Kosmos, Tullow in early talks on potential merger to create West Africa-focused producer

US oil and gas company Kosmos Energy on December 12 confirmed it was in early talks for an all-share acquisition of Tullow Oil, a London-headquartered independent energy company, following media speculation.

Dallas-based Kosmos noted in a statement that the discussions with Tullow were “very preliminary” and there could be no certainty that any offer would be made, nor as to the terms of any such offer.

“A further announcement will be made as and when appropriate,” Kosmos said. However, according to stock exchange regulations, the company is required to declare by January 9 whether it intends to make an offer.

The merger of the two debt-laden companies would mark another step in the recent trend of energy sector consolidation, as boards aim to enhance performance through greater scale and cost reductions, Reuters reported on December 13.

The newly combined entity is projected to produce about 130,000 barrels of oil equivalent per day (boepd), based on both companies’ guidance for 2024, with operations spanning Mauritania, Senegal, Ghana, Equatorial Guinea on Africa’s west coast and the US Gulf of Mexico.

The news of the discussions emerged several days after Tullow CEO Rahul Dhir announced he would step down after four and a half years at the helm and would also resign from the board during 2025 “to pursue other business, academic and family interests”.

According to Dhir, during this period, Tullow has achieved a step change in its operating performance, cost structure and capital discipline, delivered over $1.1bn in free cash flow and reduced its net debt from $2.8bn to around $1.4bn.

“I am also very proud of our team’s strong culture of ownership and commitment to business delivery. With a strong pan-African platform, Tullow is well-positioned as a trusted partner and responsible operator to deliver the next phase of growth,” he said in a statement.

Tullow, established in the late 1980s, initially focused on exploration in Africa, the UK, and South Asia. It experienced significant growth in the 2000s through acquisitions and major discoveries, including the Jubilee field in Ghana, reaching a market value of nearly $22bn by 2012.

However, the explorer faced setbacks owing to operational challenges, underwhelming exploration results, leadership changes and waning investor interest as attention shifted towards the energy transition. 

An international arbitration court in London is set to deliver its verdict on a $400mn tax dispute between Tullow and Ghana’s Revenue Authority (GRA) by the end of 2024. The case involves multiple tax assessments, including a $320mn branch profits remittance tax (BPRT) imposed after audits of Tullow Ghana Limited (TGL) for the 2014-2016 financial years. Tullow argues that the tax falls outside the framework of its petroleum agreements and relevant double tax treaties.

In Kenya, after repeated setbacks, Tullow said in March it would write off $17.9mn worth of its assets in the East African country on the uncertainty over attracting a strategic investor and commercial exploitation of the Turkana oil deposit. In April, Tullow said it was eyeing 2028 for its inaugural commercial oil export. The projected timeline hinging on Tullow's ability to secure a strategic partner to help finance the project, especially following the exit of its joint venture (JV) partners, Canadian firm Africa Oil, and French behemoth TotalEnergies, in May 2023.

On Friday (December 13), Tullow’s market capitalisation had dropped to $480mn, with its shares declining over 7%. The company is quoted on the London and Ghana stock exchanges.

According to Bloomberg Intelligence analyst Will Hares, part of Tullow’s debt requires refinancing. “A deal would resolve Tullow’s balance sheet issues, but will have to address its imminent refinancing of its 2026 $1.4bn notes,” Hares said.

James Hosie, an analyst at Shore Capital Group, suggested in a note that Kosmos’ approach might be “somewhat opportunistic” given the news of leadership change at Tullow. He noted that while a deal could help resolve balance sheet issues, finding a structure that satisfies both shareholders and creditors remains a significant challenge.

Kosmos, a full-cycle deepwater explorer, is already a partner of Tullow in the Jubilee and Tweneboa Enyenra Ntomme (TEN) oilfields in Ghana. The company, with a market capitalisation of $1.5bn, saw its shares drop by about 15% following news of its talks with Tullow.

Kosmos, with a net debt of $2.7bn at the end of September, is anticipating the imminent start-up of the BP-operated Greater Tortue Ahmeyim (GTA) LNG project located offshore Senegal and Mauritania, Reuters reported. Kosmos is a partner in the GTA project, which aims to produce LNG for export and provide gas for domestic use in both Senegal and Mauritania.

“This would be a sensible deal, given the shared assets in West Africa, and with Kosmos having a more diverse asset base and healthier balance sheet, would have the ability to take on the mountain of debt Tullow labours under,” a Panmure Liberum analyst, Ashley Kelty, was quoted by the media agency as saying.

“The fact that Tullow's CEO is on the way out also makes the company weaker, with no clear direction on future strategy,” he added.