Industry Trend Analysis - Upstream Acquisition To Catalyse Senegal Investment - APR 2017

BMI View: The potential acquisition of additional producing assets in the North Sea from DONG would allow Cairn En ergy to generate greater cash flow with which to focus on developing its prospective Senegalese resource base.

The potential sale of DONG Energy's upstream oil and gas assets to Cairn Energy may facilitate greater focus and momentum towards the development of Cairn's highly prospective Senegal acreage. If an acquisition were to take place, the addition of approximately 100,000boe/d of production from the transferred fields would combine with several of the UK independents' existing project start-ups, to notably increase Cairn's cash flow in 2017. More fundamentally, with DONG keen to divest its upstream assets, Cairn will look to acquire good value producing-assets at an opportunistic moment, facilitating momentum in achieving its broader growth strategy.

Having emerged as a frontrunner in DONG's upstream asset negotiations, we believe Cairn would look to combine new production from its equity interest in the Kraken and Catcher fields with production from DONG's assets with which to generate cash flow and subsequently allocate additional capital to expand its operations in the Senegalese offshore. The company has recently made good progress developing and appraising the SNE discovery in the country, drilling the SNE-5 in January 2017, with SNE-6 expected to follow. The offshore resource base has the potential to be a transformative asset for the company, with independent estimates for gross oil in place reaching approximately 2.7 billion barrels.

The production start-up of both the Kraken and Catcher fields on the UK Continental Shelf will eventually contribute a net 25,000boe/d to Cairn, with first oil expected in Q217 and H217 respectively. Similarly, over the longer term, equity interest in the Skarfjell project, on which we expect a final investment decision will be taken imminently (see ' FID ' s Primed For The Taking ' , February 16 ), will provide an additional source of cash flow once in production.

DONG Energy: Key Producing Assets
Country Field Name Equity Interest Completion Date Est.Peak Oil/Liquids Range (boe/d) Est.Peak Gas Output (bcm) Type of Project
Source: BMI Upstream Database
United Kingdom Laggan, Tormore SSE plc (20%), Total (60%), DONG Energy (20%) 2016 90,000 14 Gas & Condensate
Norway Ormen Lange Petoro (36.5%), Royal Dutch Shell (17.8%), DONG Energy (14%), Statoil (25.3%), ExxonMobil (6.4%) 2007 50,000 25 Gas & Condensate
Norway Marulk Eni S.p.A (20%), DONG Energy (30%), Statoil (50%) 2012 20,000 1.5 Gas & Condensate

Senegal Development Will Be Prioritised

The possible acquisition of additional producing assets in the North Sea will enable Cairn to focus on the development of its West African assets. We maintain our view that Cairn's Senegalese assets offer an attractive investment (see ' Bright Spot Status Confirmed ' , September 1 2016). The cost structure for the SNE project is comparatively low, with Cairn estimating a breakeven oil price of USD35.0/bbl, rendering it broadly competitive in a sustained lower oil price environment. Development costs have been estimated at USD13.0-15.0/bbl and operating costs at USD12.0-14.0/bbl (including the costs of a leased FPSO). The project is well-positioned to benefit from the current down-cycle. Depressed demand for services has driven around a 20.0% decrease in offshore drilling and subsea costs over the past two years: together these costs will account for over 90.0% of the total development spend. Project optimisation and standardisation offer room for further cost savings.

Competition May Outmuscle Cairn

Several other potential buyers are still present in the upstream asset bidding. Notably, interest from Cairn may spur A.P Moller-Maersk to renew negotiations with DONG after talks stalled at the end of 2016 after the companies failed to agree on price. Similarly, interest from private equity companies in North Sea assets continues ( see 'Shell's Upstream Divestments To Pick Up', January 19), and EIG Global Energy Partners are thought to be involved with the bidding process. These larger players have strong financial backing to compete with Cairn Energy should the sale descend into a straight pricing battle, however at present, there is limited visibility over the potential involvement of additional bidders.