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Britain’s Premier Oil once was skeptical about the value of the Solan oil field in the North Sea west of the Shetland Islands, but now it has reversed course, taking full control of the project. The stock market reaction that followed was positive.
Already Premier owns 60 percent of Solan and so far has spent about $1.5 billion developing the Solan project. On June 2 it announced that it is buying up the 40 percent stake now owned by Chrysaor, a company focused on exploiting North Sea oil and gas.
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The move is something of an about-face for Premier. In February it dramatically reduced Solan’s value because of the equally dramatic plunge in the price of oil in the past year. It also cited work delays, many due to unusually inclement weather near the Shetlands – which always is challenging – and low productivity at the project during the past winter.
Yet Premier seemed to have been inspired by the actions of larger oil companies, including the Anglo-Dutch Royal Dutch Shell and Britain’s BP, which have been investing generously in large North Sea fields neighboring Solan.
But last month, Premier said it expected Solan to generate as much as 20,000 to 25,000 barrels of oil equivalent per day, which could net the company significant revenues.
Premier also was influenced by calming weather. “With improved weather, better progress has been made with the commissioning work on the Solan facilities,” it said in the statement announcing the buyout from Chrysaor. Still, Premier expects to produce the first oil from the field in the fourth quarter of 2015, not the second quarter as originally expected.
The transaction allows Chrysaor to receive payments of up to $3 million per year for the purchase of its stake in Solan and royalty payments of as much as $100 million once Chrysaor repays an outstanding loan from Premier, as well as accrued interest. As for Premier, it expects to raise $100 million by selling 15 percent of Solan’s output to FlowStream Commodities, an energy finance company.
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European stock markets have been shaky lately, in part because of the year-long plunge in the price of oil, as well as concern about Greece’s ability to repay a 300 million-euro loan to the International Monetary Fund by the June 5 deadline, and the conclusion of efforts to bail out the country by the end of the month. Yet the value Premier’s stock rose 3 percent the day the Solan transaction was announced.
Tony Durrant, Premier’s CEO, said the transaction enables his company “to focus on delivering first oil from the Solan project without partner-funding concerns, while the transaction with FlowStream reduces our balance sheet exposure to the project and releases capital to fund completion of the development. We continue to look at further opportunities to realize value from the project.”
Mark Henderson at Westhouse Securities, a financial services company in London, was a bit less positive. “The market may initially be pleased that Premier has bought out its partner in Solan as there have been concerns about Chrysaor’s ability to fund its share in the project.
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“However,” Henderson added, “the [financing scheme with Chryasaor] might also suggest that funding options are starting to get stretched at Premier. We maintain that Premier still has financing flexibility, but the market may [eventually] take a different view.”
By Andy Tully Of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com