Interactive Investor

£1.4bn oil merger signals new era for ex-FTSE 100 pair

1st June 2022 13:22

Graeme Evans from interactive investor

Tullow Oil and Cairn Energy spent time in the FTSE 100 index on the back of earlier successes. Now the businesses are joining forces.

A planned £1.4 billion merger of Tullow Oil (LSE:TLW) and Capricorn Energy (LSE:CNE) brings together two former FTSE 100 companies whose shareholders have experienced plenty of recent uncertainty.

Debt-laden Tullow Oil’s survival owes much to a refinancing deal struck last May, while former Cairn Energy business Capricorn was impacted by a long-running tax dispute in India.

Now the pair are in stronger positions to announce a potential merger deal that will create an exploration and production company built around their Africa upstream assets.

It’s billed as a merger of equals, but shareholders of Tullow will end up holding 53% of the combined group. Starved of a dividend due to the balance sheet pressures, Tullow’s owners can look forward to a “sustainable” shareholder returns programme.

Capricorn shareholders will get 3.8068 new Tullow shares for each one of their own presently held. They are currently being returned $700 million (£556.8 million) after resolution of the tax dispute dating back to 2014 generated $1 billion (£800 million) from the Indian government.

As Cairn Energy, the company delivered huge returns for shareholders after its Rajasthan project became the largest onshore discovery in India for more than 25 years.

Cairn first joined the FTSE 100 index in 2004, when it replaced Bradford & Bingley, and after a promotion and relegation in 2005, eventually lost its blue-chip status in 2012. Between 2006 and 2012, $4.5 billion (£3.6 billion) was returned to shareholders as the Indian business was spun off into a separate listing and a majority stake then sold.

Senegal’s largest offshore discovery followed in 2014 and Capricorn was involved in UK North Sea projects Catcher and Kraken, which began production in 2017. Edinburgh-based Capricorn is now focused on interests in Egypt, Mauritania, Mexico, Suriname and the UK.

Tullow’s flagship projects include the Jubilee field in Ghana and its Simba field in Gabon, as well as Espoir in Côte d'Ivoire. Daily production improved markedly last year to 90,000 barrels a day as Tullow also reached agreement with lenders on tackling its debt mountain.

Boss Rahul Dhir, who has overseen a reduction in Tullow’s gearing from three to 2.2 times, will be in charge of the newly merged business. He said today: "Our two companies are a perfect fit and this combination draws on the proud heritage of both Tullow and Capricorn to create a leading African energy company.

“With renewed focus and ambition, the combined group will have the financial flexibility to accelerate organic growth and pursue further opportunities as they arise, while creating value for shareholders and host countries alike.”

After almost 11 years as chief executive of Capricorn, Simon Thomson will step down. The deal is expected to be completed in the fourth quarter of the year.

At a Brent price of $75 a barrel, the merger partners predict that “stable, low-cost production” can deliver free cash flows of $2.4 billion (£1.9 billion) over the 2022-2025 period. This will result in a base annual dividend of $60 million (£47.7 million), with the potential for additional returns.

Capricorn shares were 6.1p higher at 204.6p in the FTSE 250 index today. Tullow, which was founded in Dublin by Aidan Heavey in 1985 and listed in the FTSE 100 index between 2007 and 2015, rose 0.7p to 55.3p. Its shares had been above 200p in 2019.

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