Galoc: the turnaround
Galoc is a high margin oil production asset located within the attractive operating and fiscal environment of the Philippines.
Prior to acquisition in 2011, we identified Galoc as having low risk operational, development, appraisal and exploration upside that was not appreciated by the existing operator.
Galoc represented a deal sweet spot for Risco in both size and scope: too small for larger players and too big for smaller ones, it aligned with our strategy of acquiring underfunded small cap assets with potential for value creation and growth. Furthermore, our deal structuring and capital capabilities provided incremental value to both ourselves and the counter parties, paving the way for deal execution. The ultimate result for Risco was exceptional, arguably representing Asia’s best upstream investment return in 2012.
Identify and create opportunity for value creation
Risco’s deep knowledge of Galoc and its existing partners prior to the deal allowed us to quickly recognise the asset’s full potential, while also grasping the entry opportunity. Existing operator Vitol’s desire to exit was driven firstly by the company’s strategic global realignment. Additionally, it held a contrary view to both ourselves and its secondary partner, Otto Energy, on the viability of Galoc’s potentially transformational Phase II development plan and was adverse to further financial commitment.
Meanwhile, Otto Energy shared our excitement of the asset’s future value generation, but their balance sheet constrained their ability to take out Vittol independently and fund the elements necessary to unlock Galoc’s potential. The solution lay in us partnering with Otto Energy, offering balance sheet, operational and commercial augmentation with them as operator in return for influence disproportionate to our headline 27% interest, essentially providing de facto joint operatorship.
Set strategy for value creation
A March 2011 MoU between Risco and Otto set the strategy for Galoc’s value creation and growth. This spanned validating operational, production, commercial, development and exploration initiatives, all ultimately converging in a singular focus to enable the progression of Galoc Phase II, accelerate production, expand reserves and consequently unlock future value.
With a clear pathway for asset’s value creation laid down, we then set about structuring an offer to Vitol with attractive features for both parties intended to secure deal execution.
Execute strategy for value creation
Key to Risco and Otto’s offer to jointly acquire Vitol’s interest was vendor retention of oil marketing rights and Risco’s replacement of payment guarantees – an innovative mutually beneficial strategy that proved critical in closing the deal in April 2011. The provision of marketing rights alone reduced the gross purchase price without removing any value for Risco.
Strong cash flow further reduced the deal closing price to sub US$30m, versus an effective headline transaction price of US$35m. In essence, our transaction structuring provided us with significant control of the asset for the minimum possible capital outlay.
Execution of our predetermined value creation strategy began immediately. Through strong alignment and controls with our partner, Otto Energy, we put a well-matched and coherent management team in place to oversee the existing business as well as progressing future value accretive objectives. Efforts to progress planning approval for the US$200m Galoc Phase II development began immediately. In tandem, we forged ahead with 3D seismic exploration, which validated progressing Phase II development well locations and exploration upside. This was completed by January 2012.
Effective people management, as well as dispute resolution, was also required as a precursor to solving the key operational challenge of weak production performance from the Floating Production and Storage unit Offshore vessel (FPSO). Offshore specialist and FPSO-owner Rubicon had been locked in a commercial dispute with previous operator Vitol – Otto and Risco resolved this within three months of our entry.
This resolution paved the way for tackling a critical operational constraint of weak production uptime with the FPSO. Our solution was a US$40m refit involving the addition of a new anchoring system, a turret. This allowed for 360° vessel rotation and increased uptime from a seasonal 75% to more than 95%. The corresponding impact was increased production, cashflow and thus overall asset value. We also took advantage of the FPSO’s in dock refit to add additional features to the vessel for future Phase II use at a fraction of the cost if done later. All this was completed within three months during the low opportunity cost period of the Philippines’ traditional hurricane season. By April 2012 the revamped FPSO was producing at historically unseen uptime.
A few months later, in July 2012, we achieved our key objective of Phase II development approval, aided by our understanding of the local operating regime and intense work with the Philippine Department of Energy. The consequence of this, and associated lead-up efforts, was significant. Reserves experienced a near doubling, the asset was materially de-risked and value creation was crystalised with an exceptional investment return when we exited in March 2013 to Kufpec.
Key challenges overcome
- Enhancing restricted debt capacity: Galoc’s debt capacity was constrained by the perceived risk of 80% of production derived from a single well. We resolved this issue by materially reducing this risk. Specifically, shooting new, high quality 3D seismic supported Phase II development with exploration upside – thus reducing the perceived reliance on one well. This was further augmented by Risco’s own corporate debt capacity, which leveraged a low-risk, production heavy, multi-geography portfolio.
- Arbitration settlement: Within three months of our entry we resolved FPSO-owner Rubicon’s commercial dispute with previous operator Vitol. This freed up critical production equipment for refit, ultimately leading to increased production and value.
- Securing Plan of Development (POD) approval: Securing POD approval represented the ultimate challenge with Galoc and the focus point common to all our efforts. A combination of aligned partnership, effective people management, operational enhancement, effective exploration and knowledge of the local operating regime, in addition to enhancing the asset’s debt capacity and settlement of arbitration, converged to provide success in this singular milestone of value generation.