Vice-President: Henry Wareing
Analysts: Lili Jing, Shagun Shrivastava, Royce Pan, Sia Jain
Deal Overview
Acquirer: Eni International BV (“Eni”) and Vår Energi ASA (“Vår Energi”)
Acquiree: Neptune Energy Group Limited (“Neptune”)
Deal Size: $4.9 billion
Buy Side Advisors: Goldman Sachs International (financial), Rothschild & Co (financial), Freshfields Bruckhaus Deringer LLP (legal) and Advokatfirmaet BAHR AS (legal).
Sell Side Advisors: HSBC (financial advisor), White & Case LLP (legal advisor) and Ernst & Young (tax and financial due diligence advisor).
Introduction
In a momentous development within the European oil and gas sector, Eni, Italy's prominent energy company along with the Norwegian brand Vår Energi, has reached an agreement to acquire Neptune Energy for $4.9 billion. This transaction does not include Neptune's German arm of business, which will remain under the ownership and operation of the current Neptune shareholders as an independent financial entity. This fully cash-funded transaction stands as the largest deal in the industry over the past decade, emphasising Eni's strategic foresight and dedication to reshaping its operations in line with environmental goals. Eni's overarching ambition is to increase its share of natural gas production to 60% and achieve net zero emissions from its upstream business by 2030.
By acquiring Neptune Energy, Eni reinforces its commitment to providing affordable, secure, and low-carbon energy to society and acknowledges the pivotal role natural gas plays in attaining these goals. The transaction seamlessly fits within Eni's operational and financial framework, as well as the targets outlined in its 2023-2026 Plan, providing additional earnings and cash flow growth, enhancing shareholder value and unlocking renumeration potential. This strategic vision, combined with the magnitude of the deal, positions Eni at the forefront of the industry, primed to capitalise on the evolving energy landscape and deliver long-term value to its shareholders through this transaction.
Eni Overview
Eni, also known as Ente Nazionale Idrocarburi, is an Italian energy company with operations in petroleum, natural gas, and petrochemicals. Established in 1953, Eni is one of Europe's largest oil companies, operating in 62 countries with its headquarters in Rome. Originally a state-owned entity, Eni underwent privatisation in 1995 and more than 60% of the company is now publicly owned.
Eni's activities include exploration, production, refining, transportation, and retailing of oil and natural gas. The company is recognized for its expertise in ocean mining technology and has expanded its exploration rights to regions such as North Africa, Latin America, and the North Sea. Eni also plays a significant role in importing and distributing natural gas from North Africa and Russia.
In recent years, Eni has pursued a strategy of consolidation and diversification, acquiring companies in the oil and gas industry as well as expanding into polymers, chemicals, power generation, and heavy machinery manufacturing. The company has embraced an integrated energy model focused on operational excellence, carbon neutrality, and partnerships for development. Eni aims to achieve carbon neutrality by 2050, emphasising the importance of natural gas as a bridge energy source in the transition to a low-carbon future.
Overall, Eni's business model integrates principles of environmental and social sustainability, aiming for operational excellence while addressing climate change. The company is committed to building a future where energy resources are accessible, efficient and sustainable while fostering long-term partnerships with countries and communities.
Neptune Energy Overview
Neptune Energy is a prominent player in the energy sector and an independent, global oil and gas exploration and production firm. Established in 2015 by Sam Laidlaw, Neptune Energy has gained recognition for its diverse portfolio and deep industry expertise. The company is supported by private equity investors, including Carlyle, CVC and CIC, as well as reputable bondholders.
It operates in eight nations, investing and taking part as an operator and licensee with a geographical concentration on the North Sea, North Africa, and Asia Pacific. The company's strategic vision is to become a leading independent E&P (exploration and production) company that meets the changing energy needs of society while creating value for stakeholders. To achieve sustainable growth, Neptune Energy's strategy focuses on maximising operational effectiveness, raising production capacity, and extending its global reach.
With a commitment to delivering short-term profits, Neptune Energy maintains a disciplined financial structure, focusing on shorter-cycle projects and reserves around existing operated hubs.
Through its expertise, diverse portfolio, and strategic approach, Neptune Energy aims to contribute to the sustainable growth of the oil and gas industry while addressing the continuously evolving energy landscape.
