Africa-focused independents Tullow Oil and Capricorn Energy have agreed to a merger that they say will create a leading African energy company.
The two companies' boards have agreed that Tullow shareholders will hold around 53pc of the enlarged business, with the remaining 47pc being held by Capricorn's shareholders. They urged investors to back the plan, which they say will create a company holding "a material and diversified asset base, and a portfolio of investment opportunities delivering visible production growth."
The new company will own Tullow's producing assets in Ghana, Gabon and Ivory Coast, while Capricorn brings producing fields located in Egypt's Western Desert and an exploration portfolio in that country. Tullow holds exploration licences in Argentina and Guyana, while Capricorn operates an exploration licence in Mauritania that is targeting some 1bn bl of recoverable oil. The companies noted the enlarged business will have potential major resources from Tullow's Kenyan oil development project.
Together, Tullow and Capricorn will bring to the enlarged company combined reserves and resources estimated at 343mn and 696mn bl of oil equivalent (boe), respectively. The two companies reported production for 2021 that amounted to 96,000 boe/d.
Although the respective boards believe the combination has "compelling strategic, operational and financial rationale," analysts who follow the company have mixed views. Investment bank Stifel is sceptical, arguing that "both companies had the same problem — what to invest in next — and this deal does not solve it." Stifel noted Tullow has only the Kenya project as a development opportunity, which the bank said will offer low returns, while Capricorn could fund its Egyptian exploration portfolio by itself.
Auctus Advisors' Stephane Foucaud said the deal "follows a trend we are currently seeing that more materiality is better," citing the recent Aker BP merger with Lundin. He said the net cash that Capricorn brings will give a big boost to Tullow's balance sheet. In its results for 2021, Capricorn said that its net cash at the end of December stood at $133mn, but it received in February this year a $1.06bn tax refund from India, most of which was to be returned to shareholders.
"It seems the market is still paying a premium for a strong balance sheet," Foucaud said.
