Tullow Oil has agreed to merge with fellow explorer Capricorn Energy in a deal that would give the combined group a market value of almost £1.4 billion (€1.64 billion).
The deal would technically see Tullow take over Capricorn, formerly known as Cairn Energy, and shareholders in the Irish-founded company take a 53 per cent stake in the enlarged entity, the companies said in a joint statement on Wednesday. The combined group will be given a new identity, ending the Tullow name that had been in existence for almost four decades.
It will also accelerate a reduction of Tullow’s debt burden, which had threatened the future of the group at one stage in recent years, and, in a further pitch to secure shareholder support, lead to “sustainable” investor returns, with an annual base dividend of $60 million (€56 million). This follows a decade of sporadic shareholder payments by both companies.
“The combination represents a unique opportunity to create a leading African energy company, listed in London, with the financial flexibility and human resource capability to access and accelerate near-term organic growth,” the companies said.
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The combined group, to be led by Tullow boss of almost two years, Rahul Dhir, is expected to have an output of 96,000 barrels of oil equivalent per day (BOEPD), with pro forma reserves of 343 million barrels of oil equivalent at a time of soaring fuel prices. Tullow’s flagship Jubilee and TEN oilfields off the coast of Ghana will account for the biggest share of the group’s reserves and production.
Capricorn’s key asset is a 50 per cent stake acquired in gas and oil assets in Egypt’s Western Desert hotspot last year, where its interest in production averaged 36,500 BOEPD at the time the deal was completed. It has interests in Mauritania, Mexico, Suriname and the UK.
Brent crude oil was trading at over $117 per barrel on Wednesday, up 66 per cent on the year, with inflation over the course of 2021, as economies reopened following the worst of the Covid-19 crisis, further stoked by the effects of the war in Ukraine.
In a previous existence working as an investment banker with Merrill Lynch, Mr Dhir pitched Edinburgh-based Cairn the idea of floating its Indian business on the stock market in 2006. He was subsequently hired by the exploration group to take charge of the unit and manage the deal. He left the business in 2012 after most of Cairn’s remaining stake in the unit was sold to Indian billionaire Anil Agarwal’s Vedanta Resources.
A long-running tax dispute with Indian authorities relating to the deal was settled last year, with Cairn recovering more than $1 billion (€940 million). The company was renamed on December 31st as Capricorn Energy.
Tullow, which was founded by Irish man Aidan Heavey in 1985, has been through a tumultuous period in recent years. It had focused on selling off non-core assets after warning in late 2020 that it faced the risk of defaulting on its borrowings as cash remained tight.
However, it managed to carry out a major refinancing during the period, selling $1.8 billion (€1.69 billion) of bonds and securing a new $500 million (€469 million) revolving credit facility. Net debt declined to $2.1 billion (€1.97 billion) at the end of 2021 from just more than $3 billion (€2.82 billion) in mid-2020.
The combined group’s net debt is expected to fall below 100 per cent of earnings before interest, tax, depreciation, amortisation and exploration costs by the end of this year, compared with a pro forma ratio of 150 per cent at the end of 2021. Tullow has by the far the higher debt burden of the two companies, with its own leverage ratio standing at 220 per cent as of the end of last year.
The new group is expected to deliver pretax net cash cost savings of $50 million (€47 million) a year by the second anniversary of completion of the deal. This will be done through a reduction of duplicate costs across board, corporate and group operational and technical functions and administrative functions including consolidation of office space and rationalisation of IT spend, the companies said.
Capricorn’s CEO of 11 years Simon Thomson will step down on completion of the merger, which is expected to take place in the fourth quarter of this year, subject to necessary shareholder and regulatory approvals. He will subsequently become chair of a committee overseeing the integration of the two companies. Phuthuma Nhleko, currently chairman of Tullow, will become chairman of the combined group.
The new group’s headquarters will be in Tullow’s current head office in London. Shares in Tullow were trading 1.8 per cent higher in London in midday trading in London, while Capricorn’s stock was up 3.3 per cent.
