More oil and gas firms are “pivoting” their business models towards shareholder returns and away from high risk and reward exploration, an analyst has said.
Nathan Piper, head of oil and gas research at Investec Securities, said the likes of Serica Energy, Energean, Jadestone and Diversified Gas and Oil were all paying dividends.
Far fewer of the small to mid-cap London-listed exploration and production (E&P) companies Investec follows are spending money on significant amounts of exploration.
“Some of the leopards are changing their spots,” Mr Piper said, adding: “I think there has been a flip in the business model to focus on shareholder returns from some of the group.
“Rather than offer high risk and reward exploration, which hasn’t worked for a long time, frankly, they are now pivoting their business models toward shareholder returns, generating cash flow.
“Rather than wasting it on exploration, some might argue, they’re giving it back to shareholders.”
Cairn Energy last week announced its plans to pay out special dividends of £188m in January, a move which relates to the sale of its Senegalese business to Woodside.
Mr Piper also expects to see more activity across the board in the second half of 2021 if the oil price holds in a $50-60 per barrel range, whether that means deal flow and investments in projects.
He said an oil price range of $40-50 wouldn’t be good enough to support final investment decisions on large offshore projects.
Callum Macpherson, Investec’s head of commodities, said producers still saw a “decent upside” in oil prices, though uncertainty remains around how quickly the Covid-19 vaccines make a difference and demand recovers.
Higher oil prices could also result in more trade sales or private companies coming to market in the next couple of years, according to Mr Piper.
Private-equity backed Chrysaor’s reverse takeover of London-listed Premier Oil is expected to go through by the end of the first quarter of 2021.
Mr Piper said the enlarged business, to be named Harbour Energy, would be a “welcome addition” to the roster of public companies.
He said Harbour would be “bigger and steadier” than other E&P propositions on the market and is watching with interest to see whether it drives investor interest.
“If Harbour delivers and we see an improving oil price backdrop, that could pave the way for more initial public offerings, though next year may come too soon,” he said.
“None of the private equity owners are in a rush and there is no point trying to exit if you are not going to get the valuation you want.
“They will look to recover their investments through dividends, paid for by the revenues they generate.
“That would be a pragmatic way forward until the market shows it is prepared to pay for a high quality E&P business, and that time is not now.
“But the bigger ones like Neptune Energy will get the best reception.”
Bosses at UK-focused, private independents Zennor Petroleum and Tailwind Energy both recently said they could keep paying dividends until their oil and gas portfolios run dry and before “turning out the lights” if other exit options for their backers do not pan out.
Mr Piper also said the sale of ExxonMobil’s UK North Sea portfolio would be keenly watched.
“There is quite a roster of companies who are looking to grow so it will be interesting to see who executes on that,” he said.