O&G M&A Roundup, May 2018

Russia – Total to acquire 10% stake in Arctic LNG 2 project

Total SA will take 10 percent stake in a multibillion dollar liquefied natural gas project in Russia’s frozen north from Novatek PJSC.

Total is aiming to become a key global LNG player, competing with Royal Dutch Shell Plc and Exxon Mobil Corp., after it snapped up assets from Engie SA last year. The world’s biggest oil companies are also promoting cleaner-burning natural gas as they attempt to stay profitable, and relevant, in a world that’s increasingly demanding less polluting fuels. For Novatek, Total’s involvement would provide much needed funds for a venture that may cost as much as $20 billion.

“This project fits into our strategic partnership with Novatek and also with our sustained commitment to contribute to developing the vast gas resources in Russia’s far north, which will primarily be destined for the strongly growing Asian market,” Total’s Chief Executive Officer Patrick Pouyanne said in the statement. “Arctic LNG 2 will contribute to our strategy of growth in LNG by developing competitive projects based on giant low-cost resources.”

The French energy giant’s direct and indirect holding in Arctic LNG 2 in the north of Siberia will be about 21.5 percent. Total owns about 19 percent of Novatek, which plans to retain a 60 percent share in the gas project in the north of Siberia, it said in a statement Thursday. The company has the option to raise its direct holding to as much as 15 percent should Novatek reduce its share to below 60 percent.

The companies expect to take a final investment decision on the project next year. It will have a capacity of 19.8 million tons a year, or 535,000 barrels of oil equivalent a day, according to the statement. The first of three production units is likely to start in 2023.

Total and Novatek have already teamed up at the Yamal LNG project, which started output last year.

UK – Quadgas Investments acquires 25% stake in Cadent Gas from National Grid

Quadgas Investments BidCo Limited (‘Quadgas’), a consortium of long-term infrastructure investors, is pleased to announce it has entered into an agreement to potentially acquire the remaining 25% ownership interest in Cadent Gas (‘Cadent’) from National Grid plc (‘National Grid’).

The acquisition is at the option of National Grid or Quadgas (as applicable) to complete at any time between 1 March 2019 and 31 October 2019, subject to no less than six months’ prior written notice and satisfaction of customary regulatory conditions.

In March 2017, Quadgas announced that it had acquired a 61% interest in National Grid’s gas distribution networks. At the same time, Quadgas and National Grid announced that they agreed the potential future sale and purchase of an additional 14% interest in the networks. As part of the March 2017 transaction, Quadgas was also granted pre-emption rights over the residual 25% interest held by National Grid.

The proposed follow-on investment represents a deepening of Quadgas’ commitment to Cadent. Once this transaction is closed (subject to the aforementioned conditions), Quadgas will have a 100% ownership interest in Cadent.

Netherlands – Aberdeen Standard Investments acquires 20% interest in Noordgastransport pipeline system

Aberdeen Standard Investments’ private markets arm SL Capital Partners has more than doubled its stake in a Dutch pipeline with the acquisition of further a 20% stake.

SL Capital Infrastructure I LP Fund (SLCI I) has acquired the InfraVia Capital Partners managed fund’s 20% interest in Noordgastransport (NGT).

Last September, SLCI I bought an 18% interest from Dutch exploration and production company Nederlandse Aardolie Maatschappij.

NGT owns a pipeline and processing plant transporting and treating natural gas that is principally produced from the Dutch Continental Shelf.

Dominic Helmsley, the head of economic infrastructure at Aberdeen Standard Investments, said: “This second stake in the NGT pipeline system follows our strategy to develop a strong presence in the European gas and midstream sector.

“The investment provides us with exposure to a greater number of gas fields, therefore diversifying cash flows for investors in our infrastructure fund. We will continue to work closely with the other shareholders and management team for the pipeline system, to deliver natural gas onshore in a safe and reliable manner.”

Vincent Lévita, CEO, InfraVia Capital Partners, said: “Since we acquired the 20% stake in NGT from Engie in 2014, the company has been performing well and has been providing high-quality infrastructure to the North Sea gas producers.

“We believe that with the recent development activity in the North Sea and the quality of its infrastructure, NGT will continue to play a critical role in the Dutch gas industry.”

SLCI I, which is focused on investing in core infrastructure assets in Europe, already holds six other investments including a hydro-electric plant in Norway, a gas distribution business in Finland, and new trains across the UK.

Canada – Vermilion Energy acquires Spartan Energy Group

Vermilion Energy Inc. announced on April 16 it was acquiring Spartan Energy Corp. in an all stock deal valued at $1.4 billion.

