Keeping Up With Capricorn: A Coup in the Making?

Capricorn’s shareholders, led by activist investor Palliser, refused to support a tie-up with the UK-based and Africa-focused independent oil and gas producer Tullow Oil, leading the company to look for other candidates for a potential merger. Then came the recommendation for the merger with the Israeli gas producer NewMed in late September 2022. 

Capricorn is one of the exploration and production company in our Oils equity research universe.

Amidst vehement protests that the NewMed merger massively undervalues Capricorn and because they were unhappy with the board’s performance, the shareholders called for the replacement of 7 of the 9 board members on 19 December 2022. 

Capricorn’s shareholders holding 32% of the issued capital sent a letter to the company’s board on 9 January 2023. The letter was submitted as Capricorn issued a notice announcing the date of a general meeting to vote on the removal of 7 board members and the appointment of 6 new board members previously proposed by Palliser, which holds 6.9% of Capricorn’s issued share capital. 

The Capricorn management plans to hold the general meeting for the board change on 1 February 2023 and hopes to obtain approval for the merger with NewMed Energy on the same date. 

A Coup in the Making?  

There could be a coup in the making at Capricorn after months of a governance problem in addition to bringing a clear strategy of growth and shareholder remuneration. 

Some shareholders claim that the newly reconstituted board will not have a proper opportunity to reassess the merits and terms of the NewMed transaction. There is legally more than enough time to vote on the merger with NewMed. The shareholders of NewMed will have time until 31 March 2023, with a longstop date option until 30 June 2023. Therefore, these shareholders claim that the management is tactically rushing the decision on the NewMed transaction in a move that does not serve the best interests of the shareholders. 

Palliser and other shareholders are proposing 6 names to replace 7 board members, including the CEO and CFO. To replace the incumbent CEO Simon Thomson, they will vote for the appointment of Hesham Mekawi ― the former head of BP North Africa with extensive knowledge and experience in Egypt where Capricorn’s production assets are located, and the company should focus on immediate value enhancement. Mekawi will surely bring much-needed dynamism to the company. 

In our view, Capricorn clearly needs to enhance its portfolio. Achieving accretive growth as an independent company will take time and investment, nonetheless. After years of failed and costly exploration ($3bn), the management was right to decide on a lucrative merger and NewMed seems to be a good candidate. Yet, there are clearly major issues to be solved by the Capricorn management and shareholders with regard to the NewMed merger or grander corporate strategy. 

The valuations are available on request.