Strategy & Business Development

Background

The Norwegian Continental Shelf (NCS) is a maturing petroleum province, yet activity levels are still high and the shelf continues to be attractive to a large number of players present. These players vary strongly from each other - from Statoil and majors to small exploration-focused companies, having specific strategies and pursuing different opportunities, for example exploration only or tail-end production. As these companies optimize their portfolio according to their strategies, acquisition candidates become available. Rystad Energy has extensive experience in helping companies in screening for acquisition targets.

Approach

Rystad Energy’s proprietary database UCube includes production profiles for all fields and discoveries worldwide and estimated yet-to-find resources. When screening for acquisition targets or farm-in candidates, UCube, public sources, and our industry knowledge are utilized to identify a long list of potential companies, fields, discoveries or licenses based on client needs (e.g. exploration companies with large future capital expenditure commitments, discoveries with mainly oil reserves, exploration licenses with future drilling planned, etc.). Acquisition targets are thoroughly researched by Rystad Energy before a discussion with the client commences. A short list of opportunities is then prepared, which the client can pursue.

Result

The result is a detailed evaluation of opportunities and the impact each of them has on the client’s portfolio, especially when it comes to production, reserves, and cash flows. A sample illustration of this is shown to the right.

Transaction Opportunities with Possible Impact on Cash Flow and Production
Background

The portfolio of producing assets on the Norwegian Continental Shelf (NCS) is dominated by mature fields entering tail production. As this represents a new phase for many operators and partners, the development of a strategy for such fields causes the need for new thinking and approaches. In our project example, the licensees needed assistance with the process of updating the asset strategy for the field. Rystad Energy was in a good position to assist the license group due to our in-depth knowledge and understanding of the NCS but also because of our specific insight into individual field opportunities and challenges through our continuously updated research products (NCS Business Development Atlas) and databases (UCube).

Approach

Rystad Energy supported the license group by reviewing existing plans and conducting in-depth individual interviews with key people from the licensees to understand their views on the situation and opportunities for the field. Prior to the interviews, Rystad Energy prepared a key value driver analysis to understand how value is created for the field, including cost improvements/curtailment, reserves growth, production acceleration/uptime, third-party tariffs, and deferred abandonment. After the interviews the key value driver analysis was finalized and core findings documented, including a long list of opportunities for further discussion and prioritization by the partnership.

Result

The final delivery included Rystad Energy preparing and facilitating the discussion of the strategy module in the license meeting, where specific tasks and targets for the field were agreed upon.

Mature Field Production, Economics and Drilling Activity
Background

The business development and exploration teams within oil and gas companies often work together in identifying potential farm-in candidates to inorganically acquire future exploration opportunities. However, with geologists heavily concerned with geological data and business developers/analysts concerned with the transaction landscape, there could be a challenge in finding proper overviews and tools that facilitate discussion between these teams. Rystad Energy was given the task to facilitate such a workshop, preparing the relevant material.

Approach

The Rystad Energy team systematized all historically drilled exploration wells in the area of interest and classified the exploration targets with the targeted geological age (play). By leveraging already established databases of resources found, the team created exploration creaming curves for the individual geological plays. In short, a creaming curve shows aggregated resources found as a function of number of wells drilled; hence, steeper curves indicate more prolific and attractive plays.

Result

A comprehensive report outlining the historical and recent development within resource additions from individual plays within the selected area was established. Bringing the report of creaming curves to the client workshop, Rystad Energy managed to facilitate an efficient process with the business development and exploration teams. The client teams found a common ground on which to assess peers exploration positions and efficiently reached a consensus long-list of farm-in opportunities.

Norwegian Side - North Sea

Company or Asset Valuations

Background

In recent years, exploration activity has increased significantly on the Norwegian Continental Shelf (NCS). The number of small E&P companies with exploration focus establishing themselves on the NCS has also increased strongly. Along with the exploration success one has been able to see increasing activity in the transaction market for exploration license interests. Sell side companies are focusing on exploration but not wanting to participate in the development of discoveries. Buy side companies are driven by production, reserve replacement targets, and portfolio balance considerations.

Approach

Rystad Energy assists industrial players in establishing a value for new discoveries – both the bottom-up value and the expected market value. Attaining a value of a discovery is essential for clients to establish their future strategies. Rystad Energy generates production profiles for discoveries using a wide set of analogs. Capital and operating expenditure profiles are estimated thereafter based on characteristics of the field and our database of actual costs in the region. These input data series are subsequently added to our proprietary valuation models. Different scenarios are then evaluated depending on possible appraisal results and additional exploration success in the area. The impact of different oil price scenarios is also included in the analysis.

