 Upstream
Kosmos Energy has been described as the “natural acquirer” of Tullow Oil, analysts told Upstream, after the companies released statements notifying the market about a potential takeover being discussed.
The two companies issued press statements on Thursday, confirming that discussions are underway. Kosmos described the interaction so far as “very preliminary discussions.”
Analysts reacting to the news suggested the US-based player is arguably best placed to weigh the value of such a transaction, given its experience in the regions where Tullow is present and its understanding of the underlying assets.
“Given that Kosmos know the assets very well, they're the natural acquirer of Tullow if they did want to do it,” Daniel Slater, research director at Zeus Capital, told Upstream.
Tullow is the operator of the Jubilee and Twenboa-Enyenra-Ntomme (TEN) fields offshore Ghana, where Kosmos is a partner.
London-based Tullow’s other assets include operatorship of the long-stalled Lokichar oil project in Kenya as well as holdings in Ivory Coast, Gabon and Argentina.
Rahul Dhir is to step down as Tullow Oil chief executive.
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On a financial level, Slater said the company is “still relatively highly levered, but they've brought that leverage down quite a bit over the last few years”, making the prospect of a deal more attractive.
He believed a transaction would likely be a cash and stock deal.
On the deal's actual value, he said: “It's a question of, given the value of the debt, whether they can come to a price for the equity that is low enough for it to be attractive to Kosmos and high enough for it to be attractive to investors.”
Tullow has been facing challenges on a number of fronts, recently reporting production issues at Jubilee.
The company saw its share price plunge to a four-year low in late November, following a downgrade of its cash flow guidance for the year.
About a week later, Tullow announced its chief executive, Rahul Dhir, would be leaving next year, triggering another sharp drop.
The Tullow stock was down over 10% on Friday morning, following the news of the potential Kosmos merger.
“Having lost its touch in prospecting for hydrocarbons, seen sentiment towards its sector sour, and fallen into financial difficulties, Tullow’s life as a public company could soon come to an end in reduced circumstances,”; said Dan Coatsworth, investment analyst at AJ Bell.
Coatsworth noted that the stock had been gaining ground throughout this week, as media speculation suggested a deal may be on the cards. Today’s fall is a reaction to that earlier trend, he said.
Kosmos stock was also down 3% on Friday and, according to Zeus’ Slater, this may indicate investors are of getting more involved with assets that have had historical issues
“What the [share] price [movement] is telling you is they don't want more exposure to those assets,” he said.
If Kosmos does acquire Tullow, share price Angel analyst David Mirzai estimated their combined production would be north of 150,000 barrels of oil equivalent per day, some 60% generated by Kosmos based an 2024 figures.
Tullow Oil chief executive Rahul Dhir.
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“The proposed consolidation reflects the growing trend in the E&P sector to add scale and provide operational, financial and fiscal synergies that could unlock future growth by boosting liquidity and access to capital,” said Mirzai.
However, Mirzai argued that the negative share price reaction of both stocks to the deal "suggests that creating a $2-billion market cap E&P with over $4 billion of net debt may be too much for investors to swallow, despite the obvious operational synergies."
Total net debt of the two players is currently about $4.1 billion, some 65% of which is on Kosmos' books.
An oil executive familiar with Tullow well told Upstream that he can “see the logic” of the deal, pointing out there would be “a lot” of general and administrative cost savings, and would expect Tullow’s office in west London to close.
Both companies, said Mirzai, have focused on the delivery of a free cash flow inflection point in 2024 on the back of rising production and revenues against lower capital expenditures, with a 2025 strategy dedicated to debt reduction.
However, missed production targets have weighed on both share prices this year and, with significant debt still on the balance sheet, he said: “We think there is limited room for surprises compared to peers given the outlined capital allocation policy.”
Mirzai also expects other groups “to take an interest in Tullow’s operated portfolio.”
One name he highlighted is privately-owned Trident Energy, a London-based player focused on offshore operations — not exploration — in Africa, with its key asset being the producing Oveng-Okume-Ceiba oil complex offshore Equatorial Guinea, where Kosmos is a partner.
Mirzai also name-checked Carlyle Group, a private equity player that is backing up an E&P business led by former BP chief executive Tony Hayward that recently acquired the bulk of Energean's East Mediterranean portfolio.
Hayward met top Egyptian officials in London last week to discuss the company's investment plans, particularly for the Abu Qir gas complex. |
Kosmos Deal Would Ease Tullow Finances but Debt Presents Hurdle
by Bloomberg
A potential takeover by Kosmos Energy Ltd. could resolve Tullow Oil Plc’s balance sheet issues, but debt refinancing would be a challenge, according to analysts.
Both companies acknowledged early merger talks on Thursday, following media speculation. Together, they would create an Africa-focused explorer with production exceeding 120,000 barrels of oil equivalent a day. Under stock-exchange rules, Dallas-based Kosmos must announce whether or not it will make an offer by Jan. 9.
The discussions emerge days after Tullow Chief Executive Officer Rahul Dhir said he would step down after four years at the helm. While he refocused on the legacy assets in West Africa and improving the indebted firm’s finances, Tullow’s shares have slumped 39% this year.
The approach by Kosmos may be “somewhat opportunistic” due to the leadership change, James Hosie, an analyst at Shore Capital Group, said in a note. While a deal presents a way to address the balance sheet, a structure that appeases both shareholders and creditors remains a “key obstacle,” he said.
Tullow, headquartered in London, accumulated billions of dollars in debt from its free-spending days as a wildcatter. Part of that requires refinancing, according to Bloomberg Intelligence analyst Will Hares.
“A deal would resolve Tullow’s balance sheet issues, but will have to address its imminent refinancing of its 2026 $1.4 billion notes,” Hares said.
Tullow’s shares fell 10% in London on Friday, paring this week’s gain to 11%.
While Kosmos has operations spanning a wider swath of the continent, including a liquefied natural gas project with BP Plc in Senegal, it’s already a partner with Tullow in key fields in Ghana. |
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