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ConocoPhillips Turns Down a Billionaire's $2 Billion Offer

By Matthew DiLallo - Jun 14, 2016 at 9:45AM

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The company could have taken the cash in exchange for its UK North Sea assets.

Britannia Satellites North Sea, U.K. Image source: ConocoPhillips.

According to a report, ConocoPhillips (COP 1.70%) turned down a $2 billion-plus takeover approach for its UK assets in the North Sea. The bid was reportedly made by Jim Ratcliffe, the billionaire founder of chemical group Ineos. It's a bid Ratcliffe made on the heels of his company's purchase of a number of gas fields in the region last year. That said, production from those fields was threatened by ConocoPhillips' reported desire to shut down a key pipeline and gas terminal, which likely prompted Ratcliffe to attempt to buy out the U.S. energy giant's operations in the region.

Why did ConocoPhillips turn down the offer?

The reasoning behind the oil giant's rejection of the offer is interesting, with the company reportedly turning it down amid a boardroom shakeup. It's not yet known what that shakeup entails, other than the likelihood that some on the board didn't want to part with these assets at the low point of the oil cycle.

Further, while $2 billion sounds like a lot of money, it likely wasn't nearly enough for the company's entire operations in the UK. For perspective, ConocoPhillips' UK operations produced 88,000 barrels of oil equivalent per day, or BOE/d, last year, which was roughly 6% of the company's average daily output. As such, with an enterprise value currently sitting at $79 billion, Ratcliffe's bid implies that ConocoPhillips' UK assets were worth just 2% of the company's total value. While those assets don't have the upside nor the margins of some of the company's other assets, their value is likely much more than $2 billion, especially with oil moving higher.


Image source: ConocoPhillips. 

What's next for the oil giant?

While ConocoPhillips is no stranger to asset sales, and has pledged to sell additional assets in order to strengthen its balance sheet, it's in no need to sell assets at fire sale prices. In fact, the company put a number of asset sales on hold last year amid falling prices, choosing instead to reduce its dividend this year rather than sell assets at the low of the cycle in order to bridge the growing gap between its cash flow and cash requirements. That said, it's still quite possible that the company will sell assets, including some or all of its ownership interests in the UK North Sea, which is a region that's under a lot of pressure due to weak oil prices.

However, ConocoPhillips has shown no signs that it wants to give up on the region. In fact, it has been working with its Britannia joint venture partner Chevron (CVX 1.05%) to take over Chevron's ownership interest in the field's operator. Further, ConocoPhillips and Chevron brought several Britannia satellite projects online over the past year, including the Adler satellite project, which is delivering first oil this year.

Instead of exiting the UK North Sea, the company's main divestiture focus right now is to complete the phased exit of its deepwater exploration portfolio. This includes its acreage position and development prospects in the Gulf of Mexico as well as those in Senegal, Angola, and the Canadian Atlantic. That said, it still has some ongoing appraisal activities to complete in order to maximize the value of these assets in the current low oil price environment, so it's not in a rush to unload these assets either.

Investor takeaway

ConocoPhillips is always open to asset sales to strengthen its balance sheet, but it won't do so at fire sale prices. That's apparently what it was offered for its UK North Sea assets, which is why it rejected the overtures of billionaire Jim Ratcliffe. Instead, the company will continue to focus on its current plan, which includes completing its expansion projects in the UK and elsewhere, while also continuing to take the necessary steps to trim its exposure to deepwater exploration as it refocuses the company for the new normal it sees in the oil market. 

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