Industry Overview
The oil and gas industry plays a vital role in the global economy, generating approximately $5 trillion in revenue as of 2022. It is a cornerstone of the energy sector, powering various aspects of modern life, from transportation and electricity provision to industrial production and manufacturing. The United States, Saudi Arabia, Russia, Canada, and China are among the leading net producers of crude oil. Energy companies, both nationally owned and privately owned, are among the largest and most influential companies globally.
Some of the well-known energy giants include Exxon (U.S.), Chevron (U.S.), Saudi Aramco (Saudi Arabia), Gazprom (Russia), China National Petroleum Corporation (China), Equinor (formerly Statoil of Norway), TOTAL (France), and ENI (Italy).
The oil and gas industry encompasses upstream, midstream, and downstream activities. Upstream activities involve exploration and production, midstream activities focus on transportation and storage and downstream activities include refining and marketing. The industry is highly capital-intensive, attracting significant investments for the development of new technology to streamline processes. In 2020 alone, the industry received over $511 billion in investments.
However, the industry faces significant challenges, particularly related to climate change and the transition to cleaner energy sources. There is increasing pressure on oil and gas companies to clarify the implications of energy transitions for their operations and business models and to contribute to reducing greenhouse gas emissions in alignment with the goals of the Paris Agreement. The industry is also grappling with issues related to working conditions, fundamental labour rights and public scrutiny due to many profiting off the current energy price crisis.
To adapt to evolving energy dynamics, some oil and gas companies are diversifying their operations and investing in low-carbon businesses. This includes ventures in renewable energy sources like solar and wind, as well as research and development activities. However, a more significant shift in capital allocation and overall industry transformation will be necessary to accelerate energy transitions and address climate goals.
The oil and gas industry remains a key driver of the global economy, but its future will be shaped by its ability to adapt to energy transitions, reduce emissions and embrace sustainable practices. The industry's response to these challenges will not only determine its own future but also contribute to addressing climate change and shaping a more sustainable energy landscape.
Financial Analysis
Comparable Companies Analysis
Compared to competitors with a similar valuation operating in similar regions, Neptune energy’s revenue growth, EBITDA Margin and Profit Margin are higher than both the peer average and median. This indicates a strong company profile and outlook and justifying the high valuation of USD$4.9bn. On the other hand, both trading multiples EV/Revenue and EV/EBITDA decreased relative to peers from 2021 to 2022, highlighting that the company may still be undervalued and providing a rationale for the acquisition price. Eni’s acquisition thus paves ways to earn profits from synergies such as higher projected revenue growth.
Precedent Transaction Analysis
Neptune Energy’s Acquisition of ENGIE E&P International
In 2018, Neptune Energy acquired a 70% stake of ENGIE E&P International for €3.9bn, with the total deal being valued at €4.7bn (approx. USD$5.16bn today) after adjustments. The goal was to increase its footprint in the North Sea region with the goal of creating a leading international independent E&P company within the next five years. ENGIE’s EBIDTA in 2017 was €9.3bn, suggesting the price paid was approximately 2.4x.
Transocean’s Acquisition of Ocean Rig:
In addition, Transocean, one of the world’s largest offshore drilling companies, acquired the offshore-drilling contractor Ocean Rig in a combined cash-and-stock deal worth around $2.7bn, which includes Ocean Rig’s net debt. This was the largest drilling deal since the oil price collapse since 2014. With a 2017 EBITDA of $420m Transocean paid approximately 6.4 times the price.
Santos’ Acquisition of Quadrant Energy:
To add, Australian oil and gas firm Santos acquired Quadrant Energy in a transaction valued at approximately $2.15bn within the same year. The acquisition was funded through existing cash resources and US$1.2 billion of new debt facilities. The deal was expected to help in achieving synergies between $30m and $50m annually. Following the deal, Santos’ sales revenue was up to a record $3660m, up 18%. Quadrant Energy was formed in 2015 and privately funded therefore its financials are not publicly available.
DCF Deal Valuation
Due to the unavailability of the companies' financial projections in databases such as Capital IQ, we undertook the task of projecting them internally, relying on a set of assumptions. Given the considerable volatility observed in Neptune Energy's revenue and operational profit, we adopted a cautious approach and based our projections on conservative assumptions, in accordance with the GAAP Conservatism principle. Specifically, we used the median percentage of historical revenue growth rate as a foundation to project its future financial performance.
