- Energy midcaps Tullow Oil and Capricorn Energy to merge
- 53/47 split between Tullow and Capricorn shareholders
Two of the UK’s oil and gas midcaps are looking to come out of this bull market on firmer ground by teaming up: Capricorn Energy (CNE) - formerly known as Cairn - and Tullow Oil (TLW) will merge to become a “leading African energy company” that would pay at least $60mn (£48mn) a year in dividends.
Capricorn is sitting on a cash pile after the settlement earlier this year of the years long fight with the government of India. It paid a special dividend of $500mn to its patient shareholders earlier this year, but has now suspended a $200mn share buyback programme in light of the deal. As per Stifel estimates, the company is sitting on net cash of up to $800mn.
Tullow, meanwhile, is coming off a near-death experience last year before it was able to swap out loans for a new $1.8bn bond issue. While the interest payments are high (at a 10.25 per cent yield), the arrangement held off a potential default. To ease the balance sheet pressure, Tullow also sold off assets in Equatorial Guinea and Gabon last year for an inital cash price of $140mn.
The company said in the merger announcement it would struggle to fund the $60mn dividend in its current financial state, and outlined a potential capital restructuring for itself or the combined group to make this possible.
Under the deal, Capricorn shareholders would get 3.8 ‘new’ Tullow shares for each share they hold, making the new company’s ownership split 53 per cent Tullow and 47 per cent Capricorn. The combined company would produce just under 100,000 barrels of oil equivalent a year.
The new company would be led by Tullow boss Rahul Dhir, while Capricorn chief executive Simon Thompson would retire on completion of the deal. The forecast for operational savings is $50mn a year in costs.
Thompson said the deal would create “significant scale and opportunities for growth”.
Stifel analyst Chris Wheaton said the deal did not solve a shared problem for both companies “of what to invest in next”. “We question the strategic rationale for this deal,” he said, adding that Capricorn's valuation was linked heavily to its cash holdings and therefore the benefits would land with Tullow and not Capricorn.
Other analysts were more positive on the deal.
Mark Wilson at Jefferies said it was a chance for both companies to find "strong individual identities post material changes to strategy", while Alex Smith at Investec said the combined company would have a "deep portfolio of incremental high return investment opportunities in Ghana, Egypt, Gabon, and Côte d'Ivoire".
For shareholders of Tullow, this is a great deal - the debt stresses go away and expansion projects get funded. For Capricorn shareholders, this looks like management looking around for ideas and grabbing one that offered them a readymade solution to the strategy question, no matter the box in which it came.
