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U.S. oil and gas company Kosmos Energy (KOS.N), is in early talks for an all-share acquisition of Tullow Oil (TLW.L) that would create a West Africa-focused producer.
The merger of the two heavily indebted firms would be the latest in a recent wave of energy industry consolidation as company boards look to boost performance by increasing scale and cutting costs.
The combined company would have production of more than 130,000 barrels of oil equivalent per day (boepd), based on the two companies' 2024 guidance, spanning Mauritania, Senegal, Ghana and Equatorial Guinea on Africa's western coast as well as the U.S. Gulf of Mexico.
Tullow, whose CEO Rahul Dhir stepped down on Dec. 4, announced the Kosmos approach for an all-share acquisition on Thursday.
Kosmos later confirmed the preliminary discussions. It has a deadline of 5 p.m. London time on Jan. 9, 2025, to decide on a firm offer.
Tullow Oil was founded in the late 1980s as an exploration company focused on Africa, Britain and South Asia. It grew rapidly during the 2000s through a series of acquisitions and oil and gas discoveries, including the Jubilee field offshore Ghana.
Riding the energy boom, Tullow became a poster boy for the sector, reaching a market capitalisation of nearly $22 billion in 2012.
But it suffered a dramatic reversal of fortune after a string of operational issues at key oilfields, disappointing exploration results, leadership changes and the loss of investor interest in oil and gas drillers as the focus shifted to the energy transition.
Tullow's market capitalisation stood at $480 million on Friday, when its shares dipped by more than 7%. It has net debt of about $1.4 billion.
Kosmos, based in the Texan city of Dallas, has a market cap of $1.5 billion. Its shares were down by about 15% after the news of its approach on Thursday.
With net debt of $2.7 billion by the end of September, Kosmos is awaiting the imminent start-up of the BP-operated (BP.L) Tortue liquefied natural gas development offshore 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," said Panmure Liberum analyst Ashley Kelty.
"The fact that Tullow's CEO is on the way out also makes the company weaker, with no clear direction on future strategy."
Tullow's total production for the first half of 2024 was 63,700 boepd. Kosmos pumped 65,400 boepd in the third quarter. The two are partners in the Jubilee and Tweneboa Enyenra Ntomme (TEN) oilfields in Ghana.
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