Ophir Energy stake sale of Fortuna could see light interest, bankers say

10 Aug 2016 – Ophir Energy’s [LON:OPHR] ongoing sale of a stake in its Fortuna LNG joint venture faces a limited bidder pool, three industry bankers said.

Potential suitors face headwinds including LNG market oversupply, the limited scale of the project, and high capex through to production, the bankers said.

A person familiar with Ophir argued that the project’s timeline and already-signed gas supply contracts could aid the sale process. Ophir declined to comment.

Ophir owns 80% of the Fortuna JV. A partial sale of the stake could present a windfall for the GBP 471m market-cap company.

Failed talks over a sale of 40% of Fortuna to Schlumberger [NYSE:SLB] earlier this year centred on a USD 600m valuation for the stake. A 50% stake sale could value the whole Fortuna project near USD 1.85bn, a source familiar with the situation suggested.

However, few operators with experience developing LNG in central Africa would have interest in such a small-scale project because advantages of scale become apparent at the USD 10bn-plus level, the first banker argued. That could narrow the field of potential buyers as Ophir has indicated a preference for investors that can also operate the asset, he said.

A current oversupply of LNG also makes it difficult for buyers to reach an attractive rate of return on Fortuna, the third banker added. He estimated current LNG supply is sufficient to meet demand for five to six years, stretching returns for oil and gas producers already hurt by low commodity prices.

Ophir estimates Fortuna will come online in 2020, and generate USD 200m in free cash flow. The 2020 timetable could allow the LNG market to clear prior to Fortuna’s launch date, the person familiar said, arguing that bidders could prefer the asset given that timeframe.

The stake sale process could also benefit from Fortuna’s current gas contracts, the person said. Fortuna has term sheets with three buyers at competitive prices, which could form a better basis for pricing than external conditions, he added.

Ophir has continued talks with potential stake acquirers since previous discussions to sell the 40% to Schlumberger ended without agreement in April. That deal would have funded Ophir’s share of capex through to production of first gas and paved the way to develop Fortuna through Schlumberger and Golar LNG’s [NASDAQ:GLNG] FLNG joint venture.

Ophir now expects to make its final investment decision on Fortuna in 4Q16, according to an April press release.

In terms of potential buyers, Shell [LON:RDSA] has expressed interest in acquiring a 50% stake and taking operatorship, a source familiar with the matter said. Shell declined to comment.

Neither the first three bankers, nor two other sector advisers were aware of deal talks with Shell.

Shell’s strategic shift toward LNG and its geographic footprint in Equatorial Guinea could make it a logical buyer for Fortuna, the second banker said. The company’s GBP 35bn acquisition of BG Group earlier this year made it the largest LNG player in the world.

However, Shell has announced a USD 30bn divestiture program that could indicate it is shying away from projects with intensive capex, two bankers and two sector advisers said. Shell would also face the same obstacles as other potential buyers in a deal, they said.

Fortuna estimates further capex from a final investment decision to first gas of USD 450m to USD 500m as of April.

Ophir might also look to raise a portion of capex needed through debt, the source said. Talks with debt providers have stagnated due to delays at the Perenco LNG project in Cameroon, which have scared off potential investors, the source noted.

Ophir has had rounds of talks with private equity and potential suitors interested in offtake agreements, the third banker noted, though it is not clear if talks progressed for potential operating partners.

The company might have the financial capacity to fund the project on its own, the first sector adviser said. Ophir had USD 614.6m in cash at FY15 and USD 354.9m in net cash, relative to USD 87m of committed spend through 2019.

The Fortuna floating liquefied natural gas (FLNG) project includes the development of the Fortuna field using a floating liquefaction storage and offloading (FLSO) vessel that will be leased from Golar LNG. It forms the first phase of the proposed four-phased development of the fields discovered within Block R, offshore Equatorial Guinea.

GE Petrol, Equatorial Guinea’s national natural gas company, holds the remaining 20% of Fortuna. The Block R is estimated to hold 3.4 trillion cubic feet (TCF) of recoverable gas reserves, according to Ophir.

Ophir will be the operator of the upstream development, which entails deep-water drilling. The upstream development will consist of 17 development wells over four phases. Tests conducted in 2014 flowed gas to the surface at a constrained rate of 60 million standard cubic feet of gas per day (MMscfd), according to the company.

by Brandon Hamilton, Katie McQue, and Patrick Harris