Nigel Hares, Co-founder and advisor to the CEO, EnQuest, UK
Nigel Hares, Co-founder and advisor to the CEO of Enquest discusses Enquest’s aspirations in the North Sea and further afield. A new company, Hares reveals the company’s strategy for asset acquisition and how through innovative use of debt, the company is able to finance forward movement in this market.
You previously worked for BP, then for Talisman creating a remarkable record in increasing production rates for these businesses. Why did you take the risk of founding a company such as EnQuest, focused on the North Sea?
I first worked for BP for twenty years. This was in effect two decades of learning which I was then able to put into practice with Talisman over the following decade and a half. The business strategy at Talisman was not dissimilar to our ambitions here in EnQuest. This runs on the back of observations that as basins mature the supermajors and majors, entities present in the beginning developing big fields, taking big risks, begin to view the remaining opportunities as less material. As discoveries become smaller, the likes of Shell or BP will find these remaining assets less attractive- to such companies a few million barrels are not that important. EnQuest has been set up as a small company designed specifically for the future North Sea business environment. To achieve that one must have all the capabilities of an operator and whilst remaining relatively small in size must be able to explore (though exploration is not EnQuest’s principal means of locating assets), buy and sell assets, operate platforms and develop smaller fields. EnQuest has all those capabilities and had 80 million barrels when the company floated in April 2010. This has been grown to 195 million barrels – a 25 percent per annum growth rate.
Having started with 80 million barrels, the opportunity to develop another ten remains very material- which is why EnQuest is leading in the North Sea as a notable independent producer.
What have been the principal stepping stones to the success you have had?
First, one needed the right assets, ones with remaining potential: assets that have not had the latest technology applied to them or assets which have been lying fallow because they are not, as discussed, sufficiently material for a larger player. Our first step was to find the right asset base and achieved this by demerging assets out of Lundin and Petrofac. Management of these passed to EnQuest’s staff, overseen by Amjad Bseisu, the company’s CEO. Along with Mr Bseisu, Jonathan Swinney and I were the founding directors and we grew an organisation capable of developing these mature assets and smaller fields.
The business is strongly financed, with limited debt so the business is capable of buying further assets.
You were the first firm in the sector to launch a retail bond. What was motivation for this choice, and what level of interest did you receive in these bonds?
You will find that one of the hot topics mentioned in and around the Wood Report is the difficulty that exploration companies are having in financing themselves. Companies with strong existing cash flows are finding it easier to demonstrate their viability and access finance in this respect. Often smaller companies do not have diversified financing and EnQuest’s bank debt was originally on a limited term. Since establishment, EnQuest has taken two actions to address this through firstly launching the retail bond to increase the tenor of our debt and more recently we have added some high yield debt. That gives the company debt with an eight year term.
Now EnQuest has diversified, strong financing with debt at the end of last year amounting to 380 million GBP. This includes bank debt, retail bonds with a higher tenor and high yield debt.
You aim to restart production at the Argyll field, now re-named Alma-Galia, however the start of production has been delayed. What has been the impact of this delay on EnQuest- was postponing production the right decision to make, and what will this field deliver to EnQuest after production restarts fully?
As you see we have announced that production has been delayed until the second half of this year. This is a project which was set off on a fast-track basis, refurbishing an existing vessel to allow production. As the project has progressed, we have realised the work required on this vessel needs to be more extensive than first anticipated and regulations with regard to moorings have been tightened up- the project needs to address this. There have been a number of incidents in the past few years where FPSOs have drifted on their moorings and an accumulation of these issues has contributed to the scope of the work being longer.
The timeframe for this project has simply moved from an aggressive fast-track program to one which is quite standard in its progression to completion.
Your Kraken field benefited from a heavy field tax allowance and your Thistle field benefitted from a brown field tax allowance. Do you feel the tax regime is conducive to development in the North Sea?
