Our Take: Wildcatters Discover New Business Model

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The planned merger of Africa-focused Tullow Oil and Capricorn Energy marks a coming together of two independents whose celebrated wildcat drilling stories have run their course. Billing their combination as a “merger of equals," Tullow and Capricorn will focus on developing their existing resource base — some 1 billion barrels of oil equivalent — and returning money to shareholders. Energy Intelligence sees the merger as further evidence that independents globally are shifting away from prospecting and toward production as they navigate dimming outlooks for frontier exploration and the need to attract a new investor base.

  • With a base annual dividend of $60 million and target of net-zero Scope 1 and 2 emissions by 2030, the new company will likely appeal to investors eyeing steady returns and sustainability, rather than the speculative investors of old hungry for the one-off payday a major find and farm-in bring. Tullow, best known for its Jubilee and Ten projects in Ghana, will be under pressure to pay down net debt — which stood at $2.1 billion at end-2021 — and reward shareholders rather than open up new frontiers. Indeed, Capricorn CFO James Smith, who will have the same role in the merged entity, says it will “only invest inorganically if it’s more compelling to do that than return value to shareholders or to reinvest in existing programs.”

  • We believe this prudent approach underscores a change in mindset among independents, which previously cared little for financial discipline and were expected to burn cash until they sold out. As well as generating around $5.7 billion per year in operating cash flow — at $100 oil — and achieving annual savings of $50 million through cost synergies, the merger will see Tullow and Capricorn benefit from diversification, according to Tullow CEO Rahul Dhir. Having assets across Ghana, Egypt, Gabon, Kenya and Cote d’Ivoire can release the two London-listed companies from the financing constraints of individual country ratings and achieve a lower cost of capital, he argues.

  • Independents are no longer taking the lead on frontier exploration. Both companies made their names as explorers but we note neither has notched a significant discovery for several years — the last of note made by Capricorn, then known as Cairn Energy, offshore Senegal in 2014. Their new focus will be raising production from 96,000 barrels of oil equivalent per day in 2021 to around 120,000 boe/d by 2025. While unlikely to take their combined market capitalization of some £1.45 billion ($1.82 billion) back to the dizzying heights of the early 2010s, when the wildcat model was in vogue, they must hope that's enough to win over investors.

  • Western oil majors have taken on the Africa exploration baton, farming into acreage with one another or bringing in national oil company partners rather than buying into discoveries by independents. Shell and TotalEnergies, for example, partner QatarEnergy on their respective Namibian Graff-1 and South African Brulpadda discoveries. 

M&A, Corporate Strategy , Exploration, Upstream Projects
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