Premier Oil FD on deal-making under pressure

The oil exploration industry is not known for attracting people with a nervous disposition-it’s a highly volatile sector due to the uncertainty of prospects and the fast-changing oil price.

In that context, few might have attempted what exploration and production (E&P) specialist Premier Oil pulled off- convincing bankers to lend the group $120m to purchase E.ON’s UK North Sea fields whilst restructuring its massive debt pile.

A failed project near the Orkney Islands called Solan saw the group haemorrhage cash, just as the oil price was crashing from $100 down to $25, putting Premier Oil under huge pressure. But finance director Richard Rose and CEO Tony Durrant were able to secure financing for the acquisition of E.ON’s UK North Sea assets.

The strategy paid off. Rose says that the E.ON acquisition is now worth at least $1bn, and while it and some of the group’s other assets haven’t delivered a turnaround of Premier Oil yet- it still has debt of over £2bn compared to a market value of £1bn- the group is heading in the right direction.

Pulling off the E.ON deal was a moment of sweet triumph in a period Rose considers the toughest of his career. “The last couple of years have been a fairly unconventional time..torturous would be an understatement,” says Rose.

Black gold

Despite a romantic appreciation of the oil exploration industry, Rose took an indirect route to his current role, having studied geophysics, as part of a traditional physics course, at Imperial College, London.

Deciding to move into accountancy at Ernst & Young, he gravitated to the oil and gas group, where he spent the best part of seven years.

He puts his enthusiasm for the sector down to “the ability for a company to drill a well and transform its business. One day you are company X, you drill a well and suddenly the company can go in a different direction and create a lot of value,” he says.

A move into corporate finance at HSBC, which proved short-lived due to his sense that the bank’ wasn’t committed to investment banking at the time, resulted in a move into broking. He followed HSBC colleague Brendan Wilders to the launch of mid-cap from broker Oriel Securities, to undertake equity research on E&Ps.

He describes the start-up firm’s approach as “a large cap, large bank attitude to small cap” as the 2002 bear market was starting to pick up. The focus on small and mid-cap stocks including Premier Oil proved lucrative, as the oil price surged to $100 a barrel, and the firm grew rapidly over the next six years.

“We were providing very insightful, fundamental research in a market that didn’t have a lot of it. Back then there weren’t a lot of analysts doing the fundamental research in the E&P sector,” says Rose, was the number one analyst in the Institutional Extel Mid & Small Cap Survey for Oil & Gas Research five years on the trot.

But the good times didn’t last. An overstretch into too many sectors as the financial crisis hit in 2008 resulted in a slide in the firm’s fortunes, and Rose headed out the door. He moved to RBC, a Canadian bank that was stepping up its operations in London, for a year, but then changed tack. “It crystallised that I need a different challenge,” he says.

Crossing over

The chance came when Nick Cooper, chief executive of Africa, Asia and Mexico-focused E&P group Ophir Energy -one of RBC’s clients- offered a position covering IR and strategy. “I said I’d like to get involved on the strategy side,” he says.

The 12 months he spent at Ophir prepared the ground for his arrival at Premier Oil, which Rose had been broker to, whilst at RBC. Intriguingly, Rose had proposed a bid by Ophir for Premier, which didn’t come off.

The failed bid attempt didn’t deter Premier Oil CEO Tony Durrant from asking Rose to become the group’s finance director – “a chance to use my financial skill set and to try and drive the business,” he says.

Was there was some trepidation in taking up his first group FD role? “Absolutely,” says Rose. “Anyone who steps up to a senior role and thinks they can do it as a cake walk is missing the point. You’ve got to have that doubt,” he says.

Following advice from his current and future CEOs, as well as his wife, Rose decided to accept the role, recognising his main challenge was mastering the traditional finance side, as the external engagement aspects of being a FTSE-250 group CFO were familiar to him.

But having an audit background, meant “he hadn’t completely forgotten the internal workings of companies,” he says.

Having a “solid” finance team was also key to ensuring good forecasting data, that would soon prove vital. “We have separate finance teams in each of our units, and the key there is making sure you’ve got good finance managers in each of those, and then it cascades down, as you’ve got teams below that,” Rose adds.