Based on our discounted cash flow (DCF) valuation analysis, Neptune Energy’s enterprise value is estimated to be at $5.2B.
The calculation of the Weighted Average Cost of Capital (WACC) involved determining the cost of equity and cost of debt as follows:
Cost of debt: The cost of debt was computed by averaging the interest rates on various debt instruments of Neptune Energy, including Reserve Based Lending Facility, Senior Notes, etc.
Cost of equity: To calculate the cost of equity, we used the CAPM Method (Capital Asset Pricing Model), which required the risk-free rate, Neptune Energy's beta, and the market risk premium.
Risk-free rate: The UK 10-year bond yield was used as the risk-free rate.
Beta: We used the average unlevered beta of comparable companies, such as Tullow Oil plc, Comstock Resources Inc, DNO ASA, etc.
Market risk premium: The UK Equity risk premium was sourced from Damodaran.
While explicit financials were not available in their entirety for Neptune Energy, the stringent and conservative approach taken to the valuation for Neptune provides us with what we believe to be an accurate enterprise value figure.
Deal Rationale
As the largest cash deal in the European oil and gas sector for almost a decade, Eni has said that the synergies created from the integration of operations across key geographies could reach $1 billion.
Revenue Synergies
Expanding resource base:
This transaction widely complements Eni’s core areas of geographical focus, with Eni’s chief executive Claudio Descalzi stating that Neputne’s portfolio of gas fields were an “exceptional fit”, due to the gas fields being located so close to European markets and having easy access to them. Hence supporting its objective of shifting their natural gas production portfolio to 60 percent and achieving net zero emissions from the upstream business by 2030. It has been said that increasing this share of gas in its total hydrocarbon production is expected to boost earnings immediately.
Currently, the only existing upstream portfolios of the companies are low carbon intensity gas-focused, and as such it’s such that this acquisition is set to provide Eni and Vår Energi with increased scale in growth areas and high-value markets. The boards of Eni, Vår Energi and Neptune have faith that the combination of the two companies will greatly enhance their technical and financial capabilities, focussing on a lower risk, higher quality upstream portfolio while providing affordable, low carbon and energy security to customers. Last year, the Gas and Liquified Natural Das (LNG) division was a driver of the group’s record earnings. Granted the acquisition boosts the outlook for the gas and LNG division, there is potential for share buybacks to reward investors.
Furthermore, a strengthened gas division will be able to boost Eni’s role as a core gas supplier for Europe for the time being, during the ongoing Russia-Ukraine war. With development in Eni’s Gas and LNG division guidance over the medium term, RBC’s Biraj Borkhataria has stated that the acquisition will add four billion cubic (bcm) of supply to Eni, along with synergy potentials rooting from access to additional pipeline capacity.
Future carbon capture & storage technology:
Eni’s acquisition of Neptune is part of a broader M&A strategy of enhanced decarbonisation opportunities, involving carbon capture and storage (CCSU) technology. It has been suggested that there’s a long-term plan of selling off a stake in Eni’s low-carbon unit Plentitude and the exploration and production businesses’ “mature” assets. Eni’s Chief Executive Claudio Descalzi has stated that this acquisition will bring greater scale of production to Eni’s Vaar Energy, as a result of key geographical and operational overlap. This will allow Eni to bring greater carbon capture and storage (CCSU) opportunities to reduce the North Sea’s footprint, building on Eni’s leading position in Algeria and Indonesia. Additionally, Eni’s head of gas division has said that the bulk of Neptune’s existing gas contracts are set to expire in the next 12 months, as such, it gives Eni a great opportunity of possibly integrating more CCSU opportunities into their portfolio.
To end, this transaction is extremely significant given oil majors in Europe by the likes of Eni, BP and Shell, have been making active changes to their operations upon setting carbon emission targets. These changes can be seen through a greater likelihood of oil and gas assets being sold rather than bought, signalling a shift towards greener forms of energy, in which Eni hopes to be at the forefront of after this transaction.
Cost Synergies
A key element of Eni’s acquisition of Neptune is the low-cost supply and accretive cashflow it will provide to Eni. As a result of the increased scale Eni will experience, the transaction will lead to shared intellectual property and an increase in operational volumes due to the overlapping geographical areas. Due to Neptune’s gas fields conveniently being located near European markets, the firm will be able to enjoy cheaper transportation costs, hence maximising profits.
