EnQuest: Magnus Acquisition and Rights Issue
Friday 7 September 2018
EnQuest PLC, an independent oil and gas production and development company, announced its proposal to exercise certain options relating to the Magnus field, and the Thistle and Deveron fields. The Magnus Transaction and drilling of two infill development wells in the Magnus field will be funded through a Rights Issue, raising approximately £107 million (approximately $138 million gross proceeds), (the "Rights Issue").
Background
As outlined in the 24 January 2017 announcement regarding the acquisition of its initial 25% interest in the Magnus field, EnQuest retained the option (the "Magnus Option") to acquire from BP the remaining 75% interest the Magnus field along with an increase in its stakes in the Sullom Voe Terminal ("SVT") (to 15.1%), Ninian Pipeline System (to 18.0%) and Northern Leg Gas Pipeline (to 41.9%) (together, the "75% Interests"). The option is exercisable at any time after 1 July 2018 until 15 January 2019.
The consideration for the exercise of the Magnus Option is $300 million (plus or minus customary adjustments) base consideration, and the entry into a cash flow sharing arrangement whereby EnQuest and BP share the net cash flow generated by the 75% Interests on a 50:50 basis (subject to a cap of $1 billion received by BP). $100 million of the base consideration, to be funded by the rights issue, will be payable in cash by EnQuest with the remainder funded as a non-recourse loan from BP and repaid out of net cash flow generated by the 75% Interests. The economic date of the Magnus Transaction is 1 January 2017. Therefore, on completion of the Magnus Transaction, cash flows from the 75% Interests since the Economic Date will be reclassified as accruing to EnQuest's account and reduce the base consideration and accordingly the amount of the BP vendor loan.
EnQuest successfully drilled and completed the M-62 and M-63 wells during the 2018 infill campaign. This has given the Company confidence on its ability to drill low cost wells targeting un-swept areas of the Magnus field and has significantly improved the Company's subsurface understanding of the field. As a result, the Company intends to raise an additional $27 million to fund the development of the Canute and T10/T11 Magnus Infill Wells which will target separate areas of the field with the targets defined from both analytical and reservoir simulation studies. These wells are expected to add, in aggregate, c.5.8 MMbbls of 2P reserves and c.3,500 Bopd of production.
In January 2018, EnQuest announced that it had entered into an agreement with BP whereby it would receive $30 million in exchange for paying BP an amount equal to 4.5% of BP's decommissioning costs of the Thistle and Deveron fields, subject to a cap of £57 million. The Company was also granted the option, exercisable up to and including 30 January 2019, to receive a further $20 million from BP in exchange for undertaking the management of the physical decommissioning activities for Thistle and Deveron and increasing its payment obligation to 7.5% of BP's decommissioning costs, with an increased cap of £99 million (the "Thistle Option").
The Magnus Transaction and the Thistle Transaction are both expected to complete in the fourth quarter of 2018. Completion of the Magnus Option is subject to the satisfaction or waiver of various conditions precedent, including the approval of the transaction by the Company's shareholders by ordinary resolution and receipt of customary regulatory and third party consents. In the event that the Magnus Option does not complete, the Board will consider how best to return the net proceeds of the Rights Issue to Shareholders. The Thistle Transaction is not conditional on the Rights Issue or the Magnus Transaction and, subject to the passing without amendment of the relevant resolution at the General Meeting, it is intended that the Company will exercise the Thistle Option even if the Rights Issue and the Magnus Transaction do not proceed.
Highlights and transaction rationale
- 3 for 7 rights issue at a price of 21 pence per New Ordinary Share.
- The completion of the Magnus Option is expected to add:
- approximately 60 MMboe of 2P reserves (equating to approximately 30% of the Company's reserve base as at 1 January 2018);
- approximately 10 MMboe of 2C resources (equating to approximately 6% of the Company's resource base as at 1 January 2018); and
- approximately $500 million of additional net present value to the Company on a proven and probable reserves basis
- The Proposed Transactions complement the Company's existing strategy to be the operator of choice for maturing and underdeveloped hydrocarbon assets
- BP's confidence in EnQuest taking over the operatorship of Magnus underlines EnQuest's capabilities as an asset life extension expert
- As an existing operator of three facilities adjacent to Magnus, there is potential for the Company to benefit from economies of scale and build on efficiency programmes at SVT, increasing predictability of cost and extending facility life
- EnQuest believes that the innovative net cash flow sharing structure of the Magnus Transaction could become a template for transferring maturing assets
- EnQuest expects the Magnus Infill Wells to have a payback period within two years, with internal rates of return in excess of 100%
Summary details of the Rights Issue
The Rights Issue is intended to raise gross proceeds of approximately £107 million (approximately $138 million) and approximately £103 million ($133 million) net of expenses and funds provided to the EnQuest Employee Benefit Trust ("EBT") to take up its entitlement.
The Issue Price represents an 45.6% discount to the Closing Price of 39 pence per Ordinary Share on 6 September 2018 (being the last Business Day before the announcement of the terms of the Rights Issue) and a 37% discount to the theoretical ex-rights price of 33 pence per Ordinary Share calculated by reference to the Closing Price on 6 September 2018.
Double A Limited, a company beneficially owned by the extended family of Amjad Bseisu, and trustees of the EnQuest EBT, which together currently own 154,769,489 Ordinary Shares, representing approximately 13.0% of the issued ordinary share capital of the Company, have irrevocably undertaken to take up their entitlement to New Ordinary Shares in full.