I have been very involved in working alongside Oil and Gas UK to help shape these allowances, alongside the Treasury and DECC. It was very unfortunate that within a year of floating EnQuest, the 2011 budget announced an increase in PRT from 50 percent to 62 percent with no prior consultation. Given that any project particularly those involving rejuvenating old fields tends to have marginal economics, if the tax rate suddenly increases in this respect- it can torpedo a project.
The industry and EnQuest faced a situation where this tax hike could dramatically reduce investment. Working with OGUK and the UK government we managed to double the small field allowances and introduce brown field allowances initially. These were followed by several other allowances too.
Despite this period being significantly difficult for the industry the increased communication was tailed by a more cooperative attitude between government and industry and this has been a great step forward. The government now has gained a much better understanding of the industry.
This greater understanding has resulted in the Wood Review, which fully recognises the industry’s collective opinions. It is quite unusual to see the industry welcome a stronger regulator- but this is necessary in the ever more mature, inter-dependent and connected North Sea. The industry is now more complex than ever before and this beefed-up regulator is necessary.
Last year, EnQuest acquired a 70 percent stake in the Didon field in Tunisa. Does this represent EnQuest looking further afield for growth, and if so, which areas would be targeted?
The acquisition in Tunisia is still pending government approval. A deal has been inked but still requires final verification from the government until then. In the meantime the company has moved into Malaysia and there has taken a large exploration block in an area of existing production and entered into a small field development. EnQuest continues to look at further opportunities in that country.
EnQuest has also recently acquired two exploration blocks in Norway but at the moment the focus for the company is still very much on the UKCS. There is an appropriate amount of diversity in a company- both to manage risk and also to ensure opportunities are taken. However, the North Sea is the core of our business strategy and for the foreseeable future will continue to be our biggest area of operations.
EnQuest has stated it has an appetite for further acquisitions and has a 1.7 billion GBP credit facility in place to forward such actions. What characteristics are you looking for in any potential acquisition?
As a company our assets are already creating very solid rates of growth. By the time Kraken is operational in 2017 following a steady, considered development of the asset EnQuest will be producing over 50,000 barrels a day. The business for this reason is not in a rush to acquire further assets.
What is true however, is that the environment is moving from a seller’s market to a buyer’s market. Many North American companies are moving home to focus on shale oil and shale gas and are selling their international assets to finance this. This means EnQuest is has access to more assets as they are sold off. Simultaneously our business faces less competition as these companies move out.
Currently the majors and supermajors are seeking to improve their returns on capital employed. In reality that means these companies are looking harder at disposing of mature assets which again for EnQuest represent attractive opportunities.
The business has growth plugged in and is so not in a rush to undertake any hasty acquisitions. The business is very disciplined and since foundation has looked at over 100 potential assets, but has only acquired a handful.
Any assets we acquire will need potential to have enhanced production through the application of further technology, through reducing costs on site, or through linking to other nearby fields. A good example would be EnQuest’s Kittiwake acquisition which closed this year. There was existing production on-site. This field was becoming of marginal interest for Centrica- the previous owner- due to its size. EnQuest seized on this productive potential, with opportunities to improve oil reclamation. In the area Scolty/Crathes represented existing assets for EnQuest and our business was then already drilling an exploration well to the North at Avalon. The opportunity to connect these producing assets meant Kittiwake was a logical purchase. EnQuest sees some exploration potential in this area too. The Kittiwake field is a classic example of what EnQuest is looking to do in the North Sea.
The industry is ‘hot’ at the moment. At 14 billion pounds there is record investment in the UKCS as the moment. This masks however, the real issue as there are a small number of large projects west of Shetland ongoing. Beyond this, investment looks likely to drop substantially in the near future. Implementation of the recommendations of the Wood Review is essential to brighten the future of the UKCS and it is companies such as EnQuest which will deliver this overhaul of the industry. EnQuest can do this because the challenges of other companies are our opportunities.