COLUMN | About damn time: Tullow merges with Capricorn; Siem returns to profit; Shell approves Crux FLNG project in Australia as Prelude FLNG unions act [Offshore Accounts]

Photo: Tullow Oil
Photo: Tullow Oil

Curvy, body positive American singer Lizzo's new single "About Damn Time" has stormed to number one on the Billboard Chart in the US, and into the top ten in the UK (video here).

About Damn Time also happens to be the summer anthem for the offshore industry.

"Turn up the music, turn down the lights, I've got a feeling I'm gon' be alright," Lizzo sings. All the evidence of the past week is that offshore exploration and drilling are now fully into the recovery stage.

It's About Damn Time! The industry is gon' be alright!

Tullow merges with Capricorn to create African E&P giant

Last week London-listed independent oil company Tullow Oil proposed an all-share merger with Capricorn Energy, the rump company that was formerly known as Cairn Energy until December last year. The investor presentation is available here.

This is a marriage made in heaven, which provides excellent news for both the African and Caribbean exploration sectors. Tullow's shareholders will own 53 per cent of the combined entity, whilst Capricorn's investors will hold the remaining 47 per cent.

Since the collapse in the oil price in 2015, Tullow has been a disaster zone, over-burdened with excessive debt and seemingly incapable of actually finding and producing new discoveries. It's About Damn Time the company fixed its finances.

Jubilee joy

The company's two deepwater FPSOs in Ghana are reliable producers – and it seems appropriate that over the Queen's Jubilee celebrations in the UK, the operator of Jubilee Field should be finally moving ahead with a new corporate strategy.

Tullow is the operator of Jubilee Field with a 38.9 per cent stake, and it also operates the Tweneboa-Enyenra-Ntomme (TEN) offshore oil fields, where it holds a 54.8 per cent stake. Jubilee began production in 2010 through the FPSO Kwame Nkrumah MV21, whilst TEN began production through the FPSO Prof John Evans Atta Mills in August 2016. Together the fields provided Tullow with 36,000 barrels per day of production in 2021, based on its working interest.

Unfortunately, TEN was developed at the height of the oil industry's last boom, when costs were sky-high, and the fields came to production only after oil prices had crashed.

After the crash

In late 2019, Tullow's share price was hammered when it warned of a US$1.5 billion write-down because of lower long-term crude prices, and because of disappointing drilling results in Guyana, where it found the wrong sort of oil in the wrong quantities, as we reported here. The company carried nearly US$3 billion of debt then, and the oil price crunch of 2020 sent Tullow into emergency discussions with its lenders.

Today, Tullow still has US$2.6 million of debt, which constrains its ability to develop its onshore fields in Kenya, or to conduct meaningful exploration. Tullow especially wants to find and develop satellite fields close to its existing and very lucrative Ghanaian production, and in neighouring Ivory Coast.

Tullow was the worst performing share in the entire FTSE 350 index in 2019, and even now the stock is 70 per cent below where it stood before the profit warning. Tullow's CEO and exploration head quit in the wake of the stock price collapse and the ensuing investor fury. The company then followed up in February 2020 with the sad news that its expensive 35 per cent share in a wildcat well off Peru drilled by the drillship Stena Forth (video here) had been a dry hole, too.

Tullow has negative reserves and is forbidden to pay dividends until it has sorted out its balance sheet.

Capricorn's cash hoard

If Tullow had a problem of too much debt, Capricorn had the embarrassing problem of having too much cash, and too few exploration opportunities in its pipeline. Over the last five years its shares have been completely flat, despite making big discoveries as a partner to Woodside in Senegal (which it quickly sold) and in Mexico.

Rather than winning with discoveries at the drill-bit, Capricorn made its biggest win in court. Capricorn (then known as Cairn Energy) was the beneficiary of a windfall US$1.2 billion pay-out in 2021 after it won a resounding victory in a long-standing tax dispute against the government of India, and actually got the government to hand over the cash. Capricorn played hardball and threatened to seize Air India planes on the ground at foreign airports and Indian state-owned property overseas until the money was wired from Delhi.