Result

The bottom-up valuation results provide a starting point for clients to establish a solid basis for their asset management of a discovery – value growth over time, capital requirement profiles, and possible market value if divestment is considered. The derived, implied value is benchmarked against previous transactions on the NCS as well as against transactions of similar fields globally. Such discovery valuations leverage Rystad Energy’s solid field-by-field data sets and global transaction database and take full advantage of our thorough analytical approach and broad experience in valuation of exploration assets and portfolios.

Valuation of Grosbeak Discovery - Noreco's 20% Sold to Talisman in July 2010 for MUSD 215 (100% basis); Rystad Energy Estimates Implied Oil Price of USD 80/bbl
Background

The client is a fund manager with a portfolio weighted towards oil and gas exploration companies. The investment strategy is driven by fundamental analysis of cash flow forecasts at field level. The fund should have a balanced exposure to oil vs. gas prices, to emerging markets vs. OECD markets, to exploration upside vs. proved core assets, to cost-geared vs. high-margin developments, and to the key growth markets being North America shale liquids, Canada oil sands, Atlantic deep-water, Asia LNG, and Arctic exploration.

Approach

Rystad Energy provides discounted cash flow analysis on a large number of oil and gas fields owned by several hundred quoted companies and at various price scenarios. Data are based on UCube and supported by assumptions, justifications, and data consistency indicators. Customized deep dive analysis and presentations are performed on selected topics and companies. The data set is being updated regularly.

Result

The result of the data is summarized in a data table, where the sum of parts NPV for the company is compared with the “upstream enterprise value”, which excludes all other businesses apart from upstream oil and gas, and is based on the market value of equity and net debt. The summary data, as shown to the right, has been utilized to support the fund’s investment decisions on large cap E&P companies. The second slide shows a deep dive into the valuation of small cap E&P companies active in the Granite Wash unconventional play in the USA.

Benchmarking Rystad Energy NPV Anlaysis vs Market Valuation of Upstream Businesses
BACKGROUND

There are many E&P companies with offshore focus that have asset portfolios predominantly made up of exploration acreage. This is especially the case on the Norwegian Continental Shelf (NCS). When valuating exploration assets the challenge is not just related to volume characteristics but also to timing, for example drilling of wildcat and appraisal wells or lead time of developments in case of exploration success. Analysts have traditionally dealt with this challenge by using standard risk multiples. However, this approach often does not consider value drivers such as timing effects and regional differences within the exploration assets. For instance, there are significant differences in cost structure and development timing for assets in the North Sea compared to the Barents Sea due to market distance, infrastructure, etc.

APPROACH

Rystad Energy has built its own proprietary valuation model for exploration portfolios, which takes commercial and geological risks as well as the drilling probability into account. Based on the extensive data provided in our UCube database, reliable benchmarks are available for exploration success, cost inputs, development solutions, and lead time. Through extensive research from consulting projects and the NCS Business Development Atlas, Rystad Energy has developed an extensive understanding of the rig market, especially on the NCS. This provides a strong foundation for assessing when and where future wildcat wells will be drilled.

RESULT

The result is a robust, transparent, and flexible model for the valuation of exploration portfolios, which takes into account different risks, cost, time, and regional parameters. Results can be visualized with risked production and cash flow profiles together with key ratios as seen in the graph.

License Portfolio Input and Results: Prospect Prosperity

Mergers & Acquisitions

BACKGROUND

The maintenance and modification (M&M) market at the Norwegian Continental Shelf (NCS) is a multi-billion market and represents one of the largest segments within the Norwegian oil service market. An oil service company with several business units, M&M being the largest, had recently won several large contracts on the NCS and was planning global expansion of several of its business units. The company needed assistance in preparing material for analysts and a road show for an initial public offering (IPO).

APPROACH

By leveraging existing research products (Offshore Market Report Norway) and databases (UCube), Rystad Energy identified key value drivers through additional market research and interviews with both service providers and customers (oil companies). For the largest business segments Rystad Energy created bottom-up models consisting of named projects in the company’s current and future key regions.

RESULT

Through several workshops with the company and its business development department, Rystad Energy prepared a final presentation for analysts of different investment banks to use for IPO documentation.

