In the flow article, ‘Sunset to sunrise’, we saw how reserve-based lending (RBL) helps smaller independent oil producers grow their businesses through to investment grade status and the very different approaches taken by the UK and Norway took to oil sector governance in the North Sea Basin.

In addition, the article explained how oil majors are now investing elsewhere and giant European utility companies retrenching from hydrocarbon extraction. This has stimulated a growing appetite from a new breed of agile, independent oil E&P entities acquiring competitive assets, and eagerness to reach once-inaccessible or undiscovered reserves.

An example of how this secured borrowing base structure where funds are lent against the future cash flows of the business can now also be seen in the phoenix-like rise of Norwegian Energy Company ASA (Noreco) as it prepares to make a transformational acquisition from Shell of their upstream assets on the Danish Continental Shelf (DCS).

Established in 2005, Noreco had, up until 2014, a mixture of production, development and exploration assets and, at its peak, produced around 15,000 barrel of oil equivalent per day (boepd). However, a production shutdown on the Danish North Sea-located Siri platform in August 2009 when inspections revealed cracks in a water buffer tank brought the company to crisis point. Attempts to claim the US$470m of damage from a group of 20 insurance companies were ultimately unsuccessful after an Eastern High Court ruling in 2018 – a legal battle that had gone on for almost a decade.

A combination of high production costs, a falling oil price and an over-leveraged, sub-optimal capital structure added to Noreco’s challenges. The company exited the majority of its asset portfolio and brought in a new board and management team headed by renowned investor Riulf Rustad. Together with Danish corporate turnaround expert Lars Purlund, Rustad set in motion an extraordinary repositioning of Noreco. Opportunities lay in unused tax allowances in Denmark from investments on the DCS, and an acquisition from Shell.

Deutsche Bank was contacted by Purlund in 2016, and the bank’s Structured Commodity Trade Finance (SCTF) team could see the revival potential. Thus began a 24-month-long partnership, with Deutsche Bank as the first bank on board, that led up to the conclusion of the RBL and acquisition. Few believed that Noreco could execute this kind of transaction and the detailed deal announcement in October 2018 was completely unexpected by the market.

Funding expansion takes a certain amount of agility at this critical part of the company’s development and on 31 July 2019 Noreco announced that through a wholly owned subsidiary, it had completed its acquisition of 100% of the shares in Shell Olie- og Gasudvinding Danmark B.V.

This meant agreeing a new financing and capital structure, which involved a private placement of US$352m ordinary shares, the issuance of a convertible bond of up to US$160m and a US$40m partially underwritten subsequent offering. Additional debt capital was raised through a new seven-year reserve-based lending facility of up to US$900m, with a sub-limit of US$100m for letters of credit.

Deutsche Bank was mandated, together with Bank of Montreal and Natixis to structure and underwrite the RBL.

Not only was the deal a landmark in terms of its scale, but it put in place, at a pivotal juncture for Noreco, a complete new capital structure – one that enabled Noreco to become the second largest oil and gas producer in Denmark, as well as establishing it as a considerable independent E&P company in the North Sea. It also revitalised the Noreco name, which had hitherto remained closely associated with the Siri platform failed exploration, and over-leverage. Following the acquisition from Shell, Noreco now has a 36.8% interest in the Danish Underground Consortium (DUC), a joint venture with 15 producing fields and related infrastructure. It has also increased its interest in the Lulita field from 10% to 28.4%.