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Where next for Tullow Oil and Capricorn’s £1.5bn merger?

Rows of oil barrels

The big question on the minds of Tullow Oil [TLW] investors ahead of its interim results announcement on Wednesday 14 September is whether its proposed acquisition of Capricorn Energy [CNE] will go ahead, and what will become of the Tullow Oil share price.

When Capricorn published its half-year earnings on 6 September, the company indicated that it was exploring alternative bidders amid investor and shareholder pressure.

Tullow entered an agreement to buy Capricorn in June in an all-stock deal that was to give the combined entity a value of around £1.5bn. But the transaction has been described by one large Capricorn investor as “ill-conceived”.

“The transaction undervalues Capricorn, benefits Tullow at our expense, and trades the certainty of our cash for speculative Tullow stock,” Eli Samaha, managing partner at Madison Avenue Partners, told Bloomberg in August.

Head of climate solutions at Legal and General Investment Management, Nick Stansbury, agrees. “[The] combination would not improve the resilience of Capricorn to the energy transition but worsen it,” he told Bloomberg. The firm had concerns about the “exposure of Capricorn shareholders to oil as opposed to gas markets”.

Full-year guidance reiterated

When Tullow Oil provided the market with an operational update for the first six months of 2022 on 13 July, it claimed that the merger with Capricorn would “create a leading African energy company with a material and diversified asset base and a portfolio of investment opportunities delivering visible production growth”.

Tullow Oil is mainly active in sub-Saharan Africa, with operations in Côte d’Ivoire, Gabon, Ghana and Kenya. Capricorn, meanwhile, operates in north Africa, in countries such as Mauritania and Egypt. The two companies previously worked together to control the onshore fringe of the Ivory Coast Basin between 2017 and 2021.

“This proposed merger will realise meaningful cost synergies and deliver a combined group with robust cash generation and a resilient balance sheet,” Tullow Oil added. Despite the positive outlook, the stock fell 2.8% following the announcement.

While the Tullow Oil share price is down 5.4% in the past month, the stock is up 5.5% year-to-date through 9 September at 48.98p. It has climbed 24.4% since setting a 52-week low of 39.38p on 7 July.

In the first half of the year, Tullow generated revenue of roughly $800m, including the cost of hedging. Capital expenditure was roughly $155m, while free cash flow was neutral.

The company expects full-year expenditure to be roughly $380m. It reiterated previously released guidance of $200m in full-year free cash flow. It also maintained production estimates for the full year of 59,000 to 65,000 barrels of oil equivalent per day. If merged with Capricorn, its production output would be expected to reach 100,000 barrels per day.

Merger hopes remain

Beyond the company’s half-year figures, investors and shareholders are paying close attention to whether Tullow Oil has plans to acquire any other smaller producers if the Capricorn deal collapses.

In its full-year report for fiscal 2021, Tullow Oil acknowledged possible commercial and financial risks from failing to grow the business via targeted investments in new and existing oil fields. Mergers and acquisitions were identified as a way to mitigate risk and improve the likelihood of meeting long-term production targets.

For his part, Tullow Oil CEO Rahul Dhir will still be hopeful that the Capricorn deal gets approved. He told Investor’s Chronicle last month that opposition to the merger had come from a combination of shareholders not understanding the benefits of the deal and investors buying into Capricorn post-merger announcement in the hope of forcing Tullow to increase its offer.

Jefferies analyst Mark Wilson believes the merger “makes sense strategically”. According to MarketBeat data, Tullow Oil shares currently have four ‘buy’ ratings from analysts and four ‘hold’ ratings. The consensus price target of 76.63p implies an upside of 56.4% from the 9 September closing price.


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