UK-based Prax Group has reached a deal to acquire Hurricane Energy, the operator of the producing Lancaster oil field, west of Shetland.
Hurricane has one asset, the Lancaster oil field, that produces from a single well (“P6”) and riser. As at ERCE, CPR estimated 6.6 mmbbls of 2P Reserves at the field as as at December 31, 2022.
As at March 14, production from Lancaster was currently 7,710 bopd with a rising water cut, currently at 52%
Under the agreement with Prax, each Hurricane shareholder will be entitled to receive "firm proceeds" of 4.15 pence for each Hurricane Share, comprising the transaction dividend of 3.32 pence per share in cash (£66.1 million); and the cash consideration of 0.83 pence per share in cash (£16.5 million).
In addition, each Hurricane Shareholder will be entitled to receive the "Supplementary Dividend" of up to 1.87 pence per share in cash (£37.2 million); and a "Deferred Consideration Unit", which may deliver up to 6.48 pence per share in cash (£129.1 million), plus such amount of the Supplementary Dividend Amount which is not declared as a dividend prior to the Scheme Effective Date.
According to a statement issued by Hurricane Energy on Thursday, the acquisition by Prax, assuming full value is delivered by the Deferred Consideration Units, will deliver Hurricane Shareholders 12.50 pence per Hurricane Share and values the entire issued ordinary share capital of Hurricane at approximately £249.0 million (currently around $300,8 million).
For the Hurricane directors to be able to declare the Supplementary Dividend in full, Hurricane will need to have sufficient cash resources, in particular it will need to have received the proceeds, as planned, from the oil lifting from the Lancaster field scheduled for late April 2023.
In the event that the April Lifting Payment has not occurred by the Scheme Effective Date or Hurricane does not otherwise have sufficient cash resources to declare and pay the Supplementary Dividend in full, the directors intend to declare and pay as much of the Supplementary Dividend as is permissible by law.
In such circumstances, Hurricane explains, the balance, subject to receipt of cumulative proceeds from the sale of no less than 450,000 bbls of oil from the Lancaster Field, will be added to the Deferred Consideration Units.
If the Supplementary Dividend is declared and paid in full, Hurricane Shareholders will receive dividends totaling 5.19 pence per share (£103.4 million), payable within 14 days of the Scheme becoming Effective.
In the event that only the Firm Proceeds are received by Hurricane Shareholders, the acquisition values the entire issued ordinary share capital of Hurricane at approximately £82.7 million.
To remind, Hurricane Energy in November 2022 launched a formal sale process of the company after declining an unsolicited 7.70 pence per share takeover offer. The sale process was launched "to establish whether there was a bidder prepared to offer a value that the Hurricane Board considered to be attractive, relative to the standalone prospects of Hurricane as a publicly traded company and accordingly one that should be recommended to all Hurricane Shareholders."
According to Hurricane, twelve companies engaged in the Formal Sale Process (FSP) in a meaningful manner, with five providing actionable offers in compliance with the requirements of the FSP.
Bidders Concerned about 'Fragility' of Continued Oil Output
"A key area of bidders' due diligence was the perceived fragility of Hurricane's continued oil production. Whilst Hurricane's uptime has been excellent, all of Hurricane's production is through a single well and riser, and is accordingly subject to the risks associated with multiple single points of failure, most notably the upper electronic submersible pump ("ESP"), which has been in operation for two years, following an unidentified fault with the lower ESP," Hurricane said.
"In the event of a significant failure to the upper ESP, it is possible that there may not be an economic repair solution and consequently production from Lancaster might cease permanently. In the event that an unplanned cessation of production was to occur, in addition to decommissioning costs held as restricted cash, Hurricane would be required to pay six months of the [Aoka Mizu] FPSO bareboat charter costs as well as ongoing operational and corporate costs, which Hurricane estimates could be as much as US$60 million," Hurricane explained.
"ERCE sets out a number of sensitivities to illustrate the impact of an unplanned cessation of operations in the Valuation. Accordingly, most potential offerors for Hurricane have considered a contingent structure to mitigate the potential risk resulting from an unplanned cessation of production at the Lancaster Field, or have proposed an acquisition value that is below the prevailing market price of Hurricane's shares. In addition, Hurricane has received a number of proposals for reverse takeovers or other M&A transactions that in the opinion of the Hurricane Board were either not deliverable, or were less attractive than the Acquisition," Hurricane added.
Hurricane said that the sale mitigated the risk of near-term cessation of production, accelerated returns, and removed exposure to decommissioning and wind-down costs.
Also, according to Hurricane, Prax can use Hurricane’s tax losses to make tax-advantaged production acquisitions, and shareholders could benefit from 17.5% of future acquisition net revenue, oil price upside, and Lancaster field outperformance.
The buyer Prax, a subsidiary of State Oil Limited, is a UK-based, international integrated and diversified midstream and downstream energy group with 1,274 employees in 12 offices across seven countries.
Prax's activities include refining, marketing, and distribution of commercial fuels, via its network of storage terminals and pipeline infrastructure, petrol retail forecourts, road tankers, and its marine bunkering vessel fleet.
The company has ambitions to grow into a fully integrated oil and gas company, with Hurricane as its first step in fulfilling the Group’s production target of 50,000 boepd in the medium term.
“We see great strategic value in being a fully integrated energy company and have invested in experienced upstream and M&A management teams to drive this. The acquisition of Hurricane will provide a strong foundation for further upstream investments.” Sanjeev Kumar Soosaipillai, CEO, Prax Group