The price paid is reasonable, but not a steal.
Allen Good, CFA
06:00 AM | Email Article
The North Sea has become the ugly stepchild of oil production, with most majors looking to exit the region. This has likely created an opportunity, however, and Total
is trying to capitalize. In a deal announced on Aug. 21, Total is acquiring Maersk’s oil and gas business (more than 80% of production from the North Sea) for a total consideration of $7.45 billion, consisting of $4.95 billion in newly issued shares and the assumption of $2.5 billion in debt. Deal metrics and our modeling suggest the price paid is reasonable, but not a steal. Also, given that Total’s shares are undervalued in our opinion, and it’s sitting on a rather large cash balance with modest leverage, cash might have been a better choice.
Allen Good, CFA, is an energy strategist for Morningstar.
At $46,000 per flowing barrel (160 thousand barrels of oil equivalent per day in 2018), the deal compares favorably with recent transactions, though the $15/barrel of proven reserve and $5/bbl of contingent reserves (2P/2C) are higher than Total has been able to deliver organically the past few years. That said, Total could ultimately improve those reserve figures as it increases production to 200 mboed by 2020. Strategically, Maersk’s assets fit with Total’s existing portfolio, outside the large position in Denmark. As a result, it expects to deliver $400 million a year in operational, commercial, and financial synergies by 2020.
The producing assets deliver higher cash margins than Total’s current portfolio, by our estimates, and should be accretive to free cash flow in 2018 when the deal closes. Based on our modeling, the deal is also accretive to valuation using our long-term oil price assumption of $60/bbl, but only marginally so, leaving our fair value estimate and moat rating unchanged.
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