The Largest Operator Dominates the M&M Market, with Decreasing Market Shares in an Increasing Market as New Installations Enter NCS
BACKGROUND

Development of novel technologies for the E&P industry often takes several years. Many ideas for potentially disruptive technologies are brought forward by start-up companies. For them, ensuring sufficient funding may be as challenging as the development work itself. Typically, companies establish joint industry projects together with likely future technology end users – oil companies. An important motivation is that this usually will also release substantial public grants, which in many cases provide the main funds of such projects. However, it frequently is hard to get oil companies to join these projects despite their often relatively small economic contribution to the projects. Reasons are that in the early phase the risk is high, products/services lie some years into the future, and so do the company’s benefits/savings effects of the new technology. Additionally, there may be many projects competing for oil companies’ attention and budgets.

APPROACH

The goal of our assessment was to identify the oil companies that had most to gain from new technologies in a time perspective compliant with development plans. The first step was to make an assessment of all the different applications of the company’s technology and qualify the benefits as compared to current industry practice. We worked out selection criteria for each application that would identify target fields. Next, we applied these selection criteria to our global asset database UCube to filter all fields for which this specific application was important. We analyzed the resulting data set to find out which operators were most exposed to the application – and thus had most to win by having technology developed.

RESULT

We followed the above approach for more than ten different applications. This provided a full overview of the expected market and a list of key operators that should be good candidates to partner with in projects. Further, we tailored road-show presentations for specific companies, emphasizing the particular benefits for that company.

Shell is Top Operator of Mature Fields with Platforms with Drilling Units
BACKGROUND

Initial investors in exploration-focused oil and gas or oil service companies may want to divest their interests to long-term industrial or financial investors, once these companies have established themselves in the market with a robust portfolio and/or turn-over.

APPROACH

Together with the client, Rystad Energy establishes a list of possible buyers of such interests by means of an analysis of prospective buyers’ strategic goals, current portfolio and geographical focus. On this basis, a prospectus showing the opportunity is presented to a discreet number of companies, which are then asked to express interest before further information is. Once a Confidentiality Agreement has been signed, Rystad Energy presents the opportunity in full detail and administers the Due Diligence process including data room visits. Once the preferred buyer is identified, Rystad Energy joins the client’s negotiation team and supports the negotiations with industry insight, numerical analysis and portfolio/market assessments.

RESULT

Rystad Energy provides independent assessments and valuation of companies and the underlying shares. Included in such analysis are projections of free cash flow forming the basis for value of the company in question. Once this is derived, benchmarking against historical deals is undertaken involving similar types of companies and resulting in expected market value (EMV) of the divestment object. A successful outcome of a divestment process is ensured through a robust bottom-up market value assessment combined with an aligned view between buyer and seller of the divested company’s projected future.

WellFlow: Important Information

Oil Service Market Assessments

BACKGROUND

Subsea completed wells and underwater infrastructure have been among the most important technology developments within the oil and gas sector over the last decades. The increasing volume of underwater infrastructure, depletion of developed reservoirs, increasing flow assurance issues, and trends towards ever increasing water depths have since driven the logic for taking topside processing technology and applying it subsea. Rystad Energy was hired by a subsea equipment supplier to assess the potential of all subsea processing technologies, including separation, boosting, and gas compression. The aim of the study was to consider the viability of each technology in order to make the right R&D investments and to address the most promising future markets.

APPROACH

Starting with field-by-field resource and production figures taken from UCube, Rystad Energy developed a model of the subsea processing market. By considering the additional recovery effect of applying different subsea processing technologies across all viable fields, discounted cash flow valuation was applied to each candidate to assess the operator’s increased value from installing subsea processing systems. By combining this model with knowledge of the operators’ degree of technology acceptance and with an outlook for the global subsea equipment installation capacity, a likely 10-year market development scenario was created.

RESULT

Significant market potential was identified and confirmed across all subsea processing technology segments and with some areas standing out as particularly interesting to pursue. The client applied the knowledge attained through the study to redirect some of its R&D efforts towards the most promising technologies.

