Tullow has agreed to merge with Capricorn Energy, with Capricorn Energy shareholders to receive 3.8068 new Tullow shares for each Capricorn share held. Capricorn Shareholders will own 47% and Tullow Shareholders are to own 53% of the combined group, on completion of the deal.
The combined group is expected to result in pre-tax cost savings of $50m a year, and create a base annual dividend of $60m. Please remember no dividend is guaranteed.
The group said: “The Boards of Tullow and Capricorn believe the Combination has compelling strategic, operational and financial rationale, with the ability to deliver substantial benefits to shareholders, host nations and other stakeholders. 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”.
The merger is subject to approval from Tullow’s shareholders.
Tullow shares were unmoved following the announcement.
The proposed merger with Capricorn energy makes a great deal of sense in our view. However, we can’t rule out a capital restructuring of Tullow or the new combined group, in order for the ambitious dividend policy to happen. And before we know any of this for sure, the deal still needs the approval of Tullow’s shareholders. For now, that means Tullow’s stand-alone story should remain the focus.
We’re impressed, and relieved, by the progress Tullow’s made. At one point, we were concerned about the group’s ability to continue operating.
In particular, the successful debt refinancing is a crucial milestone, giving Tullow a chance to regroup. But it’s the recovery in the oil price that has been key. It’s helped support multiple asset sales and provided a much-needed boost to cashflows, and together with cost cutting means the balance sheet’s in much better condition.
The question now turns to one of delivery.
We’re pleased to see the group loosening the purse strings somewhat to support future growth. Debt reduction remains a priority, as it should, but if the group doesn’t continue to invest in its oilfields, they’ll eventually run dry. The bulk of its spending will be funnelled to Ghana, where growth should be relatively steady. The acquisition of a larger stake in this operation has gone through, which should mean a 6.8% bump up in average production. We’re also pleased to see the group kicking up new opportunities, with gas contract negotiations with the Government of Ghana potentially offering an additional 14% bump to production.
The more important area to watch is Kenya. A total redesign has been done, and the technical work complete. Early signs are positive and the group looks close to achieving its next big milestone as long as it can bring another strategic partner on board.
The buoyant environment has helped the group back on its feet. Unfortunately, that’s not what investors want to see from oil and gas producers during such an accommodative price environment. Tullow’s strained finances mean it hasn’t been able to capitalise on the higher price environment in the same way many of its peers have. It remains to be seen whether the group would be prepared to forge ahead if prices head in the other direction.
On top of the fact that Tullow’s fortunes right now are heavily dependent on oil prices remaining elevated, we’re concerned about the group’s position as we transition toward renewables. Many of Tullow’s peers are using the windfall of cash from higher prices to accelerate their transition to sustainable energy. Tullow’s not able to put the same firepower behind its own transition, which could become a problem down the road.
We can’t knock Tullow’s progress, but it’s hard to turn overly positive on an oil company that’s struggling to turn a profit in the most accommodative environment we’ve seen in some time. The group’s valued well below the long-term average, reflecting this concern. With the energy transition also looming further ahead, caution is warranted.
Tullow Oil key facts
- Price/Earnings ratio: 2.9
- 10-Year Average Price/Earnings ratio: 12.3
- Prospective dividend yield (next 12 months): 0%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
Ghana update (21 March 2022)
Tullow has upped its stakes in the Jubilee and TEN fields in Ghana, to 38.9% and 54.8% respectively. The group paid a total of $118m in cash for the purchase.
This should add an additional 4,000 barrels of oil equivalent per day (boepd) each year and Tullow increased production guidance to 59,000-65,000 boepd for 2022.
Increased ownership at the two fields will increase capital expenditure by $30m to $380m. Assuming oil prices of $75 per barrel, the larger stake should increase free cash flow by $300m between 2022 and 2026.
Full Year Results (9 March 2022)
Full year revenue fell $123m to $1.3bn, below market expectations. This reflected a 21% decline in production following the sale of Tullow’s interest in Equatorial Guinea and Gabon as well as lower production in the TEN fields. This was somewhat offset by higher oil prices.
The disposals helped underlying operating costs fall 19% and the group swung from a $1.0bn operating loss last year to an operating profit of $514.5m. However higher tax expenses and restructuring costs meant the group delivered a net loss of $81m, below market expectations.
Assuming an oil price of $75 per barrel, the group expects underlying cash flow to increase to $750m.
The group produced an average of 59,200 barrels of oil equivalent per day, (boepd), down from 74,900. This is expected to decline to between 55,000 and 61,000 next year with a further 5,000 boepd reduction following the sale of Occidental Petroleum’s interests in Ghana. The group produced 42,100 boepd in Ghana as increased production in the Jubilee field partially offset weaker than expected production in the TEN fields. Asset sales meant revenue fell from $963.5m to $910.6m. Underlying profits nearly tripled to $360.0m, helped by higher oil prices and lower maintenance costs.
Production from the group’s Non-Operated Portfolio averaged 17,200 boepd, driving revenue of $362.6m, down from $432.6m due to asset disposals. The segment reported a $243.4m underlying profit, an improvement from last year’s $410.2m underlying loss.
Development in Kenya continued with changes to the project expected to increase total capital expenditure to $3.4bn. The new design should lower unit costs to $22 per barrel from $31 per barrel. The group needs licence permission to continue exploration, which was submitted in December 2021. Its successful passage is dependent on the group bringing a new strategic partner onboard. This part of the business broke even, compared to a $430.0m underlying loss last year.
In 2021, the group sold assets in Equatorial Guinea and Gabon for $127.9m.
Capital expenditure is expected to rise to around $350m, with the bulk invested in Ghana.
Free cash flow fell 43% to $244.7m, reflecting fewer asset sales and an increase in finance costs. Net debt fell from $2.4bn to $2.1bn, or 2.2 times underlying cash profits (EBITDA). This was an improvement from 3 times last year, helped by improved profits and lower net debt.
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