A ménage à trois of oil: Pertamina, Maurel, and Assala's love affair in Africa
Assala Energy's acquisition may result in a marriage or a break-up
This week we heard the confirmation of a speculation that has been circulating since October 2022: The Carlyle Group has put Assala Energy in the market and PT Pertamina is the potential buyer.
Wait, did you say Pertamina? I heard it was Maurel et Prom!
I know, but sometimes there is more than the eye can see. Pertamina is the Indonesian National Oil and Gas Company, but it is also the largest shareholder of Maurel. This relationship began in 2017, when Pertamina acquired ~25%. The stake has been progressively increased to reach the current 71%. In the realm of corporate acquisitions, the potential deal between Maurel et Prom and Assala Energy presents a unique set of circumstances that could lead to a variety of outcomes. However, it's important to note that these are speculative observations and should not be taken as definitive outcomes.
Etablissements Maurel et Prom
Etablissements Maurel et Prom (a really cool name for an oil company) owns assets in Venezuela, Colombia, Angola, Tanzania and … Gabon, where Assala Energy is located. Maurel has been considered the African arm of Pertamina. It also owns some unexplored/undeveloped licenses in France, Italy and Namibia. The company enjoys stable positions in Gabon, Angola and Tanzania, but it isn’t always this lucky. In January 2019, Maurel entered into Venezuela with a huge acquisition at that time ($80M + $400M in capex commitments). Shortly after, the US launched sanctions over Maduro’s government that included the export of oil and gas to US and its allies. In Colombia, the company has failed to find commercial amounts of oil, the last dry well came in January this year.
Assala Energy
Back to Assala, Carlyle acquired Assala in 2017 when it acquired the Gabonese assets from Shell for $628 million including cash and assumed debt for a net production of 40,000 boepd. Since the acquisition, Assala has added some assets and expanded production to 45,000 boepd, but the core remains the acquisition from Shell. All fields are onshore and the company also owns a pipeline and an export terminal. So, why would Carlyle Group want to sell it? Well, Carlyle is not into the energy sector, it is into private equity investment, consisting of buying companies, investing a minimal amount and selling them for a higher price. So, it is not that weird that they are selling Assala now after more than 5 years.
First of all, the potential synergies that could be realized from this acquisition are evident. Not only Maurel et Prom has the Ezanga field there, but also has a subsidiary of drillers onshore in Gabon (Caroil), which could potentially be leveraged to ramp up production if the deal goes through.
The financing
However, why is Maurel mentioned when Pertamina was the first name that came out? Well, Maurel does not seem to have enough financial resources, it had a net debt of ~€150M by the end of Q1. Of course, virtually all energy companies rely on debt when they want to complete an acquisition. However, the price tag on Assala is not for everyone’s pockets, $1 billion, versus a current enterprise value of €950 million ($1,040 million). Hence, Maurel will require a substantial financial backing to complete the operation, as it has done in the past. In 2022, it renegotiated its bank debt and the shareholder loan from Pertamina. Currently, Maurel has $100 million undrawn from its shareholder loan. Hence, the company will have to obtain another $900 million to be able to get close to the $1 billion mark; and here reserves are key. Most E&P companies negotiate Reserve-Based Lending (RBL) packages with banks for financing their organic and inorganic growth opportunities. Two different examples of how even indebted companies can have substantial financing flexibility thanks to huge reserves are:
Kosmos Energy: $2.1 billion of debt and a production of 58,000 boepd, but it still has $1 billion available in the RBL signed in 2022, thanks to 550 million barrels of 2P reserves.
Seplat Energy (20% owned by Maurel): proposed a $1.3 billion acquisition of ExxonMobil’s assets in Nigeria with $550 million senior term loan facility and $275 million junior offtake facility, despite having at that time a net debt of $426 million. This was possible thanks to 2P reserves of 457 million barrels of liquids and natural gas.
The problem for Maurel is that it had 2P reserves of 173MM barrels by the end of 2022, which could be used to get a RBL from banks, but the amount will not be close to the required $900 million. In addition, the Tanzanian reserves (20% of total 2P) are natural gas reserves being sold at a fixed price (updated according to the United States CPI Industrial index), which reduces the volatility but it does not give exposure to high prices like in 2022. Hence, Maurel sits in a position where it requires a huge debt package but the reserves don’t seem high enough to secure a corresponding RBL with banks. Besides, is it currently the right moment to enter into a negotiation with banks without strong assets? Brent prices have been in the $70-75 range in the last weeks, and some projections for H2 2023 and 2024 see it in the low $60s. So, there is an important risk here. This is where Pertamina’s role as major shareholder and its long-term vision for Maurel enters into the picture.
