Investing in a North Sea business in a low oil price world O&G UK Rob Turner Adam Maitland December 2015

Investing in a North Sea business in a low oil price world

www.pwc.co.uk

O&G UK

Rob Turner

Adam Maitland

December 2015

Investing in a North Sea business in a low oil

PwC

We are at the early stage of a significantchange in the North Sea’s ownership base

2

October 2015

1

2

4

3

5

The market for deals remains extremely challenging …

… and the traditional cyclical ‘M&A unfreeze’ remains a long way off

However, PwC is seeing signs that the crisis is driving a creative approach

Closing the value gap through deal structure and risk sharing, and new ventures forming to solve the funding gap

This will eventually unlock new capital for investment in both upstream and services

PwC

Upstream investment – Not a lack of appetite, just extremely difficult to get a deal away


3

October 2015

Challenges

• Persistent pessimism

• Unresolved price and cost pressures

Momentum for change

• Significant shift in ownership

• Innovative approach to deal structure

• Risk sharing

PwC


PwC

The ingredients are in place to unlockinvestment, despite the continued uncertainty

4

October 2015

Deals on the table

• Active conversations

• Data rooms open

• Banks

• PE

• Funds

• Strategic

Money pointed atthe sector


PwC

Why it’s not unlocking – Some familiar oily reasons

5

October 2015

Buyer-seller

mismatch

Costs

• Innovation unproven

• Savings not quantified

Oil price

• Uncertainty

• Expectation vs. base case

Decommissioning

• Immediate cash requirements

• Timing and quantum uncertainty


PwC

Financial reasons are as important – A new investment model has to be developed

6

October 2015

• Seeking

- Scale

- Control

• Distracted by the big opportunities, and global alternatives

• Still stinging – And therefore highly risk averse

• Dealing with currentlending portfolio

• Burnt by emergence of equity risk both their corporate and asset-backed books

• Keen, but having to learn

• Still trying to adapt a restructuring model andmanage downside

• Seeking a level of securityand returns which are difficultto deliver alongside existing capital structures

PE – Chasing the perfect deal

Banks – Still stinging Funds – Learning …


PwC

Unlocking this means greater risk sharing – Between buyer and seller, across the capital structure, and across stakeholders

7

October 2015

Corporate debt Equity

Asset backed lending

Supply chain?

Pricing for equity risk Delivering corporate growth

Distinction between production and pre-production terms

• Margin in exchange for risk

• Ability to put cheaper creditto work


PwC

Innovation in investment is emerging – This will drive a significant change in ownership

8

October 2015

Using deal structure to close the ‘value

gap’

New ventures toshare risk

New capital available

Momentum for growth

Changing asset ownership

No return to cyclical M&A

An oilfield services perspective

www.pwc.co.uk

O&G UK

Rob Turner

Jon Shelley

October 2015


PwC

Global oilfield services listed composite

10

Source: Capital IQ at 30.09.2015

October 2015

Oct-1

4

Oct-1

4

Oct-1

4

Nov-1

4

Nov-1

4

Nov-1

4

Dec-1

4

Dec-1

4

Dec-1

4

Jan-

15

Jan-

15

Jan-

15

Feb-1

5

Feb-1

5

Mar

-15

Mar

-15

Mar

-15

Apr-1

5

Apr-1

5

Apr-1

5

May

-15

May

-15

May

-15

Jun-

15

Jun-

15

Jul-1

5

Jul-1

5

Jul-1

5

Aug-1

5

Aug-1

5

Aug-1

5

Sep-1

5

Sep-1

5

Sep-1

5 250

300

350

400

450

427

265

271

Cumulative Market Capitalisation (£bn)

Mar

ket

cap

(£b

n)

-156bn-c40%


11PwC

Global oilfield services listed composite (continued)

Source: Capital IQ at 30.09.2015

October 2015

Oct-14

Oct-14

Oct-14

Oct-14

Nov-1

4

Nov-1

4

Nov-1

4

Dec-1

4

Dec-1

4

Dec-1

4

Jan-

15

Jan-

15

Jan-

15

Feb-

15

Feb-

15

Feb-

15

Mar

-15

Mar

-15

Mar

-15

Apr-1

5

Apr-1

5

Apr-1

5

May

-15

May

-15

May

-15

Jun-

15

Jun-

15

Jun-

15

Jul-1

5

Jul-1

5

Jul-1

5

Aug-1

5

Aug-1

5

Aug-1

5

Sep-1

5

Sep-1

5

Sep-1

5

5.0x

5.5x

6.0x

6.5x

7.0x

7.5x

8.0x

8.5x

9.0x 8.8x

6.5x

7.2x

Average enterprise value/EBITDA multiples

EV

/EB

ITD

A M

ult

iple

-2.3x-c25%


PwC

The reality

12

Listed market valuations used as a guide to deal pricing

Same businesses largely doing the same things

On average, worth c40% less ‘buyer/seller value gap’

Market volatility creating forecasting uncertainty

Very significant reduction in investment into OFS businesses and deal completions but we are seeing activity levels returning

The reality

October 2015


PwC

Global quarterly oilfield services deal volumes

13

Q1-13

Q2-13

Q3-13

Q4-13

Q1-14

Q2-14

Q3-14

Q4-14

Q1-15

Q2-15

0

20

40

60

80

100

120

140 132

47

No.

of

deals

- c.60%

Source: 1Derrick at 31.08.2015

October 2015

PwC

Why?


14

• Lower for longer – Market is not going to deliver earnings growth for most in start to medium term – Boards need to find another way to create value for shareholders

• Deal drivers:

- Cost synergies

- Ability to offer packaged solutions

- Diversification – Products, capability and geography

- Technology capture

- Opportunistic – Strong and weak balance sheets

- Normal life-cycle

- Private Equity appetite

- More upside than downside in Oil Price?

October 2015

PwC

How?


15

Buyer/seller divide still exists – But is narrowing

Creativity to bridge gap through deal structures that share risk and upside – Complex

‘Vanilla’ propositions unlikely to succeed for some time

Value creating opportunities definitely exist for the strong, brave and creative and capital is available to supportwell-thought through propositions

October 2015

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, 'PwC' refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

151002-133112-LS-OS

Thank you

Jon ShelleyPartner PwC, Aberdeen

T: +44 (0) 122 425 3194 M: +44 (0) 7740 242610E: [email protected]

Rob TurnerDirector PwC, London

T: +44 (0) 020 7804 5272M: +44 (0) 7510 351990E: [email protected]

Documents

Investing in a North Sea business in a low oil price world O&G UK Rob Turner Adam Maitland December 2015