ALTHOUGH the price of oil has been up and down recently, the general feeling across the sector is that higher oil prices are inevitable.
However, Alasdair Gardner, head of oil and gas at Bank of Scotland, reckons that people in the industry are now relatively comfortable with the idea that we are in a new era as far as the price of oil is concerned. Whereas initially the higher price
tended to dampen down deal activity because it led to assets being rather too highly valued, people are now prepared to do deals, he says.
"We at the bank are comfortable with the current price range and our clients certainly have an appetite for dealmaking," he says. According to Gardner, his team is talking to a number of companies who are new to the North Sea and who are keen to get into the game here. "When there are assets on sale, we have a number of parties to speak to who are keen, and people are prepared to pay what it takes to get the assets on offer," he says.
Gardner reckons that 2006 has been a "fantastic year" for Bank of Scotland's oil and gas team. "We've had a number of highlights, but the outstanding deal of the year has to be us supplying Tullow Oil with £53.5 million of financing in their bid for the Australian exploration and production (E&P) company, Hardman Resources," he says. The bid went in on 25 September, and the directors of Hardman recommended the offer to shareholders.
As one of the largest of the North Sea oil E&P independents, Tullow is something of a barometer for the sector and the fact that they are confident enough to make a bid on this scale says volumes for the buoyant state of the sector. The bid values Hardman at some £581m, or A$1.47bn dollars. Not only does the bid give Tullow a significant foothold in the Australian oil and gas province, it will increase the company's production by about 6,000 barrels of oil equivalent per day and extend its commercial reserves by 30 per cent.
Gardner points out that the Bank of Scotland won that deal against a range of competing funders and the bank is well-pleased with its success here. It also provided Melrose Resources with £160m to acquire Merlon, an Egyptian oil and gas company.
"A key theme in these deals is that we are assisting UK independents in acquiring overseas assets. We see the business of helping our clients to fulfil their aspirations to grow globally as a key part of our own growth strategy for the years ahead," he comments.
The Bank of Scotland also had a significant participation in Cairn Energy's £54.5m refinancing initiative in the third quarter of 2006. "The aim here is to put facilities in place for Cairn and to help them develop their Indian assets," he comments.
Gardner reckons that the bank has now moved its view of the likely underlying price of oil upwards to US$40 per barrel as the basis for senior debt lending. This is taken to be a prudently conservative view, of course, as befits senior debt. With mezzanine and other more exotic forms of "higher risk" financing there is scope to take a slightly more optimistic view of pricing in order to enable deals to be done, he says. "Our underlying view is not aggressive, viewed against the forward curve, but it is one we feel comfortable with as far as senior debt is concerned. For structures above senior debt we will take a more aggressive view on all fronts, including the forward price of oil," he comments.
Over the last three months in particular, the bank has seen a sharp upward rise in bid activity levels. "We have supported a number of transactions in the last two or three months which should show up very well in deals for us either in the last quarter of 2006 or early in 2007," he comments.
An enduring theme in the sector at present is the high level of interest being shown in North Sea assets by Canadian oil and gas companies. "These players see cultural similarities here, and making the transition from their own fields to the North Sea is relatively straightforward for them.
"They have producing acreage in their own part of the world and the North Sea makes a nice fit with their portfolio," he says. The Bank of Scotland is in the process of finalising three deals with Canadian companies and expects to complete these by the end of the year.
"As a result of the steady growth in activity in the sector, the bank has been growing its oil and gas team substantially. We have probably increased the professionals in our business by 20 per cent over the last two years but the volume of deals we are doing has considerably outstripped the additional resource we have put in. We are recruiting new people and our focus is on bringing more of our team into deal origination and into client-facing positions," he comments.
