Capricorn Energy PLC (CNE) Earnings Call Transcript & Summary

Well, good morning, everybody, and thank you for joining this meeting. I'm Simon Thomson, CEO of Capricorn. And with me are Rahul Dhir, CEO of Tullow; and James Smith, CFO of Capricorn. We've got a presentation to run through with you this morning, and we'd be very happy to take questions at the end. It is being webcast. [Operator Instructions] So this is a very exciting day for both companies as we announce our intention to combine in a merger of equals to create a leading African energy company. Our view is that this merger creates a compelling investment proposition built around scale, focus, growth and returns. In terms of scale, the combined group, which will have a new name, will have a significant 1 billion-barrel resource base and it will produce around about 100,000 barrels equivalent per day net. And that will be from a material and diversified resource base across the African continent. That brings me to the next point, focus. We will have a focus on Africa where we are well positioned to build on our successful joint heritage as companies who have been involved for many years. Growth. In terms of growth, we will have the financial flexibility to invest in, and importantly, to accelerate the growth within our portfolio. I will also be able to take advantage of further accretive opportunities as they arise because we'll have the financial flexibility to do so. The focus very much in the first instance will be on our own portfolio because we've seen so many opportunities there to access near-term growth. And returns. So we will have a transparent and disciplined return framework. There's a base annual dividend of $60 million, and additional returns will be driven by a disciplined approach to capital allocation. which I think is very much the hallmark of Rahul, and I hope is recognized as the whole market of James and I as well. So very much a shared vision in that respect. And look, as responsible and highly experienced operators, we're targeting 2030 for net zero Scope 1 and Scope 2 emissions. And we've got a clear pathway to be able to achieve that. But in addition, we want to be an enabler for the just transition for our host governments in Africa facing to development natural resources for economic and social development. With that summary, I'll hand over to Rahul.

