By Ian McConnell

Business Editor

EDINBURGH-based Capricorn Energy has agreed an all-share “merger of equals” with Tullow Oil, involving job losses, with the headquarters of the enlarged group located in London.

The deal, aimed at creating “a leading African energy company, listed in London”, will see Simon Thomson stand down as chief executive of Capricorn, which had a stock market worth of around £635 million last night after a 2.3p rise in its shares to 200.8p.

Mr Thomson has for 11 years been chief executive of Capricorn and its predecessor Cairn Energy, which was founded by former Scottish rugby international Sir Bill Gammell in the late-1980s.

Asked about the head office of the enlarged group being in London, given Capricorn and predecessor Cairn Energy had been based in Scotland since the late-1980s, Mr Thomson replied: “In terms of the legacy, I think if you asked Bill he would say the same thing – this is all about creating value for shareholders.

“Our view is this combination has greater potential to create value than the individual. Above all else, it is about how to create value.”

Mr Thomson will chair the “integration steering committee” being established to help with the combination of the two companies.

He will leave the enlarged group once the integration is complete, Capricorn noted.

Rahul Dhir, chief executive of London-based Tullow, will hold the same post in the enlarged group following the merger. And Tullow chairman Phuthuma Nhleko will chair the enlarged oil and gas company.

On completion of the merger, Capricorn shareholders will hold approximately 47 per cent of the combined group and Tullow investors around 53%.

Mr Thomson acknowledged there would be redundancies among Capricorn’s 220 staff, and at Tullow, as part of $50 million of annual cost savings envisaged from the deal.

He said there would be redundancies “across both companies…because there is duplication of roles”.

However, he added: “Aside from the duplication and dealing with that in a fair way, we will be able to offer people opportunities.”

Asked about Capricorn’s future view on the North Sea, given the enlarged group’s focus will be on Africa, Mr Thomson replied: “We have obviously got an interesting position there [in the North Sea] in terms of the southern gas basin – the things we are looking at.”

Referring to the Diadem well on which drilling is due to start this month, as part of a 50-50 programme between Capricorn and Shell, Mr Thomson noted: “We are about to drill a well in the mid-North Sea.”

In the context of the North Sea, he added: “There are some interesting opportunities. We will see how those pan out.

“The focus will be on Africa. Each company has additional exploration positions outside Africa. We will have to work those through and see how those work out.”

Mr Thomson emphasised that, while London would be the registered headquarters of the enlarged group, a presence in Edinburgh would be maintained.

He added: “There will still be a strong presence from that perspective.”

Tullow and Capricorn said of the headquarters plan for the enlarged group: “It is intended that, following completion of the combination, the headquarters of the combined group will be at Tullow’s existing offices in London and it is intended that the combined group will also retain premises in Edinburgh and through the application of a flexible work policy enable employees to operate from both premises.

“The combined group will comply with any obligations to inform and consult with employees and their representatives in respect of these intentions.”

Under the terms of the deal, which is expected to be completed in the fourth quarter of this year, Capricorn investors will receive 3.8068 new Tullow shares for each share they own in the Edinburgh-based company.

Mr Thomson said that an “ideal oil and gas company” would be “one that had scale…that had focus, that had growth potential” and had certainty on finances to be able to offer regular returns to shareholders, as he set out the rationale for the merger.

He declared the enlarged oil and gas group would have around one billion barrels of resources, and noted that its production would be approximately 100,000 barrels of oil equivalent per day (boepd), from Africa, flagging its presence across Ghana, Egypt, Gabon and Côte d’Ivoire.

The Capricorn chief executive highlighted his company’s existing presence in Egypt.

And he flagged potential to increase the enlarged group’s annual production over the next few years from around 100,000 to approximately120,000 boepd “just on the base case”.

Mr Thomson noted the enlarged group intended to make a minimum dividend distribution of $60m per annum, while noting potential for additional allocations to shareholders.

He said it had been a “pretty easy and a pretty short conversation” with Tullow Oil, which Capricorn knew well, about the merger.

Mr Thomson added: “The combination of our businesses will create a leading African energy company, with significant scale and opportunities for growth. Our two companies share a track record and continued vision of responsible energy production to support the economic and social development of our host communities. This combination will allow the two companies to accelerate investment in new opportunities across the continent, while retaining a resilient balance sheet and delivering attractive returns to shareholders.”

Laying out the rationale for the deal, the companies said: “The boards of Tullow and Capricorn believe the combination has compelling strategic, operational and financial rationale, with the ability to deliver substantial benefits to shareholders, host nations and other stakeholders.

“The combination represents a unique opportunity to create a leading African energy company, listed in London, with the financial flexibility and human resource capability to access and accelerate near-term organic growth, add new reserves and resources cost-effectively, generate significant future returns for shareholders, and pursue further consolidation.”