Tullow caps comeback with Capricorn merger

Tullow Oil has agreed to combine with its UK rival Capricorn Energy through an all-share deal that will create an Africa-focused but London-listed oil and gas specialist with a market value of more than £1.4bn.

The deal marks a comeback for Tullow, whose future had been in doubt until it struck a critical $1.8bn refinancing deal last year. It also answers questions over the future strategy of Edinburgh-based Capricorn, previously known as Cairn Energy, which was stymied for years by a tax dispute with India that finally reached a settlement in 2021.

Under the terms of the deal, Capricorn investors will receive 3.8 new Tullow shares for each of their existing shares. Tullow’s investors will own 53 per cent of the combined group, with Capricorn shareholders taking the remaining 47 per cent.

The two companies said they believed the deal would create a “stronger, more resilient” African energy company that would be able to deliver sustainable shareholder returns. The combined group will have 1bn barrels of resources spread across countries including Ghana, Egypt, Gabon and Côte d’Ivoire.

“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, add new reserves and resources cost-effectively, generate significant future returns for shareholders, and pursue further consolidation,” the companies said on Wednesday.

Led by Tullow’s chief executive Rahul Dhir, the combined group will initially set a base dividend of $60mn a year. The companies expect annual savings of $50mn by the second year after the deal’s completion.

Tullow had faced significant questions over its future until last year when it raised $1.8bn via a bond offering to repay debts. It had warned that failure to secure that refinancing would result in a “significant risk” of insolvency.

Tullow endured a number of tumultuous years after it was forced to slash production forecasts and parted ways with its former chief executive Paul McDade at the end of 2019. It was subsequently forced to embark on a swingeing cost-cutting and disposals programme.

Under Dhir, who joined the company in July 2020, Tullow refocused on its core assets in west Africa. Shares in Tullow rose 1.83 per cent in London in early trading on Wednesday following the announcement of the deal. Capricorn was up 1.06 per cent.

Analysts at Investec said the combination will “ultimately provide a significant deleveraging event for Tullow given Capricorn’s significant cash balance”. At the end of 2021, Tullow had net debt of $2.1bn.