Abundant Opportunity - Hundreds of Assets Have Been Identified as Candidates for Subsea Processing in the 2010-2020 Time Frame
BACKGROUND

INTSOK - Norwegian Oil and Gas Partners - was established in 1997 by the Norwegian oil and gas industry and the Norwegian government. The organization’s objective is to work with companies throughout the industry to expand business activities of Norwegian companies in the international oil and gas markets. Once a year INTSOK distributes an annual market report to its 200+ members. The report covers an in-depth market update, including forecasts on expenditures in INTSOK’s prioritized geographical markets and segments – both offshore and onshore. In addition, the report contains project descriptions of the most important projects in each market, a global macro update, and special focus chapters on topics such as rigs, FPSOs, and global supply chain constraints.

APPROACH

In DCube Rystad Energy has E&P expenditure forecasts for all fields and discoveries globally, split by expenditure segment. By utilizing this proprietary database, a four year forecast for each of INTSOK’s geographical markets was produced. Market forecasts also included historical numbers back to 2005. Additionally, extensive research on different geographical markets and priority projects was performed to give a broad description of each market and project.

RESULT

The result of this project was a comprehensive 270 page report covering 19 different geographical markets and more than 90 greenfield and brownfield projects worldwide. A few report pages can be seen to the right.

INTSOK Annual Market Report 2010: Special Focus - Shale Gas
BACKGROUND

With the main market driver for rig companies being drilling activity, an understanding of future drilling demand is essential for proper portfolio management. Rystad Energy was approached by a rig company with the question being whether a certain offshore region would be over- or under-supplied in terms of rig services during the next five years. The client was considering upgrades and/or additions to the current fleet.

APPROACH

By monitoring and interviewing oil companies, the Rystad Energy team aggregated future drilling plans within exploration, development and production drilling. The approach provided a meaningful forecast with a few years horizon as oil companies do not tend to disclose long-term plans. However, to complete the picture, the Rystad Energy team modeled future long-term activities within the same segments basing outlooks on assumptions such as oil price, future acreage awards and future exploration success. A look-back analysis was made along central dimensions to qualify all assumptions. To visualize sensitivities, the team created scenarios on both sides of the established base-case by challenging central assumptions.

RESULT

A fundamental, field-by-field, license-by-license, well-by-well drilling demand forecast was established and compared to the apparent new and existing supply of rig services within the region of interest. The client was able to carry a robust forecast of the future gap between supply and demand for rigs into its portfolio optimization process. The client was provided with a fundamental understanding of the market, customers and rig future rig requirements, all of which was used to base its conclusion on future capital allocation.

Putting It All Together - Forecasting Future Rig Demand by Activity Including Supply
BACKGROUND

The oilfield service segment is an attractive arena for private equity companies to find acquisition targets due to high levels of innovation and associated growth potential. Rystad Energy was approached by a private equity company targeting a candidate that already was marketing itself as an acquisition target. The key question for our client was how much they were willing to pay for the candidate, with underlying questions on domestic and international market potential as well as current technological and commercial standing of the target.

APPROACH

Rystad Energy chose a two-folded approach for the task. First, by leveraging in-house databases, the team purpose-built a model to predict future demand for the service niche. This constituted the quantitative part of the project and provided fundamental input to the client’s own valuation models. Secondly, the team carried out an extensive qualitative review of the targets position and the service niche itself. This included a substantial number of industry interviews, and learning was constantly fed back into the numerical model. Competitor standing, likelihood of a successful internationalization of the business as well as a technology assessment were central parts to this exercise.

RESULT

The Rystad Energy team maintained a running dialog with the client throughout the due-diligence process as well as through the bidding process. By complementing in-house competence with industry learning through interviews, the Rystad Energy team was able to quickly understand the niche and educate the client effectively. The client’s apparent competence level became a pivotal value proposition towards the target, and the client ended up as a winning part in a fierce competition for the acquisition.

Identifying Target Markets by Utilizing a Global Database of Oil Fields

Peer Group Benchmarking

BACKGROUND

Exploring for oil and gas is at the core of the E&P business. Measuring and comparing exploration performance between E&P companies, however, is a challenge as there are a wide number of methods available and because such analysis requires large amounts of data. Stand-alone, single benchmarks will seldom reveal the complete picture of a company’s ability to explore for oil and gas.

APPROACH

In collaboration with the client the project team established a relevant peer group of companies. Subsequently, we developed a rich data set combining data from our global upstream database UCube with official company-reported data from our databases. The project team was then able to quickly come up with a broad set of benchmarks highlighting several aspects of exploration performance and activity. This included detailed annual data on drill out volumes, reserve replacement ratios, exploration spending, number of wells drilled, development in acreage positions, signature bonuses, and other exploration-related data.