Okay. Well, thank you, Simon. And I think it is a momentous day indeed. And it's like just over the past few weeks, I think our teams, respective teams, advisers, they all work very hard together, very collaboratively to -- on this project. So -- and for me, it's been fantastic to reconnect with Simon. I think we've known each other for, I don't know, 16, 17 years. James actually longer than that. And many old colleagues and friends. And really, as Simon said, we've come together with a shared purpose, which is really to focus on the responsible resource development in Africa. And it builds on the kind of combined history of the 2 companies that are delivering value to our host nations. I think the foundation of the combined group is around some very structurally advantaged assets. And that will deliver about 100,000 barrels a day expected this year. And it's a low cost of approximately $12 per barrel of oil equivalent. And what that -- the benefit of that is it's a low cost, which means you get high margins, cash flows even at low prices. The resource base that underpins these assets, and this is key, really, that provides a very material pipeline of short-cycle, high-return opportunities and I'll talk more about that. And these drive very visible growth. The entire capital program, because this is also key, is self-funded. And with a strong balance sheet, we have the ability then to high grade this to also further accelerate, as Simon said. Interestingly, from our perspective, the group has a deep expertise, which is really combining a very strong onshore operation with offshore. And I think that balance of the experience and the skills is quite critical as we look to maximize the value from the existing opportunities that we have, but also as Simon said, to look at other opportunities. Now I think it's not surprising kind of given the strong overlap of the Board, of the group and the corporate functions in the U.K. We've already identified synergies of $15 million. And -- but at the same time, we don't expect any impact on our operations' organizations across Ghana, across Egypt, Gabon, Côte d'Ivoire or Kenya. I think James will explain this better, but with a stronger balance sheet and cash flow generation, we'll be able to optimize the capital structure better. And that will help drive down the cost of capital, which is quite key in the environment we are in. And naturally, I think if you have a stronger and more resilient business with better place to deliver more value for our host nations, more impact for those communities. Now again, I come back to a point that Simon highlighted, which is that both the companies have a deep, deep commitment to environmental stewardship and the combination obviously reinforces that commitment. And I think it's further driving us to improve the environmental performance of the combined group. So I think our view is that this offers a very compelling but also a very unique proposition because the -- there isn't anything else like this. And so maybe I think to substantially put it, it's taking on trust, but I'll explain to you why I take it. Let me start maybe just an overview of the resource base for the combined group. So it's a 1 billion-barrel resource that's -- this really kind of illustrates the point that Simon made about scale and the diversity of the resource space. And you can see the resources, West Africa, North Africa, East Africa. So when we say some leading African energy company that we source basically underpins that. It's also the scale of that illustrates a very significant organic growth potential. I think there is a benefit from -- on the production side from diversity as well. So you can see the production that is 2P reserves of production, both in terms of geography, but also in terms of oil and gas. So as you see, about 76% of the production is liquids, the rest is all gas. Now importantly, Ghana will continue to be at the heart of the combined group. So with over, as you can see, with over 60% of the 2P reserves but also underpinning some very visible growth in both production and cash flows. I think the production from Egypt, which is stable, Gabon, Côte d'Ivoire, I think, that provides additional growth but also provides diversity, so from a risk mitigation point of view. We've got a significant resource in Kenya, which is discovered. I think some of you have heard me talk about the work that we've done in terms of creating a very compelling development plan there, which is robust at low prices. We're making good progress on the farm-down, and we'll update that -- you all in due course. I think critically, these are long-life, low-cost assets, I think, as I said to you. So let me perhaps perform the basis for the self-funded growth. So let me explain to you where that is going to come from. So I promise I won't talk about all the individual projects. But there is a reason why I put all of this because I wanted to really highlight kind of this year. So first is, there is a tremendous breadth and depth of investment opportunities across our producing assets. And you can see that here. In our base case, we deliver over 120,000 barrels a day of production by 2025. So there's a tremendous amount of kind of tangible visibility we have. The second point is, and that's why James is excited about this, we have a lot of discretion in our capital spend and that's both up and down. So again, historically, as you know, it's all about balance sheet constraint. So with those capital constraints, you're trying to optimize your capital allocation within that. I think it says there's constraints today, there's an opportunity across the entire portfolio to be able to high-grade spend, to be able to accelerate. And that, I think, is a tremendous driver of value creation for the group. And I think post the completion, we'll have a proper Capital Markets Day and be able to outline that in more detail. But to give you kind of a couple of examples, right? So like if you think in Ghana, right, we have outlined our goal, the potential for Jubilee to get to 100,000 barrels a day or to get to 50,000 barrels a day. I think we're in a position to, even today, to start accelerating kind of that reality. So in Q3, you'll see us commit to a second rig that we'll bring on in the first half of 2023. I think similarly in Egypt, we're talking about bringing work. As Simon said, we're bringing 2 additional rigs, which is expected to start during this year. So that's in addition to the current 3 that are there. I think, as I said before, there is -- in addition to all this, we have significant option value, in Kenya, with the discovered resource. In terms of the exploration, there's a tremendous amount of commonality and approach between both the companies. Tremendous focus on the exploration of oil-producing assets. So whether it's in Egypt, whether it's in Gabon, whether it's Côte d'Ivoire. So this is really almost what I call short-cycle exploration, so which is accessible to infrastructure you discover, you put it on stream quickly. And also, I think we both have, whether it's in Mauritania or Guyana, some high-impact opportunity with limited capital exposure. So when you look at this, you can see there's a compelling proposition where we have the ability to drive growth visibly to deliver value. And importantly, not just for our shareholders, to those of you on the call, but also for our host mention. So let me elaborate a little bit on that part because, really, host nations and communities for us are very critical stakeholders. I think both of us independently, both Tullow and Capricorn, we have delivered and we continue to deliver significant value for host nations through our discoveries. And that's kind of why we've put this chart about discoveries here. And it was a little bit of kind of looking back in time, I mean, in India, when Simon and I worked together, we discovered over 2 billion barrels of oil equivalent and invested about $6 billion in Rajasthan, right? That's huge. But that generated $20 billion of value for India. That's material, right? I think if you look in Ghana, we've talked about the Ghana value maximization plan, $4.5 billion of capital spend, which will create over $12 billion in value for the nation, again, very material. The Kenya project, right, which is we're targeting a resource base of 600 million barrels of oil equivalent, plateau production of 120,000 barrels a day. That will deliver material value. So really at the heart of this new company, a leading company in Africa, the ability to create and be integral to the economic and social development of our stations is quite key. I think the -- that [ reason in ] business, I think, will deliver additional benefits around local content within our supply chains where we ensure that we're building capability around social investment program. So we're working with local and national governments in terms of helping and supporting kind of their priorities. So for example, like in Ghana, we've been very active in the senior high schools program, and that's something that we feel very privileged to be part of, the support through material resources we're providing, which gives us broader access to education systems. I think another part which is quite critical is the focus on natural gas, right? And that is a kind of 2- or 3-part story. So one is we take access to energy and power to Ghana, right, so which is not the case in, in and out of Africa. So in Ghana, for example, 25% of population doesn't have access to power. In Côte d'Ivoire, it's 36%. You go to a rural area, that's substantially more, right? So the gas -- whether we look at the gas in Egypt or if we look at our gas resources in Ghana, becomes a critical, critical driver for giving energy access to people. It's a critical driver as you displace expensive diesel. It's a critical driver as you displace charcoal. So it's also energy security today is a critical thing. As you've seen gas flows away from Africa to Europe, right? That's creating a gap of -- or a challenge of energy security in Africa. So we feel like we have a tremendous partner for those governments in ensuring energy security. And also, gas as a driver for industrial development. So I think it's something which you'll hear us talk more about, but this is a key theme for the new company, which is really being a true partner for our host nations and communities. And the other dimension of that is environmental stewardship. And then you want to talk about environment in 2 parts. So there is a big focus around emissions, but it's more than that. But emissions, let's start with that because I think we're fully committed to reducing emissions and to being, as Simon said, a responsible developer for oil and gas. So we're targeting a net zero on Scope 1 and Scope 2 CO2 emissions by 2030. And there is a clear plan around it. So this is not just an ambition. So -- and the plan is in 2 parts. So there are very tangible emissions reductions programs that are underway in Egypt, in Gabon, in Ghana. So this is all well-defined projects and that's all kind of budgeted and part of our respective business plans. But in addition to that, what we're looking at is there are residual emissions which were offset by a lot of nature-based carbon offsets. And the key here is that we want to drive these ourselves because, in essence, a lot of the nature-based programs are really social programs, and they are in our nation in both communities. So we feel that's very important for these projects to be done by us and -- but independently verified. And that means that it's not just about emissions, but it's also much more comprehensive about the social impact. And we know it's not a complete solution to managing the emissions, but we think it can go a long way in terms of mitigating the impact. And like I said, it's not just about emissions. And again, over time, we'll talk much more about broadening the narrative to showcase to you what we're doing in other areas where, for example, in biodiversity, where we're using our presence in the field. Whether it's onshore or offshore, really to focus, for example, in monitoring, protecting one of the species. So that's something, I think, again that's near and dear to the culture, the heart and the ethos of both the companies. So I'm going to move away from this to a bit more kind of into, first, to James who can talk about how the value manifests. And then I'll come back and conclude. So James, over to you, please.

