The Joint Venture will create a strong and sustainable 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.
Centrica plc (“Centrica”) and Stadtwerke München GmbH (“SWM”) have reached an agreement to combine Centrica’s European oil and gas exploration and production (“E&P”) business with Bayerngas Norge AS (“Bayerngas Norge”) to form a newly incorporated joint venture (“Joint Venture”) (the “Transaction”) and create a leading independent European E&P company.
The Joint Venture will have two shareholding entities. 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 1 January 2018 and it is expected to close in the fourth quarter of 2017, subject to competition and regulatory approvals and other conditions.
The Joint Venture will create a strong and sustainable 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 is similar for both Centrica and SWM:
Like-minded shareholders with strategic alignment on the role of E&P.
Combines a complementary mix of producing and development assets with strong positions in the UK, Netherlands, Norway and Denmark.
Creates a robust, self-financing entity with an attractive financial profile, enabling organic and inorganic reinvestment and distributions.
£100-150 million of net present value (NPV) expected through synergies from cost savings and portfolio optimisation.
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.”
Overview of the joint venture
The Joint Venture combines two complementary portfolios and will create one of Europe’s leading independent E&P companies, 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 licences, 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 an attractive 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 Joint Venture 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 Joint Venture’s assets under marketing and sales agreements.
Financial structure of the joint venture
Centrica will contribute the whole of its European E&P business and make a series of deferred payments totalling approximately £340 million, post tax, to the Joint Venture between 2017 and 2022, in exchange for a 69% share in the Joint Venture.
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 commence 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 Joint Venture, held through Bayerngas HoldCo.
Following completion of the Transaction, Centrica will consolidate the Joint Venture in its accounts.
Financial framework of the joint venture
In creating the Joint Venture, 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 Joint Venture will invest in the range of £400-600 million per annum.
The remaining post-tax operating cash flow is intended to be distributed to shareholders in proportion to their respective interests.
Operational structure of the joint venture
Following completion of the transaction, it is intended that the Joint Venture 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.
On completion, existing Centrica E&P and Bayerngas Norge employees who are employed by entities that are contributed to the Joint Venture will continue to be employed by those entities and it is expected that they will therefore transfer to the Joint Venture 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 Joint Venture on the same basis. To ensure that the Joint Venture will benefit from the scale and expertise of its shareholders, Centrica has agreed to provide a range of services to the Joint Venture post-completion. These services principally comprise support functions, including HSES, HR, Finance and IT. The annual charges to the Joint Venture will depend on the actual level of services required by the Joint Venture.
Synergies resulting from the joint venture
Both Centrica and Bayerngas Norge have already implemented and delivered targeted cost reduction programmes and taken a disciplined approach to capital allocation.
It is envisaged that the Joint Venture will target further opportunities to reduce costs and improve cash flows and Centrica and SWM believe the formation of the Joint Venture will create opportunities to accelerate and increase existing cost saving programmes, improve efficiency and optimise the joint portfolio. This will be achieved through the sharing of technical expertise and best practice across the two portfolios, the streamlining of operations and areas of overlap, for example at Cygnus, and the delivery of corporate and administrative efficiencies.
Governance of the joint venture
The Board of the Joint Venture is expected to be comprised of the Chief Executive Officer 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 Joint Venture will be incorporated and tax resident in the UK and its headquarters will be in the Greater London area.
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.
Centrica and SWM believe that the creation of an independent Joint Venture should enable additional strengthening of the combined business through further consolidation and joint ventures, including the possibility of an IPO in the medium term, all of which provide additional optionality for both shareholders including a number of potential exit pathways, should individual shareholders wish to pursue this following an initial lock-up period.
Conditions to completion and initial timetable
Completion of the Transaction is expected in the fourth quarter of 2017 and is conditional on, amongst other things, approval by the relevant competition and regulatory authorities.