Maersk Oil’s liquids-weighted production will provide the French energy giant with short-term benefits, with key United Kingdom and Norway assets boosting cash flow, and possibly cost-savings synergies in the North Sea, according to Energy Intelligence.
French energy giant Total’s $7.45 billion purchase of Maersk Oil appears to be more of an opportunistic, short-term move rather than a strategic, long-term acquisition, according to Energy Intelligence’s research and advisory group.
Under the deal, which was signed Monday, A.P. Moller-Maersk will receive a consideration of $4.95 billion in Total shares, while Total will assume $2.5 billion of Maersk Oil’s debt. Total will issue 97.5 million shares to Maersk Group, representing 3.75 percent of Total’s enlarged share capital.
The transaction is expected to close during the first quarter of 2018 and has an effective date of July 1, 2017, Total said.
Analysts from financial services firm Raymond James said the deal’s value seemed fair, with Total paying $13.4 per barrel of reserves – in line with what Royal Dutch/Shell spent to acquire its rival BG in 2015, which was the largest oil transaction of the past decade, according to a report from Reuters.
“The important thing to me, after looking at this deeper, is that Maersk isn’t really gaining cash out of this deal. They’re wiping away a significant amount of debt and the rest is in Total shares,” said Monica Enfield, director of research and advisory at Energy Intelligence. “That keeps them in the oil biz as an investor rather than an operator. Not a bad position because they’ve been struggling as an operator for a while. Total is bigger and Maersk can benefit from that scale.”
Energy Intelligence said that for Maersk Group, the upstream segment’s financial and operational struggles have been apparent for several years. The Danish conglomerate even noted how the move is part of its restructuring strategy, which involves it focusing more on transport and logistics.
“Maersk Oil was the second-largest component of the Maersk Group business, but weak oil prices, poor shipping container rates, and the general commodities super-cycle downturn undermined the Danish conglomerate strategy,” Energy Intelligence said. In regards to what Total gains from the acquisition, Total touted how the deal will bolster its production by 160 barrels per day in 2018 and strengthen its operations in the North Sea. Total also said it expects the acquisition to result in financial synergies of over $400 million per year.
In addition, Total pointed out the transaction’s expected boost to its reserves, acquiring over 1 billion barrels of oil equivalent of 2P reserves and 2C resources, but Energy Intelligence noted how the immediate impact is more limited, with Maersk Oil reporting only 339 million barrels of oil equivalent of 1P oil and gas at the end of 2016, equating to a proforma boost of only around 3 percent to Total’s 2016 numbers.
Energy Intelligence said that Maersk Oil’s liquids-weighted production will provide Total with short-term benefits, with key UK and Norway assets boosting cash flow, and possibly cost-savings synergies in the North Sea.
Looking at the deal on a cash flow basis, the rational for Total is relatively clear, Energy Intelligence explained. “While the Maersk Oil unit did see cash flows turn negative in 2015-16, the extent of the shortfall was (by industry standards) relatively limited,” Energy Intelligence said. “The company claimed significant reductions in operating costs, and in the first half of 2017, Maersk Oil reported a return to free cash flow generation.”
However, from a balance sheet perspective, the addition of Maersk Oil’s debt will likely result in only a modest increase in gearing (net debt-to-equity), which totaled 31 percent at mid-year.
“The longer-term strategic benefits are less clear cut, with Maersk Oil’s portfolio notable for its limited reserves life, and smaller scattered international assets likely add little immediate value to Total,” Energy Intelligence said.
“The Supermajor has actively worked to offset exposure to high-risk and costly African deepwater by pursuing long-life conventional assets in the Middle East, quick-return projects and longer-term natural gas options that advance integration objectives,” it added. “Deepening its portfolio position in lower-risk, moderate cost North Sea plays at least offers near-term portfolio balance.”
Energy Intelligence: Total-Maersk Oil deal mutually beneficial
