The boards of Tullow Oil and Capricorn Energy have reached agreement on the terms of a recommended all-share merger.
Under the terms of the combination, each Capricorn shareholder will be entitled to receive 3.8068 new Tullow shares for each Capricorn share, ultimately holding 47% of the company.
A statement explained that the deal "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".
This diversified pan-African upstream portfolio is underpinned by low-cost producing assets, with a portfolio of incremental high return investment opportunities in Ghana, Egypt, Gabon and Côte d’Ivoire.
Capricorn’s Egypt portfolio also potentially provides significant opportunity to deliver self-funded growth production via infill drilling and low-cost exploration to sustain the resource base over time, while a resource development project in Kenya provides additional growth.
The "substantial prospective resource base" in Guyana and Mauritania provides material potential upside with limited capital exposure.
The combined group has "robust cash generation and a resilient balance sheet" while realising cost synergies.
With around $1.8bn of liquidity, the new group is expected to realise pre-tax net cash cost savings of $50m on an annual run-rate basis by the second anniversary of the completion, through the reduction of duplicate costs across board, operational, technical and administrative functions - including consolidation of office space and rationalisation of IT spend.
The Tullow board estimates that realisation of these net cash cost synergies will give rise to one-off costs of approximately $45m incurred in the two years post-completion of the combination.
Capricorn has suspended its previously announced $200m share buyback programme - other than in respect of the $25m tranche announced on 7 April, which is being conducted by JP Morgan Securities on a non-discretionary basis and will end no later than 6 July 2022.
Lower cost production could deliver forecast cumulative pre-financing free cash flows of $2.4bn over the 2022-2025 period at a flat nominal Brent price of $75 per barrel.
Base annual dividend of $60m, with additional returns driven by a disciplined, would be driven by a value-driven capital allocation framework.
Tullow currently has no distributable reserves and is therefore currently unable to pay dividends to shareholders. The board stated that it intends to address this issue by taking such steps, which may include a capital restructuring of the Tullow Group.
The combined group is committed to achieving net zero scope 1 and 2 emissions by 2030, through emissions reduction programmes underway in Ghana, Gabon, Côte d'Ivoire and Egypt and by offsetting hard to abate emissions through company-run nature-based solutions.
The board of directors and management of the group will comprise a mixture of individuals from Tullow and Capricorn. Upon completion, it is intended that:
- Phuthuma Nhleko, currently chair of Tullow, will become chair of the board of the group;
- Nicoletta Giadrossi, currently chair of Capricorn, will become senior independent director;
- Rahul Dhir, chief executive of Tullow, will become chief executive of the group;
- James Smith, chief financial officer of Capricorn, will become chief financial officer of the group.
The new board will include a further five non-executive directors drawn from both companies, with two to be current Tullow non-execs and three to be current Capricorn non-execs.
After almost 11 years as chief executive of Capricorn, Simon Thomson will step down on completion and will become chair of the Integration Steering Committee.
Thomson commented: "Our two companies share a track record and continued vision of responsible energy production to support the economic and social development of our host communities.
"This combination will allow the two companies to accelerate investment in new opportunities across the continent, while retaining a resilient balance sheet and delivering attractive returns to shareholders."
It is intended that the headquarters will be at Tullow's existing offices in London, although Capricorn's premises in Edinburgh will be retained - letting employees work flexibly from both.
Capricorn's directors intend to recommend, unanimously, that shareholders vote in favour of the scheme at the Court Meeting and the resolutions to be proposed at the Capricorn general meeting.
It is intended that the scheme document will be despatched to Capricorn shareholders around the fourth quarter.
Rahul Dhir, chief executive of Tullow, said: "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."
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