Maurel could lower the required debt levels by selling some of its assets. The Colombian, French or Italian licenses haven’t generated any value so far, the price would be quite low (or practically zero). The Venezuelan assets are a sit-and-wait play, the company will recover all the previous dividends and resume the production with steady cash flow at some point into the future. Nonetheless, this has a large uncertainty as it depends on the decision of the US government, and any potential buyer will reflect that in the price. Lastly, the company owns 20% of Seplat Energy, but the acquisition of ExxonMobil’s assets (90,000 boepd & 400+ million barrels of 2P reserves of liquids) is not closed yet, so the price tag would not be as high as if the operation is done after its completion. So, there are some potential divestment opportunities that could reduce the required external financing, but the timing seems awful, because selling Seplat or the Venezuelan assets while their uncertainty is still high will destroy a lot of value. In a very optimistic scenario, it could happen that Venezuelan sanctions are lifted during the negotiation process (who knows what Biden’s cronies may do in that regard), and that will be exceptional for Assala’s acquisition.
Our opinions
These are just our personal opinions, but we see 2 scenarios, the optimistic and other pessimistic ones, in both Pertamina would play an utterly crucial role in the transaction:
Name’s opinion (the optimistic)
For some, it could be said that Pertamina considers Maurel another investment and therefore, it could facilitate the transaction taking place with harsh conditions. In my view, a high rate on the loan for Maurel makes little sense, not only because such quantities (even draconian rates of 12-15 points on the higher end of the probable loan, $800M) are negligible in a company which currently produces close to 1 million boe every day; but also because the initial premise is not likely. As Pertamina explains in their annual reports, it does not consider M&P a mere investment, but rather part of its international branch (Pertamina Internasional EP, PIEP), which aims to reach 650,000 boed by 2025 and currently produces circa 100,000 boed. PIEP recognises M&P production and reserves as their own and state they hold full control of M&P financial projection and operations.
Furthermore, Maurel acknowledges this as can be seen in the strategy section of the 2017 annual report.
“The Group is also pursuing an active acquisition policy in line with the wishes expressed by its majority shareholder, PIEP, which wants to make the Group the new international development platform for its upstream oil operations.”
Therefore, why would Pertamina impose draconian conditions on one of their branches? In our view, Pertamina will act as a capital facilitator, providing Maurel with access to cheaper debt than the one that its sector, jurisdiction and size would normally have, as happened in the refinance that took place in 2017. Compared to the conditions that bigger peers obtained in the same year like Kosmos, Pertamina’s terms were more favorable:
Maurel: In 2017, Maurel & Prom successfully refinanced its entire debt, assisted by its new shareholder, Pertamina Group. This included a $600 million term loan from international banks, a flexible $100 million shareholder loan from PIEP, and repayment of $762 million in existing debt. An optimized repayment plan was established, featuring a two-year grace period and steady annual repayments of $150 million from 2020 to 2023. The interest rates were set at Libor + 1.5% for the bank loan and Libor + 1.6% for the shareholder loan.
Kosmos Energy: By December 31, 2017, Kosmos had borrowed $800 million under a facility, including $200 million for the KTIPI investment, with undrawn availability of $500.8 million. In February 2018, the company revamped this facility, securing a total commitment of $1.5 billion from numerous financial institutions, with an option to extend up to $0.5 billion. The amendment process led to several changes, including the extension of the facility's maturity date to March 31, 2025, and semi-annual principal amortizations starting from March 31, 2022. Interest rates were established at LIBOR plus 3.25% for the next four years.
This strategy could be repeated now to solve the liquidity issues and facilitate the repayment of current outstanding debt. This could, in theory, bolster Maurel's growth in the long run, as the current liquidity situation is really a matter of when the US will lift sanctions on Maurel’s Venezuelan assets or when Seplat will close the ExxonMobil transaction. If such events are satisfactorily resolved, Maurel could potentially find itself in a stronger financial position, where taking the "usual path" to finance the Assala Energy acquisition could be followed. There's also a possibility of an asset swap, with Maurel selling its stake in Seplat or Venezuelan assets to Pertamina, as a way to anticipate the liquidity needed.