Thanks, Rahul. So on the next few slides, I'll run through the cash flow generation capacity of the combined business, which really underpins the value-creation opportunity set. And then we'll look at what that means for the balance sheet as we roll forward. And I'll also set out how we're thinking about the capital allocation framework. So as Rahul and Simon have both mentioned, the combined business has significant potential for accelerated organic growth as well as the capacity for inorganic expansion over time. But what we set out on this slide is just the cash flow generation from that base business plan, which will take us from 100,000 barrels of oil equivalent a day currently through to about 120,000 by 2025. And as you can see, the portfolio is extremely robust at low oil prices and that's as a result of the low average production cost and G&A. So forecast to generate $3.5 billion of operating cash flow and $1.1 billion of free cash flow before debt service, even at $55 Brent flat from today. Obviously, at oil prices because today, revenues will be significantly higher, and that benefits all of our stakeholders, our host governments as well as our shareholders. And you can see at $100 Brent, we would expect operating cash flow of $5.7 billion and prefinancing free cash flow of $3.6 million over the same period. And it's worth just reiterating points made, these cash flows take account on this page of the benefits of expected annual synergies of $50 million a year, which is obviously clearly a material source of value for the combined business, which we don't have on a stand-alone basis. So looking now at the combined balance sheet. You can see the combined group had a net debt-to-EBITDA multiple pro forma for year-end 2021 at 1.5x and combined liquidity of $1.8 billion. That's from balance sheet cash and undrawn bank facilities. But I think the important thing to point out is that by year-end 2022, so the expected sort of start date for the combined entity, we expect that leverage multiple to be below 1x and then deleveraging further thereafter as a result of the cash flows that you've seen on the previous slide. So clearly, that's a very strong starting position for the combined group. It gives us the flexibility to optimize the capital structure by reducing the quantum of debt and potentially the cost of the group's debt and thereby maximizing the cash flow available for enhancing equity value. So I think just to summarize on the balance sheet. It's important to stress that we're committed to maintaining a prudent level of balance sheet debt and one that we're confident will keep leverage multiples modest even when tested at lower oil prices. However, the strength of the cash flow generation profile from the asset base is such that we believe we can do that and maintain that prudence at the same time as generating significant capacity to accelerate high-return organic opportunities to consider inorganic expansion and to deliver consistent and meaningful returns to shareholders. And on that note, we set out on the slide a framework or, if you like, priorities for capital allocation. First and foremost, we'll invest to grow and indeed to decarbonize the core production base across Ghana, Egypt, Gabon and Cote d'Ivoire, which is where our best defined and most deliverable investment opportunities lie. After that, as we've mentioned, we'll continue to ensure that we maintain a balance sheet that is prudent through price cycles. Initially, we'll focus on optimizing the capital structure, the debt stack base completion, and at all times, we'll design a capital program to ensure that we maintain that ongoing resilience of the balance sheet. Taking that into account and looking at the combined cash flow strength of the business, we're committing to a base annual dividend of $60 million, which again is set at the level we're confident can be delivered through the cycle. As you've heard from all of us, as seen in the previous slides, we expect to have significant free cash flow after that base business plan. And those cash flows that can support investment in the diversified portfolio of high-return organic opportunities that will deliver accelerated growth from that portfolio. And then at the bottom there, you see our plans for cash flows generated at higher oil prices and those allow us to consider additional shareholder returns. But also to support our capacity to act as a regional consolidator if and when we see compelling opportunities to do that. And on that note, I'll hand back to Rahul.

