Sean Lightbown May 24, 2017
Denmark’s DONG Energy (CPH: DENERG) has agreed to sell its North Sea oil & gas business, DONG E&P, to INEOS for $1.3 billion in a deal comprising $1.05 billion on a cash- and debt-free basis and contingency payments of up to $250 million. The deal marks DONG's exit from the upstream energy sector after deciding to focus solely on renewables last year, while INEOS, a UK-based petrochemicals manufacturer, takes on board a business currently producing 100,000 barrels per day.
DONG's move, coupled with Engie's (EPA: ENGI) sale of its E&P unit to Neptune Energy earlier this month, represents a divergence from M&A trends in European energy exploration, production and refining over the last few years. Completed deals in the space slumped in 2016, according to the PitchBook Platform. The dip in dealmaking has coincided with one of the sharpest drops in crude oil prices in history, from over $108 per barrel in June 2014 to under $30 in January last year—a crash of more than 72% in price.
While it may seem counterintuitive, holding onto oil & gas assets—even in the face of falling commodity prices—can make more sense than initiating a fire sale. And in industries dependent on traded commodities, safeguards for companies can be baked into deals in order to combat price fluctuations. Indeed, in the INEOS deal, DONG has retained the hedge contracts on DONG E&P. These contracts alone had a market value of DKK1.9 billion (around €256 million) at the end of March.
But prospective buyers also had reason to hold back last year. The price drop for a barrel of crude, while making targets cheaper, also hit their bottom lines and credit ratings, making it more difficult to raise or free up the cash needed to buy companies. However, with prices rising again, potential acquirers are finding more room for increased capital expenditure, as well as more success when it comes to issuing debt.
The DONG and Engie deals should be viewed in strategic terms as a departure from oil & gas altogether in favour of a focus on more renewable forms of energy production. Despite the wider shift into renewables, however, a post-oil global economy remains a number of years away. And now that buyers and sellers are on a steadier footing, allowing them to be aggressive, we could be set for more moves in European energy exploration and production during the coming year.