Riverstone runs dry

Yesterday Cuadrilla’s parent, AJ Lucas announced that it had “approved the acquisition, effective immediately, of Riverstone’s interest in the UK shale gas explorer, Cuadrilla Resources.”

What does this mean?

Well Riverstone had owned 45% of Cuadrilla and had invested $US 58 Million in 2010 for equity in Cuadrilla Resources Holding Ltd, the holding company established by Lucas to hold its investment for unconventional hydrocarbons exploration and development in Europe.

Back in 2013, Lord Browne, then managing partner at Riverstone went on record as saying that “We will finance whatever it takes. Equity finance, then debt and equity. If we really succeed, it will be billions, over 10 years it will be billions [of finance to provide],“

Times have of course changed and there is now another moratorium on fracking after the earthquakes in 2018 and 2019 at Preston New Road and precious little optimism amongst the frackers that it will be lifted in the foreseeable future.

What are Riverstone getting for giving their 45% to AJ Lucas?

First of all they are getting “A nominal payment on signing the agreement”. So nothing worth getting excited about, or even making it worth having a base in the Cayman Islands really.

On top of this they may get “On the resumption of Spirit Energy’s next contingent carry (gross-£46.7 million) a payment of US$2 million, provided the contingent carry commences within 3 years of this agreement;“. The contingent carry referred to would only be payable after Cuadrilla have flow tested a well for 6 months. Given that, as far as we know, they do not currently even have planning permission for any further drilling or fracking this looks extremely unlikely to happen within the specified 3 years.

Finally

“If AJL sells its 25% or more of its interest in the UK shale assets (based on the amount it holds immediately post this transaction) within 3 years of the agreement a payment of:

a)US$5 million if the value of the AJL sale is the equivalent of US$100 million or more of AJL’s 100% interest; or

b)US$10 million if the value of the AJL sale is the equivalent of US$200 million or more of AJL’s 100% interest.”

Again unless Cuadrilla can somehow unlock the moratorium and prove an amazing resource in the Bowland this looks extremely unlikely.

It seems therefore that Riverstone are walking away pretty much empty handed with the promise of a small compensatory payment (maximum $12 million) if Cuadrilla surprised the world by putting in a stellar performance over the next 3 years. Even then a return of $12 million on a 10 year investment of $58 million would make most fund managers weep.

In the USA this year we have seen that the wave of shale gas industry bankruptcies has continued over the last year

It looks as though UK shale gas is just as bad an investment.