Okay. Thank you, James. So as I said, it's been a collaborative effort and that sort of really underpins this merger of equals. It's been recommended by both the Boards. Restructuring this as an all-share combination where Tullow would issue new shares to Capricorn shareholders at an exchange ratio. And I'm not going to read all the [indiscernible] points, but about 3.8 new shares for each Capricorn share. But it's important that the exchange ratio really reflects the share price performance of both the companies over the recent period. So when you do the math, post the combination, the Tullow shareholders would own about 53% of the combined entity and Capricorn shareholders would own 47% of the combined group. I think we're very privileged across both the companies. We have very experienced people as non-execs. Phuthuma Nhleko, who joined our Board recently, will continue as the Chair of the combined group. Nicoletta Giadrossi, who's the senior -- who's the chair of Capricorn, she's come on board as a senior Independent Director. And I'll continue as CEO and James, who will join Simon and I working together again after 18 years?

Yes, something like that. Yes. He didn't want to say that because that makes him seem like older.

And Simon, who will share with me, very important because we [indiscernible] the integration here. So that -- really, I think the combined group gets the benefit of the leadership experience as the combined -- the best talent and skills from both teams. And I think we're targeting getting the deal to complete by the end of the year post receipt of any relevant regulatory consents and the shareholder approvals. So interesting, if you -- [indiscernible] sort of rhetorical question, but if you're a blank sheet of paper. You're a blank sheet of paper and you wanted to create a company that was relevant in today's world that was impactful and also have the ability to create value for shareholders and host nations and a company that you, as shareholders, but also employees were really excited to be part of. What would the company look like, right? And we can also give you the answer. But I think you'd want a company that had scale, that had visibility on growth, that had focus. But also would have the ability to deliver tangible returns while ensuring responsible development, right? That's a lot to ask for. But I think today, we're creating that company because that company doesn't exist. I think today, we're creating the company by combining Capricorn and Tullow. And I think that, to me, is the excitement that we bring. So just to -- so that -- as they're kind of leading African energy company with 100,000 barrels a day of production, 1 billion barrels of resource across Africa, that's got materiality and diversity with a deep portfolio of short-cycle, high-return opportunities. We can deliver visible growth. We can deliver cash flows. And that's all through a self-funded investment program. The balance sheet cash flows that James talked about, that helps us further accelerate this investment. But at the same time, deliver tangible returns to shareholders in a predictable manner. So I believe, I think that's the conviction that we have as a team. That's the conviction the Board has, that this will become a milestone investment. I think this will be a company that people will want to own, not just have to own. But equally, it will be a trusted and a credible partner even more so than we are today for our host nations and other stakeholders. So look, I think that we'll conclude, but really look forward to your support as we take this merger forward and look to create this very exciting company. So thank you again for your time, but we're open for your questions. Starting in the room.

Alex Smith from Investec. Congratulations on the merger. I guess the first question is just on the medium-term ambition of the new group. You mentioned the upside of $100 per barrel oil, $3.5 billion of free cash flow. You now have the scale and the opportunity. But what do you guys do with the cash? Are you going to be a free cash flow dividend vehicle? Do you have other E&Ps in the sector paying 10% dividend yields? Or is the opportunity to go out there and acquire more assets across the African region? There are plenty of disposals coming. We see all the majors already dispose their assets at quite good multiples. You now have the scale and no need to deleverage. So is there opportunity there? And then second of all, can you refinance earlier under the corporate action announcement or when the next time for you to bring down your cost of debt?