Into the maelstrom

Although he joined a group with an experienced team, holding “a lot of corporate memory”, that was headed by a CEO who had also been CFO for several years, Premier Oil was in a difficult place.

The group had “struggled for the last couple of years because of a weak balance sheet during a period of a very low oil price,” says Rose. “We had a project that had gone very badly wrong, Solan- which caused our debt to go too high. But at the time we’d had $100 a barrel oil for three years. There was a risk on the downside- but nobody was foreseeing $25 a barrel,” he adds.

“I’dcome into the role thinking about long term strategy, direction, how do I fund the Falklands project, but the role soon became one of addressing the stretched balance sheet,” says Rose. “I realised we were going to have to have hard conversations with our banks, to cut costs, get rid of discretionary spend, and batten down the hatches,” he advises.

For the next three years Rose’s life was dominated by tough meetings with debt bankers about the future of the group. “Once you move out of the relationship banks into a restructuring group, there are more challenging conversations,” he says.

Rose say one positive aspect of a well-run finance team was having the ability to undertake very reliable forecasting. “Through that whole process we were able to articulate a clear set of numbers, that we were able to meet or beat on a monthly basis,” says Rose. “We were able to say fundamentally this is a solid business, which was important for our credibility,” he says.

Although Premier Oil was heavily indebted, there was enough cashflow coming from assets in Indonesia, Vietnam and the North Sea “to persuade the banks to keep us going through that period, which meant we could be relatively robust in our argument,” says Rose.

Making the big call

At that point, Durrant and Rose pitched bankers to secure the $120m needed to acquire Eon’s North Sea assets, “while at the same time we were saying we’ve got a covenant issue,” he says.

Key to success was providing accurate forecasting data that would help develop trust with the bankers. “It was a series of very forceful conversations where we said it’s the right thing for debt holders and equity holders and sticking to our guns”, says Rose.

“It would have been very easy to back off, but if you genuinely believe it’s the right thing to do, you need to have the courage of your convictions. It was quite stressful, as it was touch and go as to whether they were going to approve the deal,” he reveals.

Rose says that despite many sleepless nights, his broking background helped him deal with the accompanying stress levels. “I was going into roles where you sink or swim, where you’re constantly exposed. You end up becoming very driven to deliver, and I kind of drew on that,” he says.

Being in an industry that can be dominated by dramatic spikes in the oil price, demands a robust mind set. “We can do hedging to smooth out those peaks and troughs, and even that can cause consternation, so when the oil price goes up, shareholders then say why are you hedging?” he says.

“When the share price goes up, the phone doesn’t ring- everybody’s happy. When the share price goes down, you’re having to spend a lot more time dealing with shareholders, trying to explain to them that it’s the market- it’s not us. it’s part of the job,” says Rose.

Forward thinking

Out of crisis mode, Rose says Premier Oil can now look forward to a future that is not just about constantly putting out fires. “We haven’t had a lot of exploration drilling in the last couple of years, because of the constraints we’ve had.”

Having gone through this drama, on reflection what did he draw from the experience? “I think one of the lessons learned, is understanding downside risk. Having lived through what a downside scenario looks like, you become more finely tuned to it, we can now see what happens in that scenario. It makes it real,” says Rose.

You have more tools now to model? “I think we have very good forecasting tools and what I think this restructuring process did in the last couple of years is improve that further. Our short, medium and long term forecasting has got even better, becoming through this process more granular and more forensic,” says Rose.

Last year fortunes began to change with Premier Oil’s biggest oil discovery- the Zama field in Mexico. “It doesn’t transform us as a company, but it has a material impact in terms of our valuation, and also potentially the direction of the company because we’ve expanded into Mexico now, we see that as an additional business unit,” says Rose.

At an industry event, Rose was asked if the successful refinancing and recovery of Premier Oil gave him most satisfaction. Most present were taken aback by his answer. “It’s Zama every day of the week,” he says beaming. “It’s why we went into this industry.”

 

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