Now, Capricorn brings its cool billion dollars to the merged entity. Suddenly, Tullow's net debt, which was 3.5 times larger than its operating cash flow (EBITDA) last year, will fall to a much more manageable 1.5 times for the group as a whole, pro forma, and the debt should be further reduced below the level of annual cash production (EBITDA) by the end of this year.

The company estimated that there will also be annual cost savings of US$50 million from synergies, a reduction in corporate overheads, and the inevitable staff lay-offs.

Decommissioning Tullow's legacy, drilling Capricorn's prospects

As a bribe incentive to shareholders, the combined company has promised to pay a minimum dividend of US$60 million a year. It will also push ahead with exploration campaigns in Gabon, Ghana, Mauritania, Ivory Coast, and Mexico.

Interestingly, there was no date given for drilling a wildcat in Suriname, which Capricorn had been studying, nor in Israel, where Capricorn has a 33.34 per cent working interest as operator in eight offshore licences. Capricorn had earlier advised that an evaluation of all reprocessed seismic data had been finalised, with an assessment of prospectivity being undertaken ahead of a "drill or drop" decision on the licences in the next few months.

With both Energean and Chevron pushing ahead with developing deepwater gas and condensate discoveries off Israel, Capricorn has some prime acreage in the hottest exploration areas in the Eastern Mediterranean. Last month, Energean announced it had made a commercial gas discovery offshore Israel, using Stena Drilling's Stena IceMAX drillship

Tullow is also finally decommissioning its legacy fields in Mauritania. Originally Maersk Decom, a joint venture between Maersk Drilling and Maersk Supply Service, was contracted for this work, after production from the Chinguetti oil field ceased in 2017 and an abandonment programme commenced in 2019. However, with the merger of Maersk Drilling with Noble Corporation, the Decom joint venture was abruptly terminated, all the staff were let go, and the contract was transferred to Petrofac. Mimi Webb's "Goodbye" song video here.

North Sea spot market sizzles

Two weeks ago (here), we looked at the dramatic return to profit of DOF, one of the final "unreconstructed" companies in the offshore industry. Since then, both international term charter rates and North Sea spot rates have continued to soar. About Damn Time, many would say.

On Friday, June 3, brokers reported that the 2002-built, 198-tonne bollard pull AHTS Maersk Handler had been fixed for a cool £100,000 (US$124,900) per day for a rig move a few days after the PSV Siem Symphony was chartered by CNR International UK for over US$33,000 and Seacor's battery-hybrid PSV Seacor Nile was fixed to Peterson for supply duties at a princely £30,000 (US$37,500).

No surprise then that the rising tide of stronger demand is lifting all owners with exposure to the PSV and large AHTS markets.

Siem Offshore returns to profit – pays down debt

Siem Offshore announced its first quarter results last week here. Siem scraped a small operating profit of US$800,000 but the net cash flow from operating activities for the first three months of 2022 was US$14.3 million. The company's gross interest-bearing debt is equivalent to US$613 million, and it is now starting to pay this down from its own cash flows. In the first three months 2022, the company made principal repayments of US$11.8 million under the cash sweep mechanisms in the loan agreements and Siem also made interest payments of US$4.9 million.

Expect the second quarter to be even better, as the company announced it was awarded a new contract for the construction vessel Siem Spearfish, securing continued operations for the next few months, and it signed a new contract for the AHTS Siem Sapphire for operations in Taiwan, securing firm utilisation well into the third quarter of 2022, plus options.

Siem's director dated Jeffrey Epstein and Donald Trump!

This column is not a gossip column, but I am sure that I am not alone amongst non-Norwegians to be surprised/alarmed/salaciously interested that one of Siem Offshore's directors, the wonderfully named Ms Celina Midelfart, was in the news for all the wrong reasons in the British tabloid the Daily Mail last year (here).

