Capricorn Energy defends NewMed deal amid opposition from Palliser

Capricorn Energy published an open letter to shareholders on Thursday in which it reaffirmed its support for a merger with NewMed Energy amid opposition from activist shareholder Palliser Capital.

Palliser, which holds a stake of around 6.6% in Capricorn, said in October that the proposed merger with NewMed was "another one-sided deal that does not reflect the company’s intrinsic value" and urged the company "to recognise that it need not be a forced seller".

Capricorn had previously abandoned a merger with Tullow Oil.

Palliser also put forward a "Value Optimisation Plan" should Capricorn fail to find a "superior deal". But Capricorn said in its letter to shareholders that it had reviewed Palliser’s plan in detail and that it is "based on an overstated value of Capricorn on a standalone basis".

"This is due to Palliser's reliance on several outdated and incorrect facts and assumptions, including being able to immediately return to shareholders approximately $620m in cash on a standalone basis, valuing the contingent value rights at over $300m and underestimating the costs and challenges associated with optimising the Egyptian fiscal terms," it said.

Capricorn said the plan also fails to reflect the time and costs associated with executing Palliser's plan and underestimates the value creation potential of the NewMed merger.

"Our analysis concluded that pursuing this plan would be likely to deliver less value with higher risk over a longer execution period," it said.

Capricorn said the combination with Israel-based NewMed will create a "world-class gas and energy champion" that will provide enhanced scale, liquidity and a superior investment case and generate around $3bn in unlevered free cash flow between 2023-2027 from existing assets, with a shareholder distribution policy of at least 30%.

It said: "The Capricorn board believes that, as a result of the combination, the combined group will have a very high-quality asset portfolio and a resilient revenue base generating regular returns to Capricorn shareholders.

"This includes the largest interest in the world-class Leviathan Field, enabling the combined group to provide gas to growing regional energy markets and potentially LNG to European and international markets."