development of Encore’s key assets such as the Catcher discovery, which Premier will gain a 50% stake and operatorship in. The $483 million in cash that Premier Oil had on its balance sheet as of June 2011 dwarves the $28 million that Encore held at the same date. Had Encore continued as an independent company its unlikely that financing on attractive terms would have been found in the current financial climate.

In the Danish portion of the North Sea, Dong Energy acquired a 2.4% interest in the South Arne field from Noreco for $75 million. The acquisition came via the exercise of a pre-emption right as part of a previously announced deal for the asset between Hess Corp. and Noreco.

Heritage Oil made a brave move into Libya this week, the dust having barely settled after the long drawn out civil war and eventual liberation of the country. Heritage are paying $19.5 million for the acquisition of a 51% stake Sahara Oil Services Holdings Limited. The acquisition was originally cheered by investors with a 6% rise in the share price of Heritage, but the brakes were put on when the Libyan National Oil Company denied that the deal had even been struck.

In Tanzania, two deals were reached for offshore exploration blocks prospective for gas. Royal Dutch Shell farmed into a 50% interest in Blocks 5 & 6 from Petrobras and in a separate deal Mubadala Development Corp. farmed into Block 7 from Dominion Petroleum in a deal worth $44 million. The addition of a well financed partner in the Abu Dhabi company, Mubadala, in Block 7 was enough to lift the share price of Dominion by 20% on the day of the announcement.

In deals that closed this week, Noble Energy finalized its Marcellus shale play joint venture with CONSOL Energy worth $3.1 billion and Breitburn Energy Partners completed their $283 million acquisition of assets in the Green River basin in Wyoming. Both deals are highly gas-weighted and therefore susceptible to the depressed gas price in the US which currently stands at just $3.49 per mcf. Noble Energy made an allowance for this by placing a clause into the joint venture with CONSOL that cost carry obligations may be suspended whenever the gas price drops below $4 per mcf. For Breitburn, the threat of a sustained lull in the gas price has been catered for by very low acquisition metrics. The cost per proved mcf which is 59% developed is just $1.24 and added to the anticipated lifting cost of $0.83 per mcf gives Breitburn room for manoeuvre given their most recent hedge position taken out of $4.96 per mcf.

Looking for previous deals? Check out the Weekly Updates page for archives.

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