Centrica on hunt for oil and gas deals
UK’s biggest energy supplier wants to build out production after Bayerngas Norge tie-up
The UK’s biggest energy supplier Centrica is hunting for a second joint venture partner to further boost its oil and gas production business after a recent deal with German-owned Bayerngas Norge.
Chris Cox, chief executive of the newly enlarged exploration and production business, a joint venture that is 69 per cent-owned by Centrica, said it is looking for another partner “about the size of Bayerngas or a bit bigger”.
His comments reinforce market expectations that this year’s spate of dealmaking in the European oil and gas industry will continue into 2018.
Most recently, chemicals group BASF said this month that it would merge its Wintershall energy business with another German company DEA, which is owned by Russian billionaire Mikhail Fridman.
Other major deals have included the $7.45bn acquisition by France’s Total of the oil business of Danish conglomerate AP Moller-Maersk.
Centrica’s Bayerngas deal, first announced in July, initially raised questions about the strategy of Iain Conn, chief executive of the FTSE 100 group. He had said in 2015, shortly after taking the job, that he wanted to shrink Centrica’s oil and gas business to focus on customer-facing activities such as household energy supply.
While Centrica has sold production assets in Canada and in Trinidad and Tobago, it now has an enlarged Europe-focused oil and gas production business on its balance sheet.
Mr Cox said in an interview with the FT that the expansion of the oil and gas business — now called Spirit Energy — through joint ventures was consistent with Mr Conn’s strategy.
“Iain did say early on in his tenure that he wanted to reduce exposure to E&P but he didn’t say he wanted to get out and he has been pretty firm since then that he likes having exposure to E&P,” Mr Cox said.
“That’s partly for balance sheet strength and it’s partly frankly for exposure to commodities prices and the view that they have been low for a few years and that’s not going to last for ever and why would you get out at the bottom of the market anyway?”
What Centrica will not do is hand Spirit Energy a pile of money to go out and do further deals, said Mr Cox, because it wants to reduce spending on exploration and production.
Spirit Energy is aiming to invest about 80 per cent of its operating cash flow after tax on “growth options”, including developing new fields, while the remainder will be distributed to its parent companies as dividends.
It is looking for another partner that wants to offload assets in Europe either to concentrate on lower-cost regions, or to quit exploration and production.
Although many of the biggest energy companies have been looking to sell their North Sea assets for cash, Mr Cox believes some of them could be persuaded to enter a joint venture.
“If they [the energy majors] are interested in getting out, they could try to sell for cash today and we know a number of them have done and have been unsuccessful.
“[Or] they could put their assets into our JV and we’d probably save some money in the short term through synergies . . . we could probably run it more efficiently just because we’d have more operations we could spread our costs over and we can create that option over the next few years to potentially IPO or a trade sale to another investor at that point.”
He stresses that neither Centrica nor Stadtwerke München Group, Munich’s municipal utilities company and the majority owner of Bayerngas, have yet committed to float Spirit Energy following the expiry of a two-year lock-up period in 2019, but the option is there.
The Bayerngas joint venture is a “good marriage” Mr Cox said, because the German group has a number of immature assets that require development but need cash to press ahead, while Centrica’s assets throw off a lot of cash but are ageing.
Centrica’s E&P business was likely to end the year with about 50m barrels of production as a standalone business, he said, but that is due to fall in coming years as older assets go into decline or have to be decommissioned.
“We started with a business that wasn’t sustainable and would . . . generate cash for the next 5-6 years but beyond that was not a sustainable business. So that’s what we are creating here,” said Mr Cox.