Further possible cost synergies can be derived from more generic M&A possibilities. Post-acquisition, Eni may attempt to implement a rationalisation strategy to streamline operations, consolidate redundant departments, and optimise workflows, resulting in improved efficiency and cost savings. In order to reduce overlapping functions, there may be an identification and elimination process to avoid unnecessary costs. This consolidation process eliminates duplication in order to optimise resources and maximise efficiency to achieve the desired synergies of achieving economies of scale, and hence the financial benefits, possibly further enhancing their competitiveness in the market in the long run.
Risks
Acquisitions in the energy sector, especially of companies engaged in exploration, production, and refining, are prone to various unpredictable risks. Energy companies are heavily dependent on oil prices for their revenue generation and profitability; hence they are extremely vulnerable to changes in commodity prices, regulatory challenges and environment concerns.
The energy industry is susceptible to oil price volatility, as this can impact the profitability of energy companies, and thus the success of this deal in the future if profits fall. With continued pressure for oil and gas companies to invest and transition to cleaner energy sources, O&G prices may be volatile, so if prices drop too low, the acquisition becomes financially unfeasible and operations economically unsustainable. Additionally, High price volatility can disrupt Eni’s long-term investment plans, especially in clean energy and CCSU, resulting in lost opportunities and hence lower profitability. However, Deloitte has found that O&G companies have continually produced healthy balance sheets, through practising capital discipline and focussing on cash flow generation. Hence, pressure lies on O&G companies to decide on whether they will prioritise shareholder payouts or increase investment in energy alternatives in order to provide clean, affordable energy to customers. Nevertheless, Deloitte also projects that there may be new policies and investment that could boost the role of natural gas in the clean energy transition. This puts Eni’s LNG division at the forefront of the industry as this acquisition has a key objective of shifting their natural gas portfolio to 60 percent. This is in line with Eni’s 2025 carbon neutrality goal.
Another significant challenge Eni will face post-acquisition is finding a balance between their goal of increasing their natural gas production and various environmental regulations, otherwise known as the energy trilemma. It reflects the interconnected nature of energy challenges, involving energy security, supplier diversification, and low-carbon transition. This trilemma highlights the difficulty of providing reliable and uninterrupted supply to meet the needs of society at an accessible rate. This must be implemented alongside a transition towards cleaner and more sustainable energy sources. As such, energy companies must comply with a wide variety of environmental protection regulations, health and safety, and land use. A failure to comply with these may result in a decrease in the value of this acquisition. While Eni continues to specialise in natural gas, we can see that Eni already has intentions of utilising this acquisition as an opportunity to decarbonise and invest in CCSU technology, putting them at the forefront of low-carbon technologies.
While there is limited information on the potential risks of this deal, it would still be prone to integration challenges, cultural differences and regulations. Granted the two companies are both European companies, but if the two companies aren’t able to set aside cultural differences and collaborate between each other successfully, there could be operational disruptions and decreased productivity.
Conclusion
To conclude, this deal represents a tangible, strategic shift within the energy industry. It shows that energy companies are beginning to deploy inorganic growth methods (as opposed to just internal investment) to prepare for a net zero future, by diversifying revenue streams and creating new infrastructure. Examples of this approach are seen by Eni’s strategic rationale for this deal, as carbon capture and storage technology are key strategic drivers which Eni has focused on in the execution of this deal. This also shows how smaller energy companies are beginning to catch on to the trends of decarbonisation and following in BP and Shell’s footsteps.
In terms of the success of the deal from a technical standpoint, Neptune has strong fundamentals behind its business, such as its high EBITDA and Profit margins, shown in the CCA conducted. This, combined with the fact that EV/Revenue and EV/EBITDA are still lower than Neptune’s peers show that there could also be a straightforward value creation rationale for Eni, as it may have viewed Neptune as undervalued and hence sought to snap up a good deal on a company which could contribute to their 2025 carbon neutrality goal as well. Therefore, it is encouraging to see that this deal has a strong foundation in financial metrics, and is not based on high valuations and multiples, which can sometimes be the case with M&A deals in the energy industry.
In summary, this deal should be successful and create value for Eni’s shareholders, and, furthermore, should provide Eni with the means to effectively implement market shifts within their own business plan, and decrease their future carbon emissions to retain market share in a possible green future for the industry.
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