We can do that in 2 parts. So maybe let me answer kind of the growth part and then James can cover the capital return and the refi piece. So I think, Alex, the -- what's exciting to me is, again, if you have a well-defined opportunity set and I think certainly kind of, at Tullow, I think to some extent also true, but I think there is a constraint, a capital-constrained investment portfolio right now. So I think we can do better together from an investment point of view. So I would say base case, you're going from 100,000 to 120,000 barrels a day. We've got 10 enhancement projects. We can bring additional rigs into Egypt. We're looking at gas development. We're looking to bring in a second rig early in the first half of next year. So I think there's a lot we can do to deliver visible growth organically in the near term, right? That is a pretty good choice to be. I think that excites us. I think Kenya is a big thing because, again, we'll update you guys in due course, but that provides us visibility kind of production growth in the beyond '25 time frame. And then you have all the options you talked about. So I think before we think inorganic, before we think inorganic, I think we have a tremendous opportunity set within great portfolio that we can unlock, right? And then I think -- I don't want to steal James' thunder, but I think his focus is very much on this kind of very disciplined capital allocation and balancing that return. So let me not.

I think on shareholder distributions, I mean, the important thing to say is that we've set the base dividend level of $60 million because we think that is meaningful but also sustainable through the cycle. And that's our thinking around setting it at that level. As Rahul said, it's a good place to be in to be able to make these capital allocation decisions between having reinvestment opportunities within the existing portfolio, which are compelling, the flexibility to expand through inorganic growth if we see compelling opportunities to do that. And clearly, as ever to weigh those both up against returning more to shareholders. And it will be a disciplined capital allocation process across those 3, right? I mean we will only expanding organically if it's more compelling to do that than to return value to shareholders or to reinvest in existing programs. I mean it's kind of obvious things to say. But I think what we've designed here is a business that enables us to make those decisions. On the debt stack, I mean, I think you wouldn't expect me to say too much about plans for refinancing, that was your word at this stage. But as we said, what the physician will be in is one of strength, less than 1x leverage, obviously, very significant liquidity available at the point of when we envisage the inception of this combined business, puts us in a strong position to optimize that. And clearly, the net debt position will be low. There's an opportunity to reduce the overall debt quantum quite significantly. And obviously, we'll be looking at the cost and structure of our debt, too.

Colin Grant from Davy. Congrats on the announcement this morning. Just in terms of the guidance you've given here in terms of the combined cumulative outlook of $2.4 billion of CapEx between '20 and '25. You mentioned there you can see production going from 100,000 to 120,000 barrels a day and just want to run through if that's captured within these numbers. And what specific areas and how you're working on how to prioritize, whether it's in Ghana or Egypt or how do you work that out?

So Colin, right now, what you have is the kind of very simplistic just to kind of an aggregation of both. So what is missing, which is what I think we would love to come back to in a proper kind of capital market day is to say how -- what does the optimized program looks like. So I think, to be honest with you, I think all we've done is just added the 2 together. So there's a lot more optimization. But I think the key is what James said, which is that we've got a balance sheet, right? It's unconstrained. So there's a lot more you can do when you have this massive opportunity set. And -- but that requires thought, I think. So I think just be patient, but we'll come back to you. It is going to look more interesting [ later ].

I mean just to be on the specific point, the $2.4 billion you saw on that slide earlier on, I mean, that's the capital program. I mean, as Rahul said, it's just added together at this time, that delivers that 100,000 to 120,000 barrels of oil a day over the next 4 years. So it's that base investment program, not an acceleration of anything else beyond that.

[ Fred Binka from Fallon ]. Congrats, Rahul and colleagues. I guess, one question I had on the regulatory side. Is that just from a U.K. basis or sort of places like the regulators in Ghana and Egypt, will that factor in, in terms of the hurdles you need to pass?

So that -- I think that what we could see I think -- we work globally with those governments everywhere we go. I think both companies have a tremendous track record of good relationships. I think we certainly would -- the way we see it is the real question because we need support from those governments as we look to accelerate programs. I think -- so the wider question, I think, really is making sure that we bring people along on this. And that's who we are engaging with people and making sure we have their support. And the specifics, I think we will share kind of in due course in terms of what specifics are required.

