RE: The Times14 Jul 2022 13:50
Courtesy of ctc1 from the advn board
Tullow and Capricorn: gushing praise for merger of oil peers Emma Powell Thursday July 14 2022, 12.00am, The Times Tullow Oil is struggling to overcome a credibility problem, with the scars of an overambitious and risky expansion emblazoned on the oil producer’s balance sheet. An all-share merger with its peer, Capricorn Energy, should hasten the reduction in leverage and recovery in free cashflows. High debt and burdensome interest costs have prevented Tullow from capitalising on the steep rally in the oil price over the past 12 months, with the shares underperforming oil and gas peers. A tie-up with Capricorn would cut Tullow’s net debt of $2.1 billion at the end of last year, to $1.1 billion as part of a combined company, boosted by the near $700 million in cash on Capricorn’s balance sheet after a windfall settlement of a long-running tax dispute in India. Cost savings of about $50 million post-merger would free up extra cash. Funds could be used to pay down debt quicker and cut interest costs, reinvest in existing assets in the hope of boosting cash returns or a mixture of the two. Higher interest rates might make reducing debt faster an appealing option. Business briefingIn-depth analysis and comment on the latest financial and economic news from our award-winning Business teams.One-click sign up. The increased scale and better leverage should make it easier to refinance Tullow’s remaining debt, which can’t be done on better terms before May next year at the earliest. Having more cash is one thing, but to win back investors, Tullow must prove it can generate good returns. Allocating too much to high-risk exploration has been Tullow’s undoing. In 2019, it took the axe to production guidance and ousted its then-boss, sending the shares down more than two-thirds, a level from which they have barely recovered. With more cash in its back pocket, investors shouldn’t expect an enlarged company to return to the high-stakes speculation in years gone by, according to its boss, Rahul Dhir. By investing in increasing production from Capricorn’s assets in Egypt and Tullow’s oilfields in Ghana, Gabon and Kenya, management reckons free cashflows of $2.4 billion between this year and 2025 if the oil price stays at about $75 a barrel. Tullow’s average price during the first half of the year was $89 after the impact of hedging. More than 90 per cent of Tullow’s capital is invested in producing assets. Between 2017 and 2019 it was more like 50 per cent, with the remainder ploughed into high-risk exploration projects that destroyed value for shareholders. Post-2014, cashflow returns have frequently come in below its cost of capital, according to analysis by Quest, a division of brokerage Canaccord Genuity. Without the merger, analysts there forecast that trend will play out this year and the next. Analysts at Investec have factored in an average Brent crude price of $95 for this year, falling to $80 next year. Full-year
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