It may be a drop in the ocean compared with some of Berkshire Hathaway’s other investments, but that’s not the way it was being seen by close watchers of the North Sea oil industry and the City of London yesterday. And that isn’t simply because the name of Warren Buffett, the famed Sage of Omaha, business magnate, investment guru and boss of Berkshire Hathaway, is therefore linked with the deal.
For Independent Oil & Gas, the agreement to sell part of its interest in a potential new gas hub to Calenergy Resources, part of the huge Berkshire Hathaway empire, for up to £165 million is a big deal on at least two fronts. First, as a vote of confidence in North Sea oil; and second, as a boost to the company’s own stature after a tricky 2019.
The London-based Independent Oil & Gas, founded in 2011 and listed on Aim in 2013, has been buying infrastructure and licences in the North Sea. It believes that its gas assets can provide net production equivalent to 18,000 barrels of oil per day when operational. However, part of its funding has come through London Oil & Gas, which in turn is associated with London Capital & Finance, an investment firm that collapsed at the start of this year after selling nearly £237 million in unregulated minibonds to 11,625 investors. Several inquiries are taking place amid concerns that investors will not get their money back. London Oil & Gas, which went into administration in March, had borrowed about £124 million from London Capital & Finance.
Independent Oil & Gas has tried to reassure investors that it is not in danger of losing funding or being drawn into the affair. Nevertheless, Rockrose Energy, another independent oil and gas group, decided to test the water with a speculative 20p-a-share bid for Independent Oil & Gas in March. The proposal was rejected.
Smith & Williamson, the administrator of London Oil & Gas and London Capital & Finance, believes that the Independent Oil & Gas deal with Calenergy should be good for creditors and bondholders. The Calenergy agreement is expected to be formally completed in September, with Independent Oil & Gas planning to pay back £16.6 million of debt owed to London Oil & Gas. About £22 million of convertible loan notes will be allocated as shares and will result in London Oil & Gas having a 29.99 per cent stake in Independent Oil & Gas.
Andrew Hockey, 60, Independent Oil & Gas’s chief executive, pointed out that the move would “simplify and clarify” the capital structure of the company and, once completed, would mean that London Oil & Gas’s only interest would be as a shareholder.
It also will pave the way for Independent Oil & Gas to raise a £70 million bond to help to fund its portion of the new gas hub, which could go into production in 2021.
This month the company began drilling on the Harvey site, near to its existing licences, to appraise its resources. If all goes according to plan, the well has the potential to become the group’s largest single gas asset. Calenergy has an option to buy into Harvey, which is estimated to have between 45 billion and 286 billion cubic feet of recoverable gas, by paying Independent Oil & Gas an additional £20 million.
The Independent Oil & Gas share price, like many of its peers, can fluctuate wildly. A peak of more than 35p was hit last September, though the shares were at 19¾p, up ½p, yesterday. A successful result on Harvey would probably lift the shares and the company appears to be on the cusp of moving up the ladder of small-cap North Sea operators.
ADVICE Hold
WHY Perhaps best to wait until Calenergy transaction is formalised and the results from the Harvey well are in
SSE
Is SSE finally about to quit the “Big Six”? After its failed attempt to spin off its household supply business and merge it with Npower last year, SSE had played down the chances of an imminent disposal, saying that it would seek “a listing or new, alternative ownership by the second half of 2020” (Emily Gosden writes).
Now, though, SSE has confirmed that it is in talks to sell the division to Ovo Energy, the privately held upstart supplier. At first glance, it would be a surprising deal. After a rapid growth spurt fuelled by buying up defunct suppliers, Ovo now supplies energy to 1.5 million households; SSE’s 5.7 million customer accounts still translates to more than double that number.
Yet SSE’s retail division has been suffering under the price cap and fierce competition and is burdened with an antiquated IT system, while Ovo does have backers with deep pockets (Mitsubishi bought a stake this year in a deal valuing it at £1 billion) and a chief executive with no shortage of ambition.
Will the two agree an acceptable valuation? Reports have suggested an initial payment of as little as £250 million, with further instalments. With analysts valuing the division at as much as £1 billion, one would expect those additional payments to be substantial, unless SSE is hiding some serious skeletons; Martin Young, of Investec, yesterday said that a total price tag of £250 million would be a “giveaway” and would knock 67p off his £11.20 valuation for SSE.
Ovo is not SSE’s only option. With investors already assuming a prolonged exit and the business still profitable, it can bide its time and continue working to an initial public offering. But even if it does opt for a cut-price disposal, it does not fundamentally affect the investment case. Tempus last looked at SSE in May, recommending buying the shares, then trading at £10.42, on account of its compelling growth prospects in offshore wind. The shares, which went ex-dividend late last month, closed at £11.09½ yesterday, up 15p, or 1.4 per cent. They have gained 2.6 per cent this year. The wind prospects remain undiminished and for that reason the shares remain a “buy”.
ADVICE Buy
WHY Retail disposal is a sideshow to offshore wind
