Premier Oil & Chrysaor Merge: A New UK Energy Giant

The landscape of the UK’s oil and gas sector is undergoing a significant transformation, marked by the proposed all-share merger between Premier Oil plc and Chrysaor Holdings Limited. This pivotal agreement, initially announced in early October 2020, is poised to create a formidable new entity, Harbour Energy plc, which is set to become the largest London-listed independent oil and gas company by production and reserves. This strategic consolidation is not merely about size; it represents a robust repositioning for resilience, efficiency, and a commitment to a lower carbon future within the energy transition.

This ambitious merger encompasses not only the integration of Premier’s and Chrysaor’s extensive operational assets and expertise but also a crucial reorganisation of Premier’s existing debt and cross-currency swaps. The move is designed to forge a stronger, more financially flexible company capable of navigating the complexities of the global energy market while delivering long-term value to shareholders. The formal steps towards completion have been steadily progressing, with a shareholder circular and prospectus published in December 2020, and a General Meeting for Premier's shareholders scheduled for 12 January 2021 to approve the Transaction. All signs point towards a completion by the end of the first quarter of 2021, marking a new chapter for both companies and the broader UK energy sector.

The Birth of Harbour Energy: A Strategic Vision

Upon completion of the merger, Premier Oil will officially be renamed Harbour Energy plc. This new identity signifies more than just a change of name; it embodies the strategic intent to create a resilient, cash-generative business with a diverse portfolio and a global footprint. The combined group aims to be a leader in the energy transition, committing to a lower carbon intensity than the average UK oil and gas producer and setting ambitious targets to achieve Net Zero greenhouse gas emissions by 2035. This commitment is a clear signal of the company's forward-looking approach in a rapidly evolving energy landscape.

Harbour Energy will boast a robust balance sheet, providing the financial muscle necessary for disciplined mergers and acquisitions (M&A) and the realisation of value from a top-tier development and exploration portfolio. The expectation is that the combined entity will generate sufficient free cash flow to support attractive shareholder returns, including the introduction of a sustainable dividend, subject to market conditions and Board approval, anticipated from the financial year ending December 2021.

Leadership for a New Era

The proposed board of Harbour Energy will comprise 11 directors, featuring a blend of independent non-executive directors, non-executive directors appointed by EIG Global Energy Partners (EIG), and executive directors. This diverse and experienced leadership team is designed to steer the new company through its growth phase and uphold its strategic objectives.

Blair Thomas, currently CEO of EIG, is set to become the Chairman of the Combined Group. With over three decades of experience in investment management, particularly in energy, his leadership is expected to be instrumental. Linda Cook, CEO of Harbour Direct Holdings Ltd, will assume the role of CEO of Harbour Energy, bringing extensive experience from her tenure at Royal Dutch Shell plc. Phil Kirk, the current CEO of Chrysaor, will take on the role of President and CEO Europe, ensuring continuity and deep regional expertise. The appointment of a new Chief Financial Officer is also anticipated prior to completion, further strengthening the executive team.

Premier Oil: A Strong Foundation for Merger

Premier Oil has demonstrated consistent operational performance, laying a solid groundwork for this significant merger. For the 11-month period leading up to November 2020, Premier's production averaged 61.2 kboepd, aligning well with its full-year guidance of 61-64 kboepd. Looking ahead to 2021, Premier forecasts production in the range of 61-66 kboepd, buoyed by new production from its operated Tolmount gas field, which is expected to come on-stream in Q2 2021.

Key operational highlights for Premier include the restoration of production at its operated Catcher Area to rates exceeding 60 kbopd (gross) and the successful bringing on-stream of the Solan P3 well in September. While the Solan field experienced a temporary shut-in due to an emergency generator failure in early December, repair efforts are actively underway. The Tolmount platform installation in October and the ongoing batch drilling of its four wells are critical milestones, with Tolmount anticipated to add a substantial 20-25 kboepd (net) once all four wells are completed by Q4 2021.

Premier has also maintained significant growth optionality within its portfolio, with ongoing negotiations for the Zama unitisation and development plan in Mexico, a farm-out agreement for Tuna in Indonesia, and continued assessment of the material Sea Lion project in the Falkland Islands. These opportunities, coupled with highly encouraging results from new 3D seismic data sets in Mexico and Indonesia, underscore Premier’s robust pipeline for future growth.

Financially, Premier managed its costs effectively, with forecast 2020 operating expenses (excluding lease costs) unchanged at $12/boe. Full-year capital expenditure (including abandonment expenditure) guidance was revised to $315 million, reflecting over $250 million in savings and deferrals. For 2021, Premier forecasts operating costs of $15/boe and total capital expenditure of approximately $275 million, demonstrating a prudent approach to capital allocation.

Chrysaor: A Powerhouse of Production

Chrysaor enters this merger as a significant independent producer, showcasing strong operational performance and strategic financial management. For the 11-month period ending November 2020, Chrysaor’s production averaged 174 kboepd, in line with its full-year guidance of 170-180 kboepd. While 2021 production is forecasted to be in the range of 140-155 kboepd due to an unusually high level of asset shutdowns (driven by COVID-19 related maintenance deferrals) and impacts from suspended drilling activities in 2020, Chrysaor’s underlying asset base remains robust.

