Shearwater - NEO Energy

How NEO Energy’s growth surge is turning it into one of top five North Sea players

UK-based and North Sea-focused E&P company NEO Energy has been around for only a couple of years now after starting out in early 2019. While its pro forma production is expected to be around 80,000 barrels a day during 2021, NEO is poised to become one of the top five players in the UK North Sea with an appetite, capability, and funding for further growth.

With the ExxonMobil deal, NEO Energy is gaining access to the Shell-operated Shearwater asset in the North Sea. Photo source: NEO Energy

In an interview with NEO Energy CEO, Russell Alton, Offshore Energy has recently discussed the company’s origins, its North Sea growth strategy, M&A moves, future plans, and energy transition.

After forming NEO Energy in early 2019, the owner HitecVision in October 2019 put into motion its plans to make it a leading UKCS player and merged its other North Sea portfolio company, Verus Petroleum, with NEO.

Among some of the first deals made by NEO, Alton mentioned the company in 2020 bought the operatorship of the Babbage gas field in the Southern North Sea.

Over the course of 2020, NEO Energy and HitecVision hammered out another deal, under which the company acquired more North Sea assets, this time from the French oil major Total.

The transaction consisted of a portfolio of assets in four producing areas of the UK North Sea, with an average 2019 production of approximately 23,000 boepd and substantial development upside.

In addition, the portfolio added reserves of around 51 mmboe to NEO Energy.

Just as NEO was completing the deal with Total, Alton joined the company as the new CEO.

NEO Energy CEO, Russell Alton
NEO Energy CEO, Russell Alton

Before joining NEO in August 2020, Alton spent six years at Equinor, initially as Head of M&A and most recently as the Head of Finance.

Before Equinor, Russell was also the Head of M&A at Centrica, where he originated and executed over £9 billion of transactions, including building Centrica’s E&P business.

Having Alton’s background in mind, it is not surprising to see him at the helm of a company with such an extensive growth strategy.

But NEO Energy has not stopped there. The company in late February and early March 2021 announced two major North Sea deals.

Namely, NEO in February 2021 made a deal with oil major ExxonMobil to acquire its non-operated North Sea assets for a price tag of over $1 billion with potential for additional contingent considerations of approximately $300 million based on the potential for increases in commodity prices.

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Adding close to 40,000 boepd and more than 140 million boe of reserves, the acquisition was a major step towards NEO’s near-term target of producing 120,000 boepd in the next couple of years.

Pushing for even more growth, NEO in March revealed plans to acquire another E&P company, Zennor Petroleum, which is backed by private equity firm Kerogen Capital.

The deal to acquire the North Sea-focused Zennor Petroleum was valued at $625 million.

As a result, in the period from 2022 to 2026, about 55 per cent of the company’s production growth will be operated by NEO.

Commenting on ExxonMobil and Zennor deals, Alton pointed out that the first deal brings a large, non-operated production base for NEO in the Central and Northern North Sea with mostly Total and Shell as operators.

When it comes to the acquisition of Zennor, Alton said: “Zennor brings in slightly gassier portfolio developments and operated assets and, of course, people as well. We’ll be merging with the Zennor business and Martin Rowe and his team will come and join us at NEO, which we are certainly looking forward to”.

Specifically, following the completion of the acquisition of Zennor, NEO’s headcount will grow to over 180 people.

Developments provide room for more growth

While most of the producing assets being acquired through these two recently announced deals are non-operated for NEO, the company will actually operate a lot of the developments, according to its CEO.

As a result, NEO will be producing about 80,000 barrels a day on a pro forma 2021 basis and about 25 per cent of that is NEO-operated but the developments will provide NEO with more room for growth. This is in addition to bringing in a gassier portfolio, which is also good for the company’s ESG credentials.

“We see it as a portfolio that can certainly grow over time and that 80,000 grows to about 100,000 boepd over the next two or three years”, Alton said.

“Actually, we’re still here to do more. We had initially set ourselves the target of getting from 80,000 to 100,000 barrels a day, but are now focused on growing further and are on course to reach 120,000 boepd in the next couple of years.

“This will leave us in a strong position to either consolidate our position or grow even from there”, he added.

