UK’s Centrica and Germany’s Stadtwerke München GmbH (SWM) will combine Centrica’s European oil and gas exploration and production (E&P) business with Bayerngas Norge to create an independent European E&P company.
The joint venture will have two shareholding entities where Centrica will own 69% and Bayerngas Norge’s existing shareholders, led by SWM and Bayerngas GmbH, will own 31%.
The effective date of the transaction is January 1, 2017, and it is expected to close in the fourth quarter of 2017, subject to competition and regulatory approvals and other conditions.
According to a joint statement by the two companies, the joint venture will create a European E&P business by combining Centrica’s cash-generative and relatively near-term production profile with Bayerngas Norge’s more recently on-stream producing assets and development portfolio.
The strategic rationale for the transaction includes like-minded shareholders with strategic alignment on the role of E&P; combines a complementary mix of producing and development assets with positions in the UK, Netherlands, Norway and Denmark; creates a self-financing entity, enabling organic and inorganic reinvestment and distributions; £100-150 million of net present value (NPV) expected through synergies from cost savings and portfolio optimization; provides the opportunity to strengthen the entity through further consolidation and joint ventures, including the potential for an initial public offering (IPO) in the medium term.
Iain Conn, Group Chief Executive of Centrica plc, said: “As part of our strategy of 2015, we have been aiming to develop a more focused and stronger E&P business which will contribute to the resilience of the group while limiting Centrica’s E&P participation. Alongside the recently-announced disposals of our Canada and Trinidad & Tobago assets, this joint venture creates a larger, more sustainable and more capable European E&P business and brings together like-minded shareholders who have a shared strategic vision on the role of E&P.
“As one of the largest independent E&P companies in North-West Europe, the new entity will have the possibility to participate in further consolidation and joint ventures, and creates future optionality for Centrica’s shareholders.”
Florian Bieberbach, Chief Executive of Stadtwerke München, said: “We are convinced that by combining our E&P activities we will create an even stronger and more sustainable business. With its similar background and strategy, Centrica is an ideal partner to develop and grow this joint venture together.”
The joint venture combines two complementary portfolios and will create an independent E&P company with 2016 year-end 2P reserves of 409mmboe, 2016 year-end 2C resources of 216mmboe and expected combined 2017 production in the range 50-55mmboe from 27 producing fields.
The joint venture will comprise Centrica’s assets in the UK, Netherlands and Norway and Bayerngas Norge’s assets in the UK, Norway and Denmark.
The portfolio of the joint venture will be gas weighted, with approximately 66% of total reserves and resources comprising natural gas. The joint venture will contain a mix of producing assets, development options and exploration licenses, as well as one operated UK onshore terminal at Barrow-in-Furness, and will have the financial capacity to take advantage of investment opportunities.
There is substantial near and medium-term production from established assets including Morecambe, Greater Markham, Kvitebjørn and Statfjord, and from recently on-stream assets Valemon, Cygnus and Ivar Aasen. The Joint Venture will also own a collection of development assets, including Maria, Oda, Fogelberg and Skarfjell in Norway and Hejre and Solsort in Denmark, which provide future optionality for the joint venture.
The JV will control a meaningful portion of the combined portfolio, with operatorship of approximately 22% of its expected 2017 production. Centrica expects to acquire and market all production from the JV’s assets under marketing and sales agreements.
Centrica will contribute the whole of its European E&P business and make a series of deferred payments totaling approximately £340 million, post tax, to the JV between 2017 and 2022, in exchange for a 69% share in the JV.
The deferred payments will be set by reference to the near-term funding requirements for specific fields where decommissioning is already in flight or is due to start in 2017 or 2018. The existing shareholders of Bayerngas Norge, led by SWM and Bayerngas GmbH, will contribute 100% of the shares in Bayerngas Norge in exchange for a 31% share of the JV, held through Bayerngas HoldCo.
The objective of the parties is to create a sustainable E&P business with a resilient capital structure, which will be capable of self-financing through operating cash flow in a range of commodity price environments including the Centrica low case of $35/barrel Brent Oil and 35p/therm UK NBP gas.
The joint venture expects to invest approximately 80% of its post-tax operating cash flow through the cycle in organic and inorganic growth options, in order to deliver a sustainable medium-term production profile of 45-55mmboe per annum. In the near term, it is envisaged that the JV will invest in the range of £400-600 million per annum.
It is intended that the JV will manage its day-to-day operations independently of Centrica and SWM as shareholders. The management team will be led by Chris Cox, currently Managing Director of Centrica E&P, as Chief Executive Officer.
The board of the JV is expected to be comprised of the CEO plus four representatives from Centrica and two representatives from SWM Group. Certain matters will require the approval of both Centrica and SWM Group representatives. The post of Chairman will be held by a Centrica-appointed director. The JV will be incorporated and tax resident in the UK and its headquarters will be in the Greater London area.
On completion, existing Centrica E&P and Bayerngas Norge employees who are employed by entities that are contributed to the JV will continue to be employed by those entities and it is expected that they will therefore transfer to the JV with their employers. In addition, a number of Centrica plc employees that are dedicated to Centrica’s E&P business will also transfer to one of the contributed entities and join the JV on the same basis.
The parties have agreed to restrictions on transfers of interests in the Joint Venture for two years following establishment of the Joint Venture. Following such period, SWM and Centrica will have customary exit rights, including the ability to initiate an IPO of the Joint Venture.