The administration of Oilexco North Sea Limited (ONSL) earlier this year marked a milestone for the oil&gas industry as ONSL was the first major oil exploration, production and development company to be rescued out of an insolvency process.
Despite the regulatory, health and safety, financial and operational complexities and risks of this type of business, within just five months of the appointment, administrators from Ernst & Young completed the sale of ONSL to Premier Oil – a London-listed upstream company with interests in 11 countries.
Oilexco North Sea was the principal trading subsidiary of Oilexco Incorporated, a Canadian and UK-listed oil exploration, development and production group headquartered in Calgary.
Over the last four years, ONSL had become the largest driller of wells in the North Sea, with most of its trading operations based in Aberdeen. It typically concentrated on proving up targets with known oil reserves and on using its expertise to turn these fields into economically viable assets.
However, despite producing about 15,000 barrels of oil per day, the global economic downturn, falling oil prices and tightening credit conditions took their toll on ONSL.
Although the company managed to raise $750million of its target funding for 2008 during the first half of the year, it was unsuccessful in attempts at raising debt or equity to bridge the gap.
As a result, on December 31, 2008, the company directors announced their intention to place ONSL into administration. On January 7, 2009, that happened, with myself, Roy Bailey, Alan Bloom and Tom Burton, of Ernst & Young, being appointed joint administrators.
Resolving ONSL’s financing issues was our key priority even before we were formally appointed as administrators. It was vital that we were able to meet the firm’s critical payments and comply with health and safety requirements, which required negotiations with the company’s syndicate of 11 banks.
We also had to ensure that licences granted by the UK Government’s Department of Energy and Climate Change would not be revoked during the period of the administration.
Health and safety regulations around the operation of ONSL’s production facilities; adequate insurance policies, and retention and incentivisation packages for key operational management and employees were additional challenges that had to be addressed before our appointment.
Prior to being formally appointed as administrators, we agreed a strategy with the DECC whereby we would maintain oil production and suspend, where possible, exploration and development activity, subject to finalising a decision on whether two fields could be brought into production in the very short term.
ONSL’s interests in certain licences were at risk of being forfeit if the company failed to make the necessary payments required under the relevant joint operating agreements (JOAs).
To ensure that the company’s participation would continue, it was necessary to negotiate with partners to avoid such loss of interests. In addition, operatorship rights, which are strategically important, could also be lost upon an insolvency event occurring, in accordance with standard JOA documents, so we had to engage with our JOA partners to avoid this situation.
The sale process for ONSL’s entire portfolio was recommenced within a week of our appointment, with 48 confidentiality agreements signed and indicative bids requested by the end of January, 2009.
As a result of the level of interest we received in ONSL from third parties, we resolved to take six bidders through to the second round of negotiations and set a deadline of early-March for final bids.
Next steps included having to restore ONSL’s solvency status through a company voluntary arrangement (CVA), coupled with the appointment of receivers over the share in ONSL held by Inc, which had itself been placed into an insolvency procedure in Canada under the Companies’ Creditors Arrangement Act. We also had to represent the interests of the company’s creditors overall by creating a creditors’ committee.
In early-March, 2009, best and final bids were presented and final contractual negotiations were entered into over a further two-week period with the successful parties. Exclusivity was ultimately granted to Premier and contracts were exchanged by mid-March on both an enhanced share sale basis and a fallback business and asset sale basis.
On April 15, the CVA was approved, on an unmodified basis, by unsecured creditors representing 99.82% of those claims voting, together with its shareholder. Premier obtained the support of more than 99.9% of its shareholders to the transaction on April 20. The sale completed on May 22, 2009, and ONSL became part of the Premier group.
To have restructured ONSL and completed a $600million transaction within five months of being appointed as administrators was a great result. We not only managed to preserve the business and its assets as a going concern, but were also able to secure the jobs of its employees.
Despite the innumerable challenges, the unsecured trade and expense supply chain also recovered more than $125million through the administration and the terms of the CVA, resulting in a 30-fold increase in recoveries to the unsecured creditors.
This demonstrated that an insolvency process, if correctly handled, could result in an elegant solution for, and be viewed positively by, all involved – the rescue culture in action.
As part of its new owner, Premier Oil, there can be little doubt that ONSL will continue to grow from strength to strength and will remain a leading presence in the North Sea oil&gas industry.
Colin Dempster is restructuring partner at Ernst & Young in Scotland