There could be a “glut or a delay” in North Sea merger and acquisition activity towards the end of 2018, as firms wrap their heads around the prospect of transferable tax history legislation.
That’s according to Clare Munro, head of energy and infrastructure at law firm Brodies, who is urging companies to think now about new rules coming into place later this year.
From November, the UK Government will allow tax history for decommissioning to be passed from seller to buyer, which is hoped to encourage billions of pounds of fresh investment for the UK Continental Shelf.
The new measures will allow firms to claim greater tax relief when it comes to shutting down assets, an issue which has historically been a barrier to new deals.
Ms Munro expects there to be an increase in mergers and acquisitions in 2018, however many deals may not be completed until the new measures are in place.
She says that’s no reason not to start thinking about the process now, given that there are usually several months of delays between signing a deal and it being followed through to completion.
She said: “When it was first announced I was concerned there could be a delay effect.
“You can imagine how if something is coming through into the future you don’t want to be missing out on that now. That may still be the case.
“Through this year, for upstream deals you wouldn’t expect anyone to complete a deal before the first of November.
“I think in relation to those kinds of deals that will benefit from it, we’ll see those completing in the back end of the year.
“That could mean just a bit of a delay or a glut at the end of the year in terms of completion of deals.
“It doesn’t mean people can’t be actually talking about those deals and getting everything in place now for them to be complete around the end of the year.
“I do expect more activity in M&A, both in upstream and in the service sector as well.
“A lot of those asset deals are signed well in advance of completion, because the buyer and seller will sign the deal and it can take several months to complete with the way that we have our structures in the North Sea.
“It’s absolutely normal for there to be two to three months between signing and completion of a deal – complicated ones like the Shell-Chrysaor deal or the BP-Ineos FPS deal can take longer than that.
“I would be advising clients now to be thinking about the concept of transferable tax history in any deal that they are discussing and whether that suits the buyer and purchaser because by the time you have that negotiated and signed, you’re looking to be into the back end of the year anyway.”
Some recent activity in the North Sea has seen firms bypassing the issue of decommissioning tax liability.
In January 2017, Shell made a $3.8billion (£2.7billion) sale of a package of assets to Chrysaor, and Enquest bought a 25% stake in BP’s Magnus platform and interests in the Sullom Voe terminal.
Both bespoke arrangements involved the majors keeping part of the responsibility to decommission the assets, allowing the new players to come in.
Ms Munro thinks such arrangements may not be necessary once transfer of tax history comes in.
She said: “We have seen a number of new entrants and Chrysaor had been around for a while, but when it did that deal it had relatively few assets.
“That was a really interesting deal in the way that Shell structured that package of assets.
“Someone at Shell had obviously thought very carefully about how to package that, to make that an attractive or viable option for financing.
“It seemed to me that was a deal where all the assets had been carefully chosen to make that package so that you could put that to a bank or a private equity house or to someone who was going to provide you with financing and they would say ‘OK, I can finance that deal’. So that was the clever thing about how that package of assets was put together.
“That’s obviously not always the case. Quite often we’re seeing people trying to sell individual assets.
“The ability to get financing for that deal was key to enabling a smaller player to get funding in place.
“Although EnQuest took operatorship of Magnus and the Sullom Voe terminal as part of their deal, they only took an initial 25% interest in Magnus and BPs retained the other 75% along with quite a bit of decommissioning liability.
“EnQuest has an option as well to acquire more of the asset. That’s a very bespoke, phased deal and you can see the interest on both sides there and why it was constructed in that way.
“I think with transferable tax history coming in those kind of bespoke phased deals may well have their place but may not be as necessary going forward because we might be able to address some of those issues in a different way in the future.”
While transferable tax history solves some problems, Ms Munro adds there are still risks associated with the amount of decommissioning required and whether the government will change its attitude on the level of tax relief it provides to operators.
So what are companies looking for once the new rules come into place in November?
Ms Munro said: “Historically, what sellers have sought is what they would call a clean break. The position has been that sellers want to exit from the asset and they haven’t really wanted any ongoing liabilities or exposure.
“For a while, when it was a seller’s market, that was achievable and obviously that hasn’t been the case for the last three years or so.
“The transferable tax history could take you back to a position where sellers are seeing that as a more viable option. I would expect that is what sellers will be looking for but usually there’s a lot more at play in a commercial negotiation.”
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