As I see it, since 2017 Pertamina has preferred to keep Maurel as a public company, becoming an independent branch inside PIEP as it is today, instead of making it private and consolidating the different subsidiaries of M&P inside PIEP. It is fair to assume they would have done it in the past, as they gained their current 70% stake in less than a month in 2017, through an acquisition and 2 tender offers. PIEP had opportunities to take it over during COVID and the refinance process of 2022, where Maurel’s price was not reflecting not only the current business but all the leverages and catalysts it still has (e.g. Seplat, Venezuela & Namibia).
Hence, I do not envisage a scenario which involves the use of convertibles (like was done in the past to increase their stake) or the use of equity, warrants or options, as those would likely lead to Pertamina exceeding the 90% limit by the French regulator to carry out a takeover bid to squeeze out current shareholders. It must also be stated that as Pertamina has surpassed the 50% threshold, it probably has the Autorité des marchés financiers (AMF) agreement to carry out such a takeover. They simply had opted to let M&P as a public company.
Another oil and gas tourist’s opinion (the pessimistic)
The transaction must be financed with huge amounts of debt. Maurel may get a substantial RBL from banks, maybe $400 million for those 173 million barrels of 2P reserves, which I think is in the high range and still will not be enough. Therefore, the company would require another $500-700 million, depending on the final size of the RBL, and this should come from PIEP/Pertamina. So, Pertamina will be assuming a huge financial risk in the operation, while owning 71% of the outstanding shares, so, what risks are the remaining 29% assuming? I think this can be seen as an asymmetric situation, where the largest shareholder has the winning hand, versus the minority shareholders.
I think the most reasonable thing for Pertamina to do would be to offer a loan, BUT, with conditions that reflect the increased volume (last loan was $200 million) and risk of the transaction. In the refinancing in 2022, Pertamina and Maurel signed SOFR+2.2% rate (~7.4% of nominal rate at today’s levels) in line with the conditions signed with the banks offering, so Pertamina didn’t offer better conditions than the market like it did in 2017. This leads me to believe that the conditions of any new debt will not be as benevolent. Also, any improvement of the terms will also benefit (in the end) the minority shareholders who are not risking a considerable amount of funds like Pertamina does. I think the conditions may be much harder this time, for example 9-10% fixed interest or a margin of 4-5% on top of SOFR, which would reflect the actual risk in the operation. Another aspect I consider relevant is that Maurel will amass a big load of interest-bearing debt at a moment when the oil price could fall below $70 a barrel. Thus, the high interest will provide a return for Pertamina proportional to the risk assumed, earning an important amount from periodic interest payments, whilst the minority shareholders don’t obtain a return, as the dividend should be canceled for the next few years.
Also, will debt be the only mechanism to be used to finance the transaction? I think the funding could also include equity or a convertible note, which would dilute the other 29% even more. For instance, Pertamina’s stake may cross the 90% level of the AMF to make a squeeze out offer for the remaining shareholders. And this could be used to finally consolidate Maurel into PIEP, causing it to not exist as a standalone, public company anymore. Today, Pertamina controls the company’s BoD and taking it private should not affect the relationship with the Gabonese, Tanzanian or Angolan authorities, where Assala Energy has been operating with another French private company like Perenco. Since 2017, Maurel has been controlled by PIEP, and this has not raised any concerns among the authorities.
I deem the chances of Pertamina integrating Maurel into PIEP as relevant, but not 0, because the financial risk to be assumed is, in this case, quite substantial. The total integration into PIEP should not affect the plans for the internationalization of its oil production, as Pertamina could sell the stakes in countries that don’t want a 100% state-owned oil company like Pertamina to operate in its oil and gas industry (e.g., Nigeria). As of today, PIEP already integrates Maural’s reserves and productions. Why would a change of name be so relevant?
Conclusion
In summary, we both think the deal will transform Maurel into a relevant player in Africa with 70,000 boepd and it is a good opportunity to increase production in a known jurisdiction with obvious synergies. But the price tag seems big for Maurel’s financial situation. In the end, the cornerstone are the conditions offered by Pertamina; if they are reasonable, then the company will be in a very strong position in 2025 or 2026 after reducing the financial leverage, for example by selling its stake in Seplat after closing the deal. This is an interesting situation that I’ll monitor in the coming weeks and months.
Disclaimer: this document only represents the personal opinions of its authors; its content cannot be considered investment advice and it has been prepared only for informative purposes, please do your own analysis before making any decision.
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