North Sea Honeymoon

05/26/2010 12:01 am EST


John Snowden

Contributor, The IRS Report

New UK driller EnQuest combines the drilling expertise and complementary resources of its parent companies, writes John Snowden in The IRS Report.

In April, oil equipment and services supplier Petrofac (London: PFC) announced the intended de-merger of its subsidiary EnQuest (London: ENQ) into an independent oil and gas production and development company. This looks like a good opportunity for investors.

EnQuest's operations will focus on the UK continental shelf, aiming to convert contingent resources into reserves and commercialize new discoveries. The EnQuest exploration and development assets will be combined with the UK Continental Shelf (UKCS) oil and gas assets of Lundin Petroleum AB (OTC: LNDNF). The latter declared assets on [the first of] January with total net proved plus probable oil and natural gas liquids reserves of 80.5 million barrels.

The combination of Petrofac and Lundin interests will offer growth opportunities through low-risk drilling near existing fields rather than higher-risk drilling exploration opportunities. The new group will have interests in 16 production licenses covering 26 blocks in the UKCS, of which 15 will be operated by EnQuest. The assets contributed by the two companies will be on a debt-free, cash-free basis and will have a strong management team with offices in London and Aberdeen with approximately 220 employees.

The Petrofac team is strong on facilities management and execution while the Lundin team excels at reservoir management and geology. This should enable an increase in the amount of oil recovered from the reservoirs and give opportunities for selective acquisitions and new joint venture agreements.

The new company will be 45% owned by Petrofac shareholders and the 55% owned by the Lundin family will be reduced to 30% after they sell a portion of their holdings in a secondary listing to increase liquidity.

Annual output growth is targeted at 10% for the next three or four years using the end-2009 yardstick level of 13,260 barrels per day. Cash flow will come from Petrofac's Don oil and gas fields and the cash will be recycled into the Lundin fields which need additional investment but are likely to produce a higher eventual income.

Debt facilities for the new group are being negotiated, and Petrofac will also contribute significant tax losses, which can be offset against future profits.

The UKCS represents a significant hydrocarbon basin in a low-risk region. The infrastructure already installed is extensive and there is plenty of skilled labor available. The technology to drill to greater depths has improved greatly over the last few years and extraction of oil and gas at the current prices is highly profitable.

EnQuest aims to widen investor interest by seeking a listing on the OMX Stockholm exchange and also on Nasdaq, which must be regarded as positive for the future.

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