As the global oil and gas market grows, exploration and production (E&P) companies tend to merge to be more competitive. One of the most prominent mergers that occurred recently is by two leading German based firms, Wintershall Holding GmbH (Wintershall) and DEA Deutsche Erdoel AG (DEA). The merger was completed on May 1,2019 after granting the needed approvals from all relevant authorities, shareholders BASF and LetterOne.
In September 2018, BASF and LetterOne signed an agreement to merge their oil and gas E&P business branches, Wintershall and DEA, to establish a new joint venture under the name of Wintershall Dea, headquartered in Kassel and Hamburg, that explores for and produces oil and gas in 13 countries around the world.
Wintershall Dea will be managed by an Executive Board, consisting of five members: Mario Mehren, Chairman and CEO; Maria Moraeus Hanssen, Deputy CEO and COO, responsible for Europe and MENA; Thilo Wieland, Member of the Executive Board responsible for Russia, Latin America and Midstream; Hugo Dijkgraaf, CTO; and Paul Smith, CFO.
In 2018, pro-forma hydrocarbon production of Wintershall and DEA together was 215 million barrels of oil equivalent (boe), equivalent to around 590,000 boe per day (boe/d). At the end of 2018, proven reserves on a pro-forma basis stood at 2.4 billion boe, which led to a reserve to production ratio of 11 years.
As a result of the merger, Wintershall Dea has established a regionally balanced footprint with superior growth opportunities in its core regions. Based on existing E&P projects, the company is on track to reach a daily production of around 750,000 to 800,000 boe between 2021 and 2023, which is equivalent to an annual production growth rate of 6% to 8%, in which growth is expected to come from both the existing portfolio and new production regions.
“We are a European champion and are making an important contribution to Europe’s energy security,” said Mehren.
Growing Profitably Together and Exploiting Synergies
Wintershall and DEA have established their business relation for decades, including at Mittelplate, Germany’s largest oil field. According to Mehren, the newly created company has the ideal size to meet the challenges of the oil and gas market, stating that “we are large enough to be a relevant partner for the state-owned oil and gas companies, and at the same time independent and flexible enough for complex tasks where we apply our engineering skills.”
Wintershall Dea expects to realize synergies of at least €200 million per year as of the third year following the closing of the transaction, in particular from operating and capital expenditure savings. According to the current plans, around 1,000 of the total 4,200 full-time positions are expected to be reduced worldwide. The social partners are currently working on socially compatible solutions regarding the necessary personnel adjustments.
According to the merger agreement, LetterOne will offer all of its shares in DEA into Wintershall in exchange for the issuance of new shares of the company to LetterOne. The merger will have BASF holding 67% and LetterOne 33% of Wintershall Dea’s ordinary shares, representing the value of the respective E&P businesses of both Wintershall and DEA. Meanwhile, BASF will take additional preference shares, representing Wintershall’s gas transportation business.
Strong Portfolio with Four Core Regions
Wintershall Dea produces oil and gas in four core regions: Europe, Russia, Latin America and the Middle East and North Africa (MENA) region.
“As an energy company, we know that we are merely stewards of the country’s natural resources. We recognize our responsibility and work with all stakeholders to ensure that our presence improves people’s lives. In the countries where we are active, we are well positioned and often even a leader,” said Hanssen.
This applies, for example, to domestic production in Germany, as well as the Norwegian continental shelf and production in Russia. “Our portfolio is well balanced both regionally and operationally, and 70% of our production is gas. And that is a good thing for Europe with a growing demand for natural gas. Europe does not need less, but more gas, in order to achieve its own climate goals,” Hanssen added. “Our roots are in Germany, our home is Europe and our work is global.”
The upstream activities of the company are supplemented by investments in natural gas infrastructure and midstream services. Together with its partners, Wintershall Dea operates a natural gas pipeline network in Germany of approximately 2,400 kilometers. The company is also a shareholder of Nord Stream AG and provides financing to Nord Stream 2 AG.
Shared Values and Shared Responsibility
“One of the greatest challenges of our time is to protect the climate while meeting the growing global demand for energy. We want to make a contribution to both. We want to produce gas and oil economically and, at the same time, to the highest environmental and safety standards. And it is just as important that these resources are produced and consumed in the most energy- and climate-efficient way as possible,” Mehren explained.
“Greater digitalization will help us do this, as it enables us to deliver enhanced [health, safety,environment and quality] HSEQ performance, improved efficiency, and new ways of working. It will be a matter of strategic importance for Wintershall Dea,” he continued.
Mehren emphasized that Wintershall and DEA fit together not only in terms of their portfolio, but also in terms of their values and their team spirit. The new company is based on these shared values. “We are a reliable partner…. We are reliable in our dealings, in our expertise and in our performance.”
New Corporate Structure and Perspective: Initial Public Offering
“Exactly 50 years ago, in 1969, Wintershall became part of the BASF Group,” Mehren said, adding that “this created the necessary leeway for Wintershall to significantly expand its production abroad. It was also an important step for DEA to gain additional financial strength through LetterOne’s commitment in 2015. Now is the right time for Wintershall and DEA to join forces so that the new company has the scale and clout to compete in today’s environment.”
Following the closing of the merger, the company will have no shareholder loans outstanding with BASF or LetterOne. Wintershall Dea targets an investment grade credit rating.
The integration of Wintershall and DEA is expected to be completed in approximately one year. BASF and LetterOne expect to offer shares in Wintershall Dea through an initial public offering (IPO) in H2 2020, subject to market conditions.
“We want to start preparing for a listing by the end of this year. The actual listing will probably be in 2020,” a senior source in one of the merging companies stated.
The formation of Wintershall Dea represents a cornerstone for a new leading European independent oil and gas company with a global upstream portfolio and participation in natural gas transport and in midstream business.