Okay. We can now take questions from the conference call.

[Operator Instructions] The first question comes from the line of Nathan Piper from Investec.

Congratulations on the merger. I wonder if you could answer this question. I think Alex already asked a question already. But on the competition for capital in the new portfolio, how can fixed gas price, high tax gas in Egypt compete for capital with high-return oil price leverage investment opportunities in Ghana? I mean how do you see the quality and the ability of this portfolio to be capital internally? And I guess, secondly, is there any further progress on securing a deal in Kenya? Or does this new group have a different outlook on how they might tackle developing the Kenya opportunity?

Nathan, this is James. I mean just in terms of the competition for capital across the portfolio, I mean, we're obviously at the early stages of setting out what those capital priorities will be. But if you plot a chart as we started to do of the IRRs by project across the portfolio, you can see at the top end of those the smattering of Egypt, Gabon and Ghana and others altogether. Clearly, there are different types of investments in Egypt that's partly about small incremental things that can be done to expand gas production capacity, debottlenecking, well workover, incremental drilling. But as you know, in Egypt, we've also had a focus more recently on drilling wells that are targeting increase in liquids production. We've been increasing the liquid percentage of that production. So I would say, actually, when we started to clock that chart, the countries all overlap each other quite a lot in terms of the returns from investment opportunities.

And just to echo that, Nathan, I think it's, as you know, kind of we're driven very much by a very rigorous capital allocation framework. So I think James kind of thinks the same as I do in that. We're going to continue to drive that. I think it's about short-cycle, high-return opportunities. And I think also diversifying it. So you do mitigate your initial risk. You asked about Kenya, I think it's -- we're making -- I mean, I would say what I said at the AGM. So it sounds a little bit competitive, but it still happens to be true, which is making good progress, I think, in terms of our farm-down efforts in terms of being a strategic partner in. So it doesn't change, to your question, is I don't think it does not change that strategy. I think we like the project a lot. I think -- we believe it's important to bring in a strategic partner to help mitigate some of our capital exposure. But Kenya very much, I think, becomes even more central to this idea of creating a leading African energy companies. So it's kind of -- you think about a business that's strong in West Africa, North Africa, East Africa. So I think if anything, Kenya to me becomes even more central and that effort sort of continues. So again, I'll say something which is very initially. In due course, I guess, you will hear so much.

But I guess, you have the Kenyan elections in early August. I mean, is that sort of a point in time to focus on where there might be -- is that the due course [indiscernible] something that's happening before early August?

I love it. Look, I think it's as much as -- you know this very well. So like when you're not -- when you're dealing with non-Anglo-Saxon time frames, I think it's hard to be definitive. So I don't know if that said anything at all. But no, look, I think -- yes, we're working, I think, pretty closely with the Kenyan government, with the potential partners, with just our own partners as well. So it will happen when it does. And I would say, look, we'll tell you when we're ready.

The next question comes from the line of Chris Wheaton from Stifel.

One question from me, please. I'm still starting to understand, having listened to the presentation, what the combined business can do that either company could not at once. I understand Nathan's question about high grading the portfolio, but I would have thought the biggest impact would be not in the top returning projects, which both companies would have done anyway, but it would be further down in the capital allocation stack, if you like. And I'm struggling to see where the -- the merger of these 2 companies can actually deliver anything meaningful on a meaningful time scale. It's interesting to note your slide with the combined activities of the business. Again, if you add those 2 together, if you look at 120,000 BOE a day 2025, that again seems very much in line with where the 2 combined businesses would sit anyway individually. Could you help me please understand what I'm missing here this morning?

