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North Sea oil IPOs had best take the plunge soon

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by George Hay via Reuters Breakingviews

North Sea oil companies hoping to float should strip off and take the plunge. Sam Laidlaw, formerly boss of UK utility Centrica (CNA.L), is mulling an initial public offering of Neptune Energy, the driller controlled by buyout groups CVC and Carlyle, as well as China’s sovereign wealth fund. His chances of achieving a $10 billion valuation look better if he moves swiftly. 

After a recent rush of new listings, investors are showing signs of indigestion. Shares in food delivery group Deliveroo (ROO.L) are languishing 35% below their March debut price, and a bunch of smaller Spanish renewable energy groups recently pulled their listings. Laidlaw also faces competition: Oil driller Wintershall Dea said in February its mooted $20 billion IPO would be done some time this year. 

Neptune has some compelling reasons to nip in front, though. Brent oil prices that last year sank below $20 a barrel are back up near $70, buoyed by the post-pandemic recovery and a forthcoming supply crunch. Meanwhile, the influential International Energy Agency said last week that gas demand needs to peak around 2025 if the planet is to restrict global warming to 1.5 degrees Celsius above pre-industrial levels. 

Previously investors could assume several more decades of growth in demand for gas, which emits less carbon than oil and coal. If the IEA is right, the fact that Laidlaw’s company counts 72% of its proved and probable reserves as gas is less alluring. 

Neptune’s mooted valuation also looks punchy. U.S. oil groups like Chevron (CVX.N), ConocoPhillips (COP.N) and Exxon Mobil (XOM.N) sold their assets in the North Sea at valuations of around $10 to $15 per barrel of proven and probable reserves. Adding Neptune’s $2 billion of net debt to a $10 billion equity valuation, and dividing it by its 601 million barrels of reserves, implies a valuation of almost $20 per barrel. 

Neptune’s assets are geographically diversified and therefore better hedged against price movements in different gas markets. Laidlaw can also sell investors a growth story whereby reserves will hit 800 million barrels, reducing the valuation to less than $15 per barrel. But the public markets are only becoming less welcoming for fossil fuel groups. He shouldn’t hang about.

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