Capricorn Energy LON:CNE, the FTSE250-listed oil and gas exploration and production company with operations primarily in Egypt, and projects in the North Sea, Mexico, Suriname, Israel and Mauritania, announced it half-year results today (6th September).
The company narrowed its losses from USD47.4m (GBP40.9m) in HY21 to USD37.3m. At the same time, Capricorn cut its full-year production outlook to 33,000 to 36,000 barrels of oil equivalent per day (boepd) from 37,000 to 43,000boepd as a result of the company drilling fewer oil wells in Egypt than anticipated this year. The company has been trying to maximise liquids recoveries in 1H22 in the prevailing oil price environment, reporting liquids currently contribute 41% of production.
James Smith, Capricorn’s chief financial officer explained in a presentation this morning: “We have revised our full year production forecast [downwards] to 33,000 to 36,000boepd.” Later in the presentation Capricorn Paul Mayland, chief operating officer confirmed that that it would be upscaling production in the second half of the year, with “…Two to five, and potentially six rigs operational and able to deploy on production in Egypt.”
Through its joint venture in Egypt, the company had managed to secure additional rig capacity in 4Q21 and Mayland confirmed: “The third rig began operations in 1Q22, delivering three wells in the period. The fourth and fifth rigs were subject to logistics and commissioning delays.”
Mayland continued: “One of them is now operating on its first well, and the final additional rig is undergoing commissioning activities and expected to begin operations before the end of 3Q22. Consequently, the number of wells drilled in 1H22 was lower than originally anticipated, and the full-year drilling and production outlook is therefore expected to be lower than planned.”
Smith said that this would mean that the capital expenditure reserved for this year, would be pushed onto 2023. The company reported capital expenditure of USD82m in 1H22, with a full year forecast net capital expenditure of USD175 to USD195m.
Capricorn Energy winning in India
One of the biggest developments over the quarter was the receipt of a tax refund of USD1.06bn from India. Chief executive, Simon Thomson said: “We were delighted to return more than USD500 million to shareholders following receipt of the India tax refund at the beginning of the year.”
This was achieved by enabling further shareholder returns with a USD500m tender offer and USD25m share buyback which completed in July.
The company opened trading today at 238.4p and had fallen to 230.3p by noon. The company has returned 17.5% over one-year and offered a year-to-date return of 22.3%. Shares have ranged between 168.1p and 248.4p over a 52-week period. The company has a market capitalisation of GBP738.5m.
Group net cash at end of 1H22 was USD631m, comprising USD809m cash and USD178m of debt
Capricorn’s flagship projects are in Egypt. In September 2021, the company together with consortium partner Cheiron, acquired a portfolio of upstream oil and gas production, development and exploration interests from Shell in the Western Desert onshore Egypt.
The producing fields are split over four distinct areas, each with different characteristics and geographies: The Obaiyed Area (Capricorn 50% WI) contains Egypt’s largest onshore gas field and includes the Obaiyed Concession and other producing concessions.
Badr El Din (Capricorn 50% WI) comprises five producing concessions, both oil and gas and North East Abu Gharadig (Capricorn 26% WI) comprises the concession covering the NEAG Tiba area and the NEAG Extension area. Alam El Shawish West (AESW) concession area (Capricorn 20% WI). The company has an active exploration programme in Egypt, to discover new commercial volumes to replace the producing reserves in order to sustain Capricorn Egypt production from 2025 onwards.
Elephant in the Room
The biggest issue facing Capricorn was the proposed merger with Tullow Oil LON:TLW which sparked an increasingly fractious shareholder revolt last month, where Palliser Capital – which holds over 5% of Capricorn’s stock – said: “…rather than the touted ‘merger of equals’, the proposed merger appears to us to be a poorly disguised nil-premium takeover of Capricorn by Tullow…”
The fund manager argued that the merger was not in the interests of Capricorn shareholders as it would see Tullow use Capricorn’s strong cash position to pay down its debt in return for paper in Tullow. Palliser also said that Tullow and Capricorn’s managements’ assertion that the merger would create a world-class African energy company was ridiculous, given the fact that the companies were in such different geographies (West Africa and Egypt) and operated in different ways (offshore and onshore).
Palliser claimed that: “…the proposed merger materially undervalues Capricorn and its straightforward asset base, which includes a substantial net cash position, low-risk contingent receivables and a high-quality, opportunity-rich Egyptian portfolio.”
Palliser was joined by Legal & General Investment Management and Kite Lake in criticizing the deal and called for a strategic review at Capricorn. L&G holds around 4% in Capricorn, while hedge fund, Kite Lake has interests worth 6.7%.
Despite repeated requests for further information, management refused to be drawn on the subject. Thomson read a statement, which said: “The board continues to believe that the proposed merger with Tullow can deliver significant long-term value for shareholders through creating a leading, Africa-focused energy company.”
Thomson continued: “…The Board is also mindful of the impact of external factors and market conditions and is, as always, assessing all options to maximise value for shareholders. The company is exploring a number of expressions of interest relating to alternative transactions and is engaging with those parties expressing interest to evaluate potential outcomes.”
He confirmed on the call that the company was continuing with the proposed merger with Tullow Oil, but also was talking to two to three other potential partners.