Both companies have been active drillers in southeast Saskatchewan over the last year, often employing multiple drilling rigs.

Spartan shareholders will receive 0.1476 of a Vermilion share for each Spartan common share. Based on Vermilion’s closing price of $44.04 on April 13, 2018, the exchange ratio translates to $6.50 per Spartan common share, representing a five per cent premium to Spartan’s closing price. All of the officers and directors of Spartan have entered into voting support agreements and agreed to vote their Spartan shares in favour of the arrangement.  The arrangement includes a reciprocal break fee of $40 million.

Spartan’s current production is approximately 23,000 barrels of oil equivalent per day (boepd) and independently evaluated proven plus probable reserves as of December 31, 2017 were 113.5 MMboe.

The move comes a year and a half after Spartan itself acquired 7,300 boepd of production from ARC Resources in southeast Saskatchewan in a $700 million cash deal. It’s been a big year for Spartan’s President and CEO Rick McHardy as well, as he was named Saskatchewan Oilman of the Year in June 2017.

In a release, Vermillion said, “Vermilion focuses on high-netback producing areas with favourable fiscal and regulatory regimes. We entered southeast Saskatchewan with the acquisition of Elkhorn Resources in 2014, and have since continuously evaluated opportunities to expand our position in this area. We added approximately 30 sections of land to our southeast Saskatchewan core area through the end of 2017, and further augmented our asset base with the acquisition of a private southeast Saskatchewan oil producer in early 2018. The acquisition of Spartan is a value-adding investment which meets our disciplined mergers and acquisition criteria. The acquisition significantly increases our position in southeast Saskatchewan, and aligns with our sustainable growth-and-income model by appending high-netback, low decline assets with free cash flow and strong capital efficiencies on future development.”

Vermillion went on to say that making no deduction for undeveloped land value, transaction metrics equate to $12.33 per boe of proved plus probable (2P) reserves, and $60,900 per flowing barrel of production. Based on April 13, 2018 WTI strip pricing of US$65.19/bbl, the operating netback for the acquired assets is estimated at approximately $38.42 per boe. Using a 2P finding, development and acquisition cost of $19.48 per boe (including future development capital) based on the acquisition consideration and Spartan’s reserve report, the acquired assets are expected to deliver a 2P operating recycle ratio of 2.0 times (including the acquisition cost).

In a release, Spartan said, “Canadian energy is currently facing a number of significant challenges, including material infrastructure constraints causing discounted and volatile pricing for oil and gas. A combination with Vermilion exposes Spartan shareholders to a well diversified production base and a deep inventory of globally diverse drilling opportunities, providing for sustainable long-term production and cash flow growth.”

The Spartan assets are comprised of high-netback, light oil producing properties covering approximately 480,000 net acres of land (80 per cent average working interest), including 400,000 net acres in southeast Saskatchewan with multi-zone potential. In addition, the acquisition includes approximately 80,000 net acres of land in other areas of Saskatchewan, Alberta and Manitoba. Production from the assets is projected to be approximately 23,000 boepd (91 per cent oil) during 2018. The acquisition also includes ownership and control of producing infrastructure that are synergistic with Vermilion’s existing assets, as well as significant 2D and 3D seismic data.

Vermilion’s release said, “We have identified over 1,000 development locations targeting the Ratcliffe, Midale, Frobisher/Alida, Bakken, and Three Forks/Torquay formations. Most of the future drilling targets are inexpensive open-hole completions not requiring hydraulic fracturing, generating rapid payouts. There are also a large number of identified drilling locations in the hydraulically-fractured Midale play. In addition, there are significant waterflood development opportunities in the Ratcliffe and Midale zones. The assets demonstrate a current base decline rate of approximately 23 per cent for the first year, and decreasing thereafter. Under the current commodity strip, we expect the assets to generate cash flow in excess of capital requirements for continued growth plus the incremental gross dividends associated with the new shares issued.”

As a result of the acquisition, and based on an expected June 15, 2018 closing date, Vermillion put out a new 2018 production guidance to a range of 86,000 to 90,000 boepd (from 75,000 to 77,500 boepd previously). In addition, Vermilion is increasing its 2018 capital budget to $430 million(from $325 million previously) to reflect additional capital activity associated with the acquired assets. Upon closing of the Acquisition, Vermilion intends to eliminate the 2 per cent discount associated with its dividend reinvestment plan, beginning with the June 2018 dividend payable on July 16, 2018.