Alton emphasized that NEO has built a business of scale in the UK.

We have appetite and capability and funding to grow further and to grow further both organically and through developments that we see in our current portfolio, but also inorganically as we see other opportunities that fit with our ambitions”.

Following the completion of the acquisition of ExxonMobil’s assets and the acquisition of Zennor Petroleum, we have asked Alton where NEO will be in terms of size in comparison with other North Sea players and oil majors.

He told us NEO will be number five producer in the North Sea, but also pointed out that NEO’s portfolio is the one that actually grows from there and that should position the company better over time.

Another result of recent transactions is that NEO will become Shell’s largest partner in the UK Central and Northern North Sea.

“My thesis with our business is that yes, we’d like to operate assets where we think we can add value, but equally I don’t mind being a non-operator behind a focused operating partner.

“Someone like Shell is strong and has deep capabilities in operating assets. That gives me a great deal of comfort and we are happy to work with them on improving and maximising assets”, Alton explained.

NEO Energy has certainly grown to scale but there is always room for more, so we have asked if there are any more plans at NEO for further M&A deals ahead.

Alton confirmed that part of NEO’s future growth will be delivered through further acquisitions.

We certainly see an environment today where there’s an opportunity for M&A”, Alton stated.

Alton believes that the recent downturn in the oil price and the fallback with the rebalancing that we have seen as we come out of this pandemic provide a good backdrop for these types of deals.

“The majors, in particular, are focusing on what they’re good at and where they can get the most bang for their buck. You see that, as well, with some of the other players in various places around the world”, he added.

“With that backdrop, we’re certainly looking to see what’s out there, continually thinking about how we can grow the business.

“Our focus in deals that we’ve announced is on the integration of those but that doesn’t preclude us from being able to look at further M&A opportunities that fit with the growth strategy”.

NEO Energy & lower-carbon future

Delving deeper into the company’s plans for its assets, especially in the context of energy transition and the energy market’s pivot to a lower-carbon future, Alton said NEO Energy wants to optimise the ownership and drive value out of the assets to make sure the operations are very efficient regardless of the operatorship status.

Within the context of the lower-carbon future, Alton mentioned that NEO is currently working on its mission statement surrounding low-carbon and will be coming out with a low-carbon transition plan.

HitecVision has already set some goals when it comes to reducing emissions. Alton stated that HitecVision is looking for its companies to reduce carbon intensity by 50 per cent by 2030 and to get to net-zero by 2050.

He pointed out that those goals are not dissimilar to what the UK’s oil and gas regulator OGA and OGUK are talking about.

“Currently, what we are doing is articulating the NEO context around this and articulating what we can say for NEO relating to the low-carbon transition.

“What I will say is that these assets we have recently acquired are gassier and newer. Integrating the ExxonMobil and Zennor portfolios actually improves our carbon intensity within the portfolio overall, which is a good thing”, he said.

The electrification of assets, which is an ongoing discussion in the Central North Sea right now, is another element within this context in which NEO Energy wants to participate.

We certainly see that the electrification of assets has the most impact on reducing carbon intensity”, he said.

Due to its continuous growth, NEO Energy now has an opportunity to take an active role and become part of these discussions.

“I know there are some active discussions already ongoing that we’ve not been part of and, now that we’ve grown to scale, I think we have the ability to get into these conversations and be part of those and that will certainly help us.

“It will give us comfort in delivering around any of our carbon emissions reductions”.

While the second oil price collapse in six years is just behind us, there have been some rumours lately about the possibility of it reaching $100 per barrel by the end of next year.

Therefore, we’ve asked Alton for his point of view on the oil price movement within the context of the current market environment.

“I can certainly see the environment today where the demand is recovering and will continue to recover as we come out of this pandemic”, Alton said.

Alton reminded of a significant reduction in investment from the supply side, particularly from the larger companies and oil majors, over the last 12 months, which he believes provides a strong backdrop to support an increase in the oil price from today.

But whether it’s a $100, where it stops, and how high it goes, there are a lot of factors that impact into this”, Alton said.

Alton concluded that we do seem to be in a $60 to $70 per barrel world and that that feels like a reasonably sensible average price to see.