- New £1.4 billion entity will be a leading African oil producer
- Tullow shareholders own 57% and Capricorn 43% in new group
- Plan to pay annual dividend of $60 million
Shares in oil explorer Tullow Oil and (TLW) and Capricorn Energy (CNE) rose 2.3% and 3.1% respectively following the announcement of an agreement for a recommended all-share merger.
If agreed the new London listed entity would be one of the largest African oil producers with a market value of more than £1.4 billion.
Under the terms of the agreement investors holding a share in Capricorn will receive 3.8 new Tullow shares.
This means that Tullow and Capricorn shareholders will hold 53% and 47% of the equity in the new combined entity.
The new group will be headed by Tullow’s chief executive Rahul Dhir. The aim is to close the deal in the fourth quarter of this year.
ROBUST RATIONALE FOR MERGER
The merger brings potential benefits for both participants.
Tullow Oil has been facing an uncertain future having been forced to savagely cut production forecasts, and raise $1.8 billion via a bond offering to reduce debt last year.
It has been actively engaged in a disposal and cost cutting program, focusing on its core assets in Africa.
For Edinburgh based Capricorn Energy, (previously known as Cairn Energy) the deal provides a new strategic roadmap, and a more positive narrative compared to the negative sentiment that surrounding its recent tax dispute with India.
The new merged entity will create a leading African energy company with a diversified upstream portfolio across countries including Egypt, Gabon, Ghana and Cote d’Ivoire.
The group will have one billion barrels of resources, and production of 96,000 barrels of oil per day will make it one of the largest African production companies. The aim is to reach 120,000 barrels of oil per day by 2025.
With $1.8 billion of liquidity the new merged company will have a robust balance sheet. And lower cost production has the potential to deliver cumulative free cash flows of $2.4 billion over the 2022-2025 period, assuming a Brent price of $75 a barrel.
Investors are expected to receive an annual dividend of $60 million. Annual costs savings are anticipated to be $50 million by the second year after the deal closes.
SP Angel analyst David Mirzai commented: ‘With access to capital and investment opportunities a key concern in the E&P sector, we are not surprised to see two of the UK’s most long-standing independent E&Ps combine. The merger is anticipated to create a leading African energy company with a material and diversified asset base and a portfolio of investment opportunities.
‘Nonetheless, both companies have undergone significant changes to their respective strategies in the last few years and we look for the new management team to convey how it will position itself with respect to the energy transition.’