Sure. I think it's a good question, Chris. I think first thing, I think what we've said before is that -- what we're showing here today, right, is simply just adding up the 2 business plans together. So that's a $2.4 billion of capital, which takes you from 100,000 to 120,000 barrels a day, right? So that's kind of the business [indiscernible]. Now I think the question, which is we have and as do Capricorn, but we have sculpted our capital program over the next few years in a capital-constrained growth because we have to delever and so if you end up with spending less capital candidly than we would have liked to do, right? And so it's okay. So the things that we can do differently. So if you take Jubilee, so Jubilee you've got [indiscernible] program. We've got Southeast and Northeast infrastructures going to be done by next year. So you will unleash a further kind of infant program on the East. We're doing a lot of work on the 10 enhancement projects. We're looking to drill 2 strategic wells this year. Now I think the pace of the 10 enhancement projects would look very different in an unconstrained world than it does today, right? So -- and that's what I said earlier, is that we are not in a position to describe that today, but we will certainly do that from a capital -- when we have a Capital Markets Day. Similarly, I think in Egypt, we have a big resource and you add more rigs, you will be able to do more, right? You can then look to invest in the facility infrastructure, debottlenecking, gas processing and things like that. So I think across the portfolio, you've got opportunities which in a less balance sheet-constrained world, you will seek to optimize. The return portfolio that James talked about, right, it's quite a substantial portfolio and even the tail, which we wouldn't prioritize today because we just don't have the capital, is very compelling from a return perspective. So I think that's the big point from -- so I think you said what would the combined company do that we can't do independently? One is we would have a different capital program, right, which should be high graded, is different, which will have acceleration potential, number one. Number two is that we are delivering then a consistent capital return to our shareholders, both in terms of a base dividend that James talked about, plus additional returns. We have diversity, which individually we don't have. We've got a single company focus, I think. So for example, I mean, we're capped by individual country ratings, right? The combined group, you've got 100,000 barrels a day, you've got $1 billion all of resource. That then, from a ratings perspective, is very different. So why does that matter, that translates into a lower cost of capital, right? The business is self-funded, right? You have the scale. In a world like today, you have a business that's self-funded, that's got tremendous value, right? You've got synergies, which we count to $50 million in the scale of the business that we're in, very material, right? You can't do that independently. So I think that is one, but I think there are very compelling reasons what the 2 companies is going to bring. And that's why I said like if you have a blank sheet of paper and you put the company together, this is what you would do.

The next question comes from the line of Rachel Fletcher from Morgan Stanley.

I have 2 small questions, please. So firstly, on the oil and gas mix. So combined, you have, I think you said 75% oil. Is that the sort of mix you hope to maintain going forward? And then on exploration, how are you thinking about exploration in general and what happens to existing exploration assets outside of Africa, for example, Mexico and Suriname?

I'll answer that first fit. We -- sorry, the last sort of question. The exploration continues as is. We have some commitments and obligations that we're fulfilling. We have a well coming up in Mexico. We'll see how that goes until have the one in Guyana coming up shortly. We have some ILX opportunities in the U.K. So there is a commitment and we'll see how they progress. But other than that, I mean, I think as we've each said separately, but it becomes much more relevant together, there's a very interesting ILX program across the asset base. I mean, obviously, in Egypt from our perspective, we continue to pursue and accelerate that. And as Rahul has talked about, both in Ghana and Gabon, principally. So exploration will continue, but it'll be very focused in the same way that there has been in terms of spend. And certainly, anything outside of these core assets, be very capital disciplined approach towards future exploration wells, for example, something like Mauritania, which is a big, exciting prospect, but we will farm that down before drilling it.

In terms of the mix, Rachel, I'd turn you to kind of Page 6 and it's interesting. As you look at the current production, our 21 production is about 76% liquids. The 2P reserves is 75% liquids. The 2C resource is 79% liquids. So I think that ratio in the kind of mid-70s seems kind of at least across that board. Now I think specifically, it goes back to kind of the point James was talking about just from a capital allocation point of view and how the return profile actually guides our capital allocation framework, which we'll know better, I think, once we've done a deeper dive across the 2 portfolios. But I think those numbers give you some context, I think, around where the longer-term kind of oil and gas mix is going to be. I mean I don't think we can go much far from where our resource base is. Does that help?

Yes.

The next question comes from the line of Mark Wilson from Jefferies.

My question, I'd like to ask a very clear, at least state distinct identity reflecting the focus on Africa, which is obviously very clear from the production base and with the ILX exploration as well as Mauritania you've just spoken to. So I'd like to ask just how much that strategic identity moves regarding the U.K. position that particularly can still has in terms of, well, exploration certainly. You mentioned some ILX wells this year. But which -- is there a strategic desire to move all activities away from the U.K. and North Sea? And may I ask as well, with regard to a weaker spend, nothing but talked about tax situations in the U.K., whether Capricorn's earn-out from the sale of North Sea assets is affected by the current U.K. tax changes. So do you see a strategic exit from everything within the U.K., North Sea? And is there any tax implications to that earn-out?

Let me answer the first part, and James can answer on the tax. No is the short answer. I mean, as we're saying, we're focused on Africa. That's where our production base is. But as I said earlier, we have interesting positions and commitments in a number of other countries. And we're looking forward to seeing how those progress. We have flexibility when we come back to the balance sheet in the event of success to either pursue or to bring in other partners. So I think we will see how the results come and then we'll make a judgment call. But again, it's against that backdrop of financial flexibility. But the core producing base and the bulk of the investment activity, yes, will be focused on Africa.

