Tullow Oil/Capricorn: a merger of necessity still adds strength

Tullow Oil/Capricorn: a merger of necessity still adds strength

Tullow Oil, which has long been a zombie stalking the exploration sector, is drilling into the burgeoning trend for all-share mergers. Its proposed £1.4bn tie-up with fellow London-listed African driller Capricorn (formerly Cairn) Energy could be just the ticket out of the twilight zone.

The 53/47 combination, as close to a merger of equals as pairings get, brings together capital with a place to allocate it. Tullow, which discovered the Jubilee field off the coast of Ghana, has struggled with excess debts ever since. Deleveraging its balance sheet is a key priority. Capricorn, beneficiary of a windfall payout following resolution of a longstanding tax dispute in India, has the cash to plug the gap.

Tullow shareholders will own 53 per cent of the new group to Capricorn’s 47 per cent. Tullow’s net debt, of 3.5 times ebitda last year, falls to 1.5 times for the group pro forma and should be below 1 by the year end. Annual cost savings of $50mn arise from pruned corporate overheads. 

The boom markets of 2012 meant money was no object when it came to drilling for oil: commodity prices and investment were both soaring. Now oil prices are once again through the roof, but commercial realities