French oil company Total agreed Monday to buy the oil & gas division of Danish conglomerate AP Moller-Maersk for $7.45 billion, in a deal that will see it become the No. 2 operator in the North Sea.
Total said its purchase of Maersk Oil will shore up its position in the offshore and challenging waters of northwest Europe, which is the seventh-largest oil and gas producing region in the world. Industry consultants Wood Mackenzie said it's the biggest North Sea-weighted deal since 2006.
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Under the terms of the deal, Total said it will uphold Maersk Oil's development schedules and investments in a series of projects, and that Denmark will become the regional hub for all its operations in Denmark, Norway and the Netherlands.
"This transaction is immediately accretive to both cash flow and earnings per share and delivers further growth over coming years," said Total chairman and CEO Patrick Pouyanne. "It is in line with our announced strategy to take advantage of the current market conditions and of our stronger balance sheet to add new resources at attractive conditions."
As part of the deal, Maersk will get $4.95 billion worth of Total shares, which is equivalent to around 3.8 percent of Total's share capital. The French company, which will also assume some $2.5 billion worth of Maersk Oil debt, said the deal underpins its dividend profile.
The deal was welcomed in the markets, with both companies enjoying support on a day when European markets were noticeably lower. Shares in AP Moller-Maersk closed up 2.9 percent at 13,170 Danish kroner on the Copenhagen Stock Exchange, while Total's share price in Paris ended 0.3 percent higher at 42.78 euros.
Valentina Kretzschmar, a director at industry consultants Wood Mackenzie, said that for Total the deal is "first and foremost about consolidation in the North Sea" and that it improves its near-term growth outlook, providing the company with an immediate 6 percent production increase.
"Total is acquiring a deep specialist in unlocking complex reservoirs and boosting recovery factors through enhanced oil recovery techniques," Kretzschmar said.
For Maersk, the considerations are different. The sale of Maersk Oil is part of the company's restructuring strategy, which will see it focus on its core transport and logistics arms. Lower oil prices over the past few years, which have heaped pressure on energy companies' earnings, also played a role in the plan to divest its oil arm.
Although oil prices have recovered of late to trade around $50 a barrel, they are still around half the level they were just three years ago. The fall has cut into oil companies' margins by reducing the returns on what were once considered financially viable drilling propositions. That's particularly true for relatively expensive areas such as the North Sea, where deep-water drilling is required.
That's been particularly difficult for smaller and less diversified companies, such as Maersk Oil, a development that contributed to Maersk's decision to refocus its business activities. Maersk has been the main operator in the Danish sector of the North Sea for half a century, helping the country to be self-sufficient in oil and gas.
"In determining the best future ownership structure for Maersk Oil, it has been imperative for us that the capabilities and assets created in Maersk Oil continue to be developed, and that long-term investments are upheld, especially in the Danish part of the North Sea," said Soren Skou, AP Moller-Maersk's CEO.
The deal, which is subject to relevant regulatory approvals, is expected to be completed during the first quarter of 2018.