Mark, on the specific question about the contingent payments from the U.K. sale, the sale of Catcher and Kraken, no, those are -- that's calculated on a pretax basis. So as we said out at the time of the announcement, it's basically the revenues -- it's a percentage of the revenues generated from the oil price above $55. So it's straight off the top line.

All right. Excellent. Very clear, both. Then one last question on the exploration because I would -- because initially I thought Capricorn is almost unique in the E&P world at maintaining an international exploration portfolio as others moved away from it. Can I check on one specific area and that is the Israel offshore exploration? Is that still part of the portfolio? And what are the plans there?

Yes, it is still part of the portfolio, and we will get to a decision on next step on Israel towards the end of the year, I think, in Q3.

All right. Excellent. And yes, I'll add my congratulations to the merger. I think it's one for the times.

Great. Thank you.

The last question comes from the line of James Thompson from JPMorgan.

Great. Congratulations, chaps, on the merger. Just a quick question on the -- and I appreciate, Rahul, you sort of talked that this is fairly early days in your thinking in terms of the combined entity. But Slide 10 where the 2022, 2025 outlook, I mean, you talk about -- just wanted to sort of look at the numbers and the combined entity there because you talk about 170 million barrels from over the full year 2022 to 2025. That's 40-odd million barrels a year or 115,000, 116,000 a day on average. You're going to do 96 million this year as a combined group. I mean this implies going over 120 quickly soon. So I think is that an ambition that you're going to be about 120 for most of '23, '24, '25? And then...

I think, James, I'd prefer again not to kind of get down into the shape of the transition. But I think in your math, I think this year, we'll do -- if you took the guidance on both the companies, I think we'd do 100. So I'd start 2020. So 96 million was last year. So you would be at 100. So I think if you do kind of your averages, that might give you a better sense of how the thing gets calculated. But again, I'd feel a lot more comfortable once we had line of sight on the balance of the capital allocation and that allows us to be much more precise on '23, '24 production. Yes.

Okay. Just in terms of the capital piece, I mean, you're driving like sort of $600 million a year. Should we think about that as a base? I mean, judging by everything you said in terms of potentially adding rigs in Ghana, obviously, in Egypt as well and the commentary around kind of Kenya and where that might take you in terms of actually investing in that asset for growth. I mean we should be considered the $2.4 billion base. And I mean, I know you appreciate you're showing it in terms of just giving us some sensitivities around the oil price. But should there be a bit more flex in terms of the 50 to 100 ton range?

Again, I don't want to kind of misguide right now, James, because we kind of told you what we know. And I don't want to pretend that we have a better resolution of how the capital allocation would change. So be patient. I mean you'll have to form your own judgment, unfortunately, right now. I think we do want to spend some time thinking through this carefully and see what the interplay, again I go back to James' slide, on discipline and capital allocation. You just need to weigh how much do we return, what do we invest, what's the inorganic opportunity. The point I think I will leave you with is that the business has a very strong balance sheet and cash flow generation. And we've never had this kind of ability to have this debate between returning capital and accelerating CapEx. So it's kind of in a new world a little bit right now. So -- but we want to think through that in a very disciplined manner. I think we're not short of opportunities. And we recognize also, and I'll tell you this carefully, that we recognize the importance of it, returning capital to shareholders, right? We just want to get that balance right. So how do we make money for you guys in the most effective way? How do we get that balance right? So I think that's what excites us. I think that you're creating something that's unique. It's -- we couldn't do this on our own. And we can -- self-funded programs, so you can manage that, you can return capital to shareholders. James and Simon talked about the kind of inorganic potential. I think the industry is consolidating. I think this company becomes well placed for that. But we'll do it if it makes money, right? That's the key. But I think it puts us in a very unique position. So I would probably stop there.

[indiscernible] about how this all -- how it ultimately mix together. So I'll leave it at that. Look forward to Capital Markets Day, and yes, just congratulations, again, on the merger.

Thank you.

Thank you.

There are no further questions, so I'll hand back to your host to conclude today's conference. Thank you.

Okay. Well, thanks, everybody, for joining, and those who are here, thanks again for making the effort to join us in person. We look forward to engaging. I think both our teams are going to stand by if people have questions and don't hesitate to reach out. And we would very much kind of look forward to your support as we take the business forward. So thank you.

Thank you.

Thank you for joining today's call. You may now disconnect.