RESULT

The project delivery consisted of an extensive presentation package including detailed analysis of exploration performance with supporting data sets of more than 30 peer group companies in the E&P sector. Combined with in-depth discussions and workshops, the client was able to get a broad perspective on their relative exploration performance compared to their peers. The project also enabled the client to look into performance and exploration strategies of other companies and compare exploration results against their peers.

Comparing Annual Bookings of Reserves to the SEC with Annual Drill Out Volumes

Gas Markets & Infrastructure

BACKGROUND

Gassled is a joint venture that owns gas processing plants and gas pipelines in Norway and other Norwegian markets. The original owners of Gassled were E&P companies that engaged in the infrastructure investments in order to bring gas resources to the European market. Recently, several of the owners of Gassled decided to divest their participating interests (like ExxonMobil in 2009, Total and Statoil in 2011). These ownership interests were sold to financial investors. For these transactions to take place, a detailed valuation of Gassled JV was necessary. The revenue part is tariffs paid by shippers of gas. The most important value driver is future NCS gas production and consequential utilization of Gassled infrastructure.

APPROACH

In UCube Rystad Energy has production profiles of all fields and discoveries in Norway (and the rest of the world). The database also includes estimated volumes from yet-to-find resources (exploration licenses). By allocating all fields, discoveries, and yet-to-find resources to the relevant pipelines in the Gassled system, the throughput of gas can be estimated. Additional elements need to be included: bookings (on an annual basis shippers book more capacity than actually used), capacities in specific pipelines, actual bookings already made, and interdependencies between different parts of infrastructure.

RESULT

The result is a detailed and robust assessment of demand for bookings through the whole system. Finally, this can be visualized through Rystad Energy’s Cube Browser comparing historic production of each field, future production, bookings, and capacities for each part of the system. An example of this is shown to the right.

Area A Stafjord Rich Gas: Assessment of Booking Forecasts
BACKGROUND

In contrast to oil prices, achieved gas prices in a market are not easily accessible. Even though gas is partly sold in the spot markets in UK and the Netherlands, a large portion of gas continues to be sold via long-term contracts between upstream companies and European gas companies (like E.ON and GDF Suez). There are numerous kinds of contracts with different mechanisms to set a specific price. Knowledge on this can be used to understand the current situation and to provide an outlook on gas price development.

APPROACH

Understanding historic and current price mechanisms requires in-depth knowledge about the gas value chain. Firstly, collection and analysis of reported and realized prices of producer sources, government statistics (like the German Border Price) and research papers is undertaken. In particular, Rystad Energy has established regression formulas based on this research to describe a price for gas sold under long-term gas contracts. Secondly, to gain an outlook on gas price development, a market view on gas in the region can be established. This includes looking at indigenous production in the region and piped gas in Norway, Russia, and North Africa.

RESULT

Comparisons can be made between spot gas prices, contracted gas prices, and oil prices. This can be seen in context of, for instance, a financial crisis involving demand destruction and impact on different prices. We can see various prices have moved parallel in some periods and differed in other periods.

Gas Price Development: German Border Price on High Level from 2006, NBP Increasing since January 2010
BACKGROUND

On numerous occasions Rystad Energy has supported clients in their legal proceedings, in which disagreements over the correct value of assets have been the root cause. Rystad Energy has been asked to prepare and document an expected market value assessment of relevant assets at the relevant point in time.

APPROACH

Rystad Energy has a systematic approach when performing market value assessments in retrospect. Reconstruction of historic information flow from assets and/or companies as well as assessment of the historic market situation at the relevant point in time are important elements. Further, information review, judgment of assumptions made and valuations performed by others, and transaction reviews are other key activities. Our own set of scenarios and input assumptions is established and run through our own proprietary DCF valuation models. To move from different scenarios and sensitivities to one expected market value is a qualitative process in which our own best judgment must be applied. The picture to the right illustrates the movement from a “Base Value” from a DCF analysis with base case assumptions to the concluded “Expected Market Value” on one assignment.

RESULT

Legal proceedings require high quality documentation of approach, input assumptions, and end-results as well as simple high level messages. A key issue is to combine the comprehensive, detailed documentation requirements with high level, effective and reliable communication as expert witness in court when presenting and defending the work. Rystad Energy has extensive experience and a long track record in valuation and legal support.

Illustration of Rystad Energy's Approach to Set Expected Market Value (EMV) of an Asset