Swedish-based oil and gas independent PA Resources used 2010 to change its focus from acquiring licences to developing its existing assets. To do this, it closed a $250 million five-year reserves-based loan – its largest yet – against its assets in Congo-Brazzaville. The financing marks a geographic shift in focus for PA and also a change in financ­ing approach, from the Scandinavian bond-loans that have financed its growth to cheaper and more reliable bank debt.

PA was formed in the 1990s to explore in Norway’s Svalbard region, though in 2008 it decid­ed to divest its Norwegian continental shelf properties and no longer operates there. In 2007 it paid Murphy Oil $110 million upfront (as well as a $23 million carry for two explor­ation wells and a performance-related element) for a 35% stake in Murphy’s Mer Profond Sud and 35% of the Azurite field development off the coast of the Republic of Congo.

The acquisition did not mark PA’s first foray into the country, since it was already developing the Marine XIV block, a majority operator interest that it sub­se­quently farmed out to SOCO. But it vastly increased its presence in Congo-Brazzaville, the marginally more politically stable near-namesake and neighbour of the larger Democratic Republic of the Congo. PA’s acquisition consisted of 26 million barrels of recoverable reserves.

The Azurite Marine Field, discovered in 2005, is located in the Lower Congo Basin next to Angola’s deepwater Block 14. Murphy owns 50% of the asset, with Congo’s Societe Nationale Petroles du Congo owning 15%. At the time of the acquisition, Azurite and the wider exploration permit were eventually expected to account for 40,000 barrels per day of production, of which PA’s share would be 14,000.

The rest of the Mer Profond Sud prospect covers 3,500km2 and at the time of the purchase included 19 undrilled prospects, of which four were ready for drilling. Development at Azurite, how­ever, was already far advanced – in 2007 the Congolese Ministry of State approved the field’s development plan. A number of bank lenders pitched PA with ideas for reserves-based deals.

In September 2009, PA closed a $125 million one-year loan with Standard Bank to develop the assets, though the financing was secured at the corporate level and had a one-year maturity. PA’s intention, as it made clear at the time, was to replace it with a longer-term structured deal. But the financing marked an impressive increase from the borrower’s previous loan of $30 million.

By the end of the second quarter of 2010, shortly after the signing of the loan, three wells were in operation at the field, one of which had come online in May 2010, and PA’s net production was 5,450 barrels per day, more than half of its total daily production of 10,000 barrels. Tunisia, where it has been present since the mid-1990s, accounted for the rest.

By the end of 2010, six wells were producing at Azurite, and PA’s attributable production was roughly 8,050 barrels per day, while Tunisian production remained the same. The total production, at just over 12,000 bpd, was lower than PA’s 15,000-20,000 bpd forecast, in part because the Azurite wells will require additional water injection. But the Congolese assets are now the dominant part of PA’s producing portfolio.

The lenders insisted on financial covenants that applied to both the borrower and the parent, specifying a 1:1 debt:equity ratio and a ratio of equity to capital employed of 40%. They also insisted on the right to cancel the facility if the licence for the field is revoked, the assets are nationalised, or production is interrupted. How­ever, if any­thing, the environment for oil com­panies has become more welcoming in recent months. Changes to the tax treat­ment of the production sharing agree­ment for the field give PA a greater net entitlement share of field revenues, and compensates in part for lower production at the field.

The changes to the taxation regime, designed to speed up investment in Congo’s oil and gas industry, have re­ceived ministerial approval, and will be sub­mitted to the coun­try’s parliament shortly. But they bode well for the exploration of the Turquoise and Cobalt prospects in the Mer Profond Sud licence.

The reserves-based loan, which is priced at 450bp-550bp over Libor, attracted substantial numbers of reverse inquiries. Standard Bank and Credit Agricole, as mandated lead arran­gers, bookrunners, and joint technical banks, brought in Natixis as mandated lead arranger, and FBN Bank and BMCE International as lead arrangers. Standard was also accounts bank and hedging bank, while Credit Agricole was facility agent, security trustee, modeling bank and hedging bank.

A condition precedent to funding was PA completing its planned equity raising, which it did with a SEK1.8 billion rights issue that launched in May, bringing in comfortably more than the SEK1.5 billion specified in the loan agreement. The rights issue, which closed in June, left PA with gearing of 16%, comfortably inside its 50% target. At the time of the rights issue, PA said that it wanted to rely upon an existing convertible bond and secured bank debt to fund its growth.

However, in December, PA refinanced NOK500 million in existing bond-loan debt, which it raised on the Norwegian market, with a SEK850 million bond-loan, maturing in 2013. The issue was increased in the face of strong investor interest, though it carried a rich 10.5% coupon. The loan, then, has diversified, rather than transformed, PA’s funding mix, though it leaves the borrower slightly less at the mercy of the sometimes murky Scandinavian debt capital markets.

But the deal includes some notable innovations, beyond its host country. The financing backs the operation of a floating, drilling, production, storage and offloading vessel, essentially an FPSO with a land rig bolted on, which can offer cost-effective production capacity for fields where a large number of drills is required. The vessel, the first of its kind at an African field, arrived on time and on-budget, and when drilling is complete, the rig can be removed from the FPSO and used elsewhere.

The financing was also being documented at the same time as sponsor and lenders put together a definitive bankable resource report, allowing the lenders in the deal to highlight their in-house petroleum engineering capabilities. 

PA Resources Congo
Status: Signed 6 May 2010
Size: $250 million
Location: Congo Brazzaville
Description: Reserves-based loan for Sweden-based independent oil and gas producer
Sponsor: PA Resources
Lead arrangers: Credit Agricole, Standard Bank
Maturity: Five years
Margin: 450bp to 550bp over Libor
Lender legal counsel: Herbert Smith (UK) Setterwalls (Swedish)
Sponsor legal counsel: DLA Piper
Independent reservoir engineer: Ryder Scott