Ms Midelfart is the beneficiary of a family cosmetics fortune and is married to Tor Olav Trøim (of Golar LNG fame). Unfortunately, it emerged in court that the Norwegian heiress had previously dated Jeffrey Epstein in the mid-1990s, taking many flights on his private jet, and was also romantically connected to Donald Trump.

Let's hope her taste in shipping investments at Siem is better than her taste in men before she wed Tor Olav Trøim.

Australia gets a Labor government, as BHP Petroleum merges into Woodside

Last week, most of Australia was distracted by the triumph of the Labor Party in a general election that saw Anthony Albanese become prime minister, whilst the outgoing finance minister suffered the ignominy of losing his seat in parliament.

It was also the week that national champion Woodside Energy completed its merger with BHP's oil and gas division.

Woodside chief executive Meg O'Neill said here that the completion of the merger was, "one of the most significant events in Woodside's 67-year history and marked the start of a new chapter for the company… Today, Woodside begins its journey as a global company, becoming a bigger supplier of the energy that the world needs right now and will continue to demand in the future. The merger delivers a diverse portfolio of quality operating assets, plus a suite of growth opportunities across oil, gas and new energy that promises ongoing value for our shareholders."

But this long-awaited merger of two under-performing, over-polluting companies wasn't the biggest news in the Australian energy scene. That prize goes to the news that Shell and its partners will be moving ahead with the Crux LNG project.

Crux gets the US$2.5 billion green light

On May 30, Shell announced it had taken a final investment decision to approve the development of the 1.6 trillion cubic feet (45.3 billion cubic metres) of gas reserves in the Crux field off the coast of Western Australia. Crux will provide further supplies of natural gas to the existing Prelude floating LNG (FLNG) facility.

"Developing the Crux project reinforces our commitment to Australia, including boosting the regional economy, creating jobs and providing training opportunities," said Shell Australia Chair Tony Nunan. "The use of Prelude's existing infrastructure enables significantly reduced development costs, making Crux competitive and commercially attractive."

Crux is in Commonwealth marine waters in the northern Browse Basin, 620 kilometres north-east of Broome. The development will consist of a platform operated remotely from Prelude. Shell says five wells will be drilled initially. Valaris's semi-submersible rig MS-1 has been awarded the development drilling contract and is scheduled to start work on the project in October next year.

An export pipeline will connect the gas processing platform to Prelude, which is around 160 kilometres to the south-west of Crux. Shell says that construction of the processing platform will start in 2022, and it expects first gas from Crux in 2027.

Since Crux was discovered in 2000 by Nexus, it's About Damn Time that the gas was tapped.

But Prelude remains troubled

Unfortunately, Shell's Prelude FLNG plant has been a fiasco. We have covered the various shut-downs and black-outs here and here. Upstream reported that the giant gas unit was back up and running in April after another four months of downtime (here).

Now the unit is at the centre of a classic Australian union dispute, with both the Offshore Alliance trade union grouping and the Electrical Trades Union facing off against Shell. The two unions have served Shell with formal notice that industrial action will commence on the Prelude FLNG facility this Friday, June 10.

It seems that the union members' action on board will include refusing to work overtime, refusing to sign any permits to work, and refusing to restart any process compressors that have tripped off. There is also a union ban on members unloading cargo from supply vessels at Prelude (other than food, water, or medical supplies), on union members assisting with helicopter operations, and on assisting the side-by-side mooring of tankers or vessels, except the supply vessels with food, water, or medicine.

One side of the story is told on the blog here, which reports that the Electrical Trades Union has warned its members that Shell has "now resorted to industrial thuggery in a desperate effort to try and stop protected industrial action on Prelude."

I think Lizzo would agree that it's About Damn Time Australia sorted out its industrial relations offshore, for good.

Background reading

Stena Drilling's excellent video of life aboard the DP drillship Stena IceMAX is here. This rig is currently drilling for Energean in Israel.

To paraphrase David Guetta and Becky Hill and Ella Henderson, also in the UK top ten this week, it's Crazy What Love High Oil Prices Can Do (here).

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