Tullow Oil faces takeover of US rival Kosmos Energy

London-based Tullow Oil could be acquired by its larger US rival, Kosmos Energy, after the pair revealed preliminary talks.

The two companies responded to overnight media speculation in separate statements, confirming the possibility of a full takeover of the shares, but noting that there is no guarantee a formal offer will be made.

The West Africa-focused energy producer has been struggling to overcome huge debt, which it hopes to have reduced to $1.4 billion by the end of the year.

Tullow has seen its valuation fall from around £15bn at its 2012 peak to a market capitalization of just £379m today, according to LSEG data.

The group was on a winning streak of major oil field discoveries in Ghana and Uganda during the 2000s, but this came to an abrupt end. Debts skyrocketed after several failed exploration attempts.

The global race to net zero has also been increasingly damaging, with Tullow gradually calling for an end to its exploration efforts in recent years to focus on effective management of existing assets.

The shares took another hit last month when Tullow cut its free cash flow forecast, amid poor performance at its Jubilee field in Ghana.

Tullow’s current strategy aims to have less than $1 billion in net debt by 2025 and less than 1x cash leverage in the near term.

Potential suitor Kosmos has production operations and exploration opportunities offshore Ghana, Equatorial Guinea and in the deepwater Gulf of Mexico in the United States.

Kosmos, which itself has net debt of $2.7 billion, pumped 65,400 barrels of oil equivalent per day in the third quarter, compared to Tullow’s efforts of 63,700 barrels per day during the first half of the year.

Shore Capital analyst James Hosie said in a note: “The two companies share the same core assets (the Jubilee and TEN fields offshore Ghana), so there is a natural operational overlap and Kosmos will have a clear understanding of opportunities within the assets.

‘A transaction would give Kosmos operational ownership of both fields and create possibilities for operational synergies.

‘From Tullow’s perspective, a potential partnership with Kosmos could be a route to addressing its balance sheet as it needs to refinance the $1.3 billion in secured loan notes due in 2026.

“Overall, we see that a key obstacle to reaching a deal is finding a structure that satisfies shareholders and creditors of both companies and leaves the business with a solid capital structure.”