EnQuest boss Amjad Bseisu: ‘Kraken is by far the largest project we’ve done’
“We are a lot more comfortable than we were a year ago,” Amjad Bseisu says.
The founder and chief executive of North Sea oil company EnQuest is contemplating the current state of the oil and gas industry, but could just as easily be describing his own company.
This time last year, the explorer was locked deep in talks with lenders over an emergency $2bn refinancing. Debts were mounting and the oil market downturn was dragging on, raising serious questions about survival.
Twelve months later and EnQuest has emerged from the downturn as the poster child for the UK oil industry’s renaissance.
“That relieves us from a lot of strain – even at current oil prices. We’re comfortable because we’re paying back $1.8bn (£1.4bn) of debt of which $900m is bond debt and $900m is held by the banks.”
Bseisu’s tendency toward good-natured understatement belies the turnaround of a once struggling company in an market-ravaged oil basin. Months after drawing a line under its financial woes, EnQuest snapped up a lucrative deal to operate BP’s assets for a share of the earnings.
Since then, the North Sea comeback kid has returned to profit and is building on its record production rate with new oil flows from Kraken, one of the UK’s largest new North Sea projects.
The Palestinian began his North Sea career at oil services giant Petrofac in 1998. He set up the group’s operations and investment business through which Petrofac not only built the infrastructure but also had a stake in producing the oil too.
The experience laid the foundations for Bseisu to strike out on his own in 2010 after Petrofac spun off these North Sea interests. Alongside assets from Norway’s Lundin Petroleum, the new North Sea player emerged to ride a surge in oil prices to over $100 a barrel.
The oil price plunge to less than $30 took a heavy toll on the company. It took EnQuest six months to lock down agreements with its syndicate of 13 banks and a committee of advisers over the summer of 2016 to secure one of the North Sea’s largest and most complex financial restructurings.
Privately, senior industry sources say the process was accelerated ahead of other less urgent North Sea debt talks, including Premier Oil, to avert a debt crunch by this summer.
The long and brutal oil market rout was crushing for the North Sea, where costs had been allowed to balloon during the $100 a barrel oil boom. For EnQuest, the market collapse was particularly painful.
The oil producer ran up debt of $1.8bn by spending heavily through the downturn to develop the North Sea’s largest heavy oilfield project, coming within a breath of its debt covenants. Without the mercy of its lenders EnQuest would have faced a debt payment of $11m before the end of this month and $956m to its revolving credit facility by October. The painstaking financial overhaul was overseen by restructuring lawyers at Ashurst and involved refinancing its senior debt, and bonds, while undertaking a fundraising of $100m.
The deal effectively defers the maturity on its bonds to 2023 and pushes interest payments to when the oil price moves above $65 a barrel.
Bseisu says the overwhelming majority of its banks were very supportive. Those that weren’t were checking out of the oil and gas industry in the wake of the downturn; others simply had different incentives.
“The equity placing was successful from the beginning because we went to our top twenty investors, saying ‘We’re raising $100m and I’m matching you one for one – if you put in $50m, so will I’. That was obviously very well received,” he adds. The conclusion of the debt negotiations in October last year was less a champagne cork-popping than a long-awaited early night.
“It is an almost anticlimactic event. For months you are very focused on this chess game and who is doing what. You have to shield the people involved otherwise it can have a major impact on the business,” he says. “Then all of a sudden that big part of your life goes away.”
There was never any doubt the deal as a whole would move ahead, he says.
“We were a year away from starting production on our biggest investment – $2.5bn – and that was a big impetus for them to get the restructuring through.”
The investment in question is, of course, Kraken. The North Sea’s largest heavy oilfield lies almost 80 miles east of the Shetland Islands. It was first discovered by Occidental Petroleum in 1985 but in an era of Brent field giants it was pushed to the back burner due to its relatively diminutive size. A generation later the landscape of the North Sea is very different. In 2013 Kraken was the largest industrial investment in the UK and is now one of a small handful of new projects which are breathing life back into the North Sea.
Kraken is estimated to hold 400m barrels of oil and at its peak could produce 50,000 barrels of oil a day over a 25-year life. For EnQuest and project partner Cairn Energy, which has a 29.5pc stake, these volumes mark a major milestone. Kraken is expected to generate free cash flow of $700m a year for EnQuest, even at oil prices of $55 a barrel, which will be put to work eroding its debt pile.
EnQuest’s production fell to 37,000 barrels of oil a day at one point but with Kraken its full-year average production for 2017 is expected to climb to between 45,000 and 51,000 barrels, depending on how fast the project takes to reach its full potential.
“This is by far the largest project we’ve done. It’s certainly the largest field in terms of the oil it holds. This is a completely different scale to what we have undertaken before,” Bseisu says.
The project should also drive EnQuest’s overall North Sea break-even production price to between $21 and $25 a barrel.
Many of the development contracts were fixed before the precipitous slide of global oil market prices, Bseisu says. For those that weren’t in place the cost savings have in some cases been north of 50pc. EnQuest delivered its first oil from the first 13 wells ahead of schedule via four drilling centres tied to a floating production storage and offloading (FPSO) facility which sailed into UK waters from Singapore in October.
“It’s a very complex boat; it probably has the largest liquid handling capacity in the North Sea, so we’re quite pleased to have come in on time and well under budget.”
Bseisu’s tight grip on project costs and operations has proved to be a key competitive advantage in the new North Sea order.
EnQuest announced its return to growth earlier this year with a deft deal to take a 25pc stake in BP’s ageing Magnus oilfield, and operate it on behalf of the major.
Under the terms EnQuest was spared from stumping up $85m (£68m) in cash by funding the deal through future cash flow from its share of the project, which was a key benefit from the point of view of its lenders.
“It was a no-brainer. We were clear with BP from the beginning: we’d just been through a restructuring and we need to ring-fence this so it doesn’t impinge on any of the assets we have. And BP were fine with that,” he says.
The deal also leaves the door open for the oil producer to buy up BP’s remaining 75pc stake in the second half of 2018 for a further $300m, of which only a third would need to be paid upfront and in cash.
For BP the deal is one part vote of confidence, one part common sense.
“We’ve worked very closely with BP on their Thistle field where they have seen that we’ve been able to extend the life of the field by integrating all the services. I think that’s why they were convinced that Magnus is the right field for us,” says Bseisu.
It’s a trend we can expect to see more of. Oil majors are steadily handing the baton to smaller North Sea players who are more agile and better able to tap the remaining potential in fields which would be considered marginal to the likes of Shell and BP.
Bseisu says those who are able to take advantage of this changing of the guard will be separated into those who have capability, such as EnQuest, and those with cash. So should we expect a team-up between those with the expertise and those with the financial muscle? Bseisu is a step ahead.
“We’ve had discussions and will continue to. There are plenty of late-life assets to go around for those that want them,” he smiles. And EnQuest isn’t planning to go anywhere.
Source: www.telegraph.co.uk
