Oil’s Dealmaking ‘Sun King’ Returns
John Browne’s return to the top of an oil company started with a phone call from a Russian oligarch who had $10 billion burning a hole in his pocket.
“Mikhail Fridman said: ‘Would you like to invest some money for me?”’ Browne recalled in an interview, relaxing in a white chair in his characteristically stylish London office. “It was very attractive.”
Browne, the consummate deal-making CEO who turned Britain’s BP Plc into a global oil giant, already shared a very profitable history with Fridman. In the early 2000s, they put together Russian oil producer TNK with BP’s assets in the country to form a hugely lucrative joint venture. When it was bought out by state oil company Rosneft Oil Co. PJSC in 2013, Fridman came away with a pile of cash.
Fridman wanted help reinvesting his windfall and sought out Browne, who’d been filling his post-BP days with a mix of private equity deals and advising the U.K. government on how to run itself better.
Four years and several deals later, Browne has turned Fridman’s money into what’s set to become the largest independent oil and gas company in Europe. He wants to take the company public “as soon as possible,” perhaps as early in the first quarter of next year.
For Browne, 70, it’s an exhilarating return to his old life. Two decades ago, he created the blueprint for the modern oil major by announcing BP was buying American oil giant Amoco. The $50 billion deal created a company so large its competitors were forced to react. Mergers between Exxon and Mobil, Chevron and Texaco and Total, Fina and Elf quickly followed.
BP’s market cap went from as low as $5.4 billion to $250 billion during Browne’s tenure and he became the most lauded British business leader of his generation. In 2002, a Financial Times profile dubbed him the ’Sun King,’ a reference to the French monarch Louis XIV who exercized absolute power from the palace of Versailles.
But in 2007, Browne left BP under a cloud following an admission he’d lied in court about how he met a former boyfriend. While the circumstances of his departure were painful, he acknowledges he’d “probably stayed too long” atop the company in any case.
Afterward he began working at private equity house Riverstone Holdings LLC where he “learnt a lot,” but the timelines for investing felt uninspiringly short.
“I’ve always thought that the word retire doesn’t mean much, I think you just change the way you do things over time,” Browne said. “I started in this industry believing that why I loved it was you could solve problems, challenges and problems, and I still think that’s the case.”
Challenges abound. In a world that’s trying to cut carbon emissions, investors are increasingly skeptical that oil companies remain an essential building block of a profitable portfolio. When Browne was building BP, prices ebbed and flowed, but everyone assumed economic growth would drive consumption relentlessly higher. Now, executives wonder when demand will whither away.
“Twenty years ago, oil and gas represented a big percentage of the index — it was a must-have — people stuck with it with through thick and thin,” he said. Now it’s “different, very different.”
He says all energy companies can do to entice investors is tell a more persuasive story about their potential for growth — and fat dividends — than their competitors.
“John is a consummate deal-maker,” said Nick Butler, a visiting professor at King’s College London, who worked with Browne as BP’s head of strategy in the early 2000s. “He has seen there’s a gap in the energy market for a reasonably-sized independent oil and gas company which can operate in all sort of places.”
At the executive chairman of L1 Energy, a unit of Fridman’s LetterOne investment vehicle, Browne’s first task was completing the $5 billion purchase of DEA Deutsche Erdoel AG, the oil and gas unit of troubled German utility RWE AG. The second was to convince Fridman that buying DEA wasn’t nearly enough.
The DEA portfolio was too small to make the company “relevant to people,” Browne said, and he wanted to expand into the U.S. market. He quickly ran into a problem: he was shopping around West Texas shale plays with Russian funds just as accusations of election hacking in America started making headlines.
After Browne identified a deal he liked in the prolific Permian basin, it soon became clear the transaction would be rejected by U.S. regulators, according to people familiar with the matter.
Fridman isn’t one of the Russian oligarchs under U.S. sanctions, but Western governments remain wary of him. LetterOne was forced to sell some U.K. assets it acquired in the DEA purchase after the British government raised concerns over the Russian funds.
With the price of oil dropping and U.S. shale ruled out, Browne persuaded Fridman to merge with another energy company. He made a list of targets and got to work.
His first choice was the oil subsidiary of shipping giant A.P. Moller-Maersk A/S, but Total SA of France swept it up in 2017, paying $7.45 billion. He was more successful with his second choice, Germany’s Wintershall AG, a subsidiary of chemical giant BASF SE. The tie-up was announced in December 2017 and will likely be complete by June. L1 Energy will own a third of the combined entity.
Browne isn’t done yet. Before an IPO in 2020, which some estimate may value the DEA-Wintershall company at as much as $30 billion, he’s continuing with the M&A spree.
In December, DEA took over Sierra Oil and Gas for about $500 million, the biggest single deal in Mexico since the opening of the country’s oil industry to foreign investors. And there’s another $4 billion ready for acquisitions and exploration acreage.
But oil prices have taken a tumble in recent months and there’s more than one company looking to woo equity investors. Other private-equity backed companies with simpler portfolios may go public in the next couple of years, including North Sea specialists Neptune and Chrysaor.
“There’s more than one company thinking about an IPO right now,” said Jon Clark, the leader for oil and gas transaction services in Europe, the Middle East and Africa at Ernst & Young LLP. It’s still uncertain how deep investor appetite runs because “no one has really tested that yet,” he said.