Chrysaor’s operated portfolio includes key assets such as the J-Area (averaging 31 kboepd net), the Greater Britannia Area (40 kboepd net, with first production from Callanish F5 expected in Q1 2021), and the AELE area (31 kboepd net, with the LAD infill development well at Everest East sanctioned for Q3 2021). The non-operated portfolio also contributes significantly, with the Total-operated Elgin Franklin area (19 kboepd net) exceeding expectations and the Buzzard field (19 kboepd net) progressing with its Phase 2 drilling. The Beryl Area fields (17 kboepd net) have also seen positive exploration activity with successful wells on the Solar and Corona prospects.

In terms of costs, Chrysaor’s operating costs (including net tariff costs) for the 11 months to November averaged a competitive $11.4/boe. While 2021 unit operating costs are expected to be higher due to lower forecast production and increased maintenance, they are projected to remain below Chrysaor’s long-term target of $15/boe. Capital expenditure for 2020 was approximately $718 million, significantly lower than initial forecasts due to activity pauses. For 2021, total capital expenditure is expected to be between $750-850 million, primarily for drilling and development activities across its key fields. Chrysaor also benefits from a substantial hedging programme, with a significant portion of its 2021 H1 oil and gas volumes hedged at favourable prices, providing financial stability.

The Strategic Rationale: A Sum Greater Than Its Parts

The merger of Premier Oil and Chrysaor is predicated on a compelling strategic rationale that goes beyond simply combining two companies. It’s about creating an entity that is inherently more resilient, efficient, and capable of long-term sustainable growth in a dynamic energy market. Here's a closer look at the key benefits:

• Enhanced Scale and Diversification: The combined group will achieve a scale that provides significant operational efficiencies and greater diversification across a wider portfolio of assets, reducing reliance on any single field or region. This creates a more stable production profile and mitigates operational risks.
• Financial Strength and Flexibility: By reorganising Premier's debt and leveraging Chrysaor’s strong balance sheet, Harbour Energy will possess enhanced financial flexibility. This allows for sustained investment in its development and exploration portfolio, as well as the capacity for disciplined M&A activities, ensuring future growth.
• Competitive Operating Costs: Both companies have demonstrated a strong focus on cost management. The merger is expected to unlock further synergies, leading to even more competitive operating costs across the combined portfolio, enhancing profitability and cash generation.
• Commitment to Energy Transition: A crucial aspect of the new entity is its explicit commitment to reducing carbon intensity and achieving Net Zero greenhouse gas emissions by 2035. This positions Harbour Energy as a forward-thinking player, aligned with global environmental goals and attractive to increasingly ESG-focused investors.
• Strong Leadership and Expertise: The integration of experienced leadership teams from both Premier and Chrysaor, complemented by new appointments, creates a robust management structure with deep industry knowledge and a proven track record of delivering value.
• Sustainable Shareholder Returns: With a strong cash generative profile and a commitment to a sustainable dividend, Harbour Energy aims to provide attractive returns to shareholders, making it a compelling investment proposition in the energy sector.

The combined entity is set to become a UK independent oil and gas company of true scale, with a diversified UK business and a broad set of international growth opportunities. The merger is a strategic response to the evolving energy landscape, aiming to build a business that is not only robust in its core operations but also adaptable and committed to future energy demands.

Key Merger Milestones

Operational and Financial Snapshot: Premier vs. Chrysaor

Frequently Asked Questions About the Merger

Is the merger between Premier Oil and Chrysaor definitely happening?

The merger is progressing as planned and is expected to complete by the end of the first quarter of 2021. It remains subject to certain conditions, including approval from Premier shareholders and creditors, as well as regulatory approvals. European Commission merger control clearance has already been received, and regulatory approval from the Norwegian MPE has been conditionally granted. Premier has also received the necessary creditor support.

What will the new combined company be called?

Upon the completion of the transaction, Premier Oil plc will be renamed Harbour Energy plc.

What are the main benefits of this merger?

The merger is set to create the largest London-listed independent oil and gas company, bringing significant benefits such as increased scale and diversification, enhanced financial strength, competitive operating costs, and a clear commitment to reducing carbon intensity. It aims to generate strong cash flow to support shareholder returns, including a sustainable dividend.

How will this merger impact shareholders of Premier Oil?

The transaction is structured as an all-share merger. Premier’s shareholders will have the opportunity to approve the transaction at a General Meeting scheduled for 12 January 2021. A shareholder circular and prospectus detailing the terms were published in December 2020.

What is the combined entity’s stance on environmental responsibility?

Harbour Energy plc is committed to achieving a lower carbon intensity than the average UK oil and gas producer. The combined group has set ambitious targets, including a commitment to achieving 'Net Zero' greenhouse gas emissions by 2035, demonstrating a proactive approach to the energy transition.

Will the leadership team change after the merger?

Yes, a new Board of Directors for Harbour Energy is being formed. Blair Thomas (CEO of EIG) is set to be the Chairman, Linda Cook (CEO of Harbour Direct Holdings) will be the CEO, and Phil Kirk (CEO of Chrysaor) will serve as President and CEO Europe. A new Chief Financial Officer is also expected to be appointed before completion.

The Road Ahead for Harbour Energy

The formation of Harbour Energy plc through the merger of Premier Oil and Chrysaor represents a bold and strategic move in the UK’s energy sector. This new entity is poised to be a resilient and influential player, combining a robust asset base with a strong financial position and a clear commitment to sustainable practices. As the industry navigates the complexities of energy transition, Harbour Energy's focus on operational efficiency, disciplined growth, and ambitious environmental targets positions it as a leading independent oil and gas company, ready to seize future opportunities and deliver value for all stakeholders. The coming months will be crucial as the final approvals are secured and the new energy giant officially emerges, setting a new benchmark for the sector.

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