Kuwait Energy in merger talks with London-listed SOCO International

By Davide Barbuscia

DUBAI (Reuters) - SOCO International, an oil and gas exploration and production company listed on the London Stock Exchange, said on Monday it was evaluating a merger with Middle East oil and gas firm Kuwait Energy.

Its statement confirmed a Reuters report earlier on Monday that the two companies were in merger talks.

A merger would provide a way for the Kuwaiti company to go public after it failed last year to complete an initial public offer of its shares on the London exchange, through which it hoped to raise about $150 million.

SOCO, which has a market capitalisation of about $500 million, said discussions with Kuwait Energy's newly constituted board were preliminary and no deal terms had been agreed.

"SOCO confirms that, in the context of its stated objective to strategically reshape its business and grow its portfolio, it is evaluating a potential merger of equals with Kuwait Energy," the company said in a statement issued via the London Stock Exchange.

Kuwait Energy declined to comment on the merger discussions.

SOCO's shares rose as much as 15 percent on news of merger talks and were up 9.9 percent at 123.4 pence at 1224 GMT.

Kuwait Energy has assets in Iraq, Oman, Egypt and Yemen. SOCO has a very different geographic exposure, with interests in Vietnam, Congo and Angola but no major assets in the Middle East.

Thomas Streater, head of investment research at MB Commodities Capital in Dubai, said the merger could benefit both companies.

"With volatile oil prices, it makes sense for small oil companies to merge as getting bigger scale gives them balance sheet to face volatility. SOCO would get a portfolio of low cost, attractive assets, and for Kuwait Energy it would be a way to monetise some of their holdings," he said.

Streater added that Kuwait Energy's portfolio was quite attractive "but assets are in Iraq so straight away from an IPO perspective it's seen as too risky. With the merger, the company's shareholders will probably get SOCO stock, and then they'll be able to sell at a later stage."

SOCO had $132 million in cash as of September last year. Kuwait Energy had $43 million in cash at the end of September.

The potential merger would be "a merger of equals, two companies with very similar size and operations, but different geographic exposures", said one of the sources, who did not want to be named because the discussions are private.

"The difference is that SOCO has a slightly more mature or developed asset base and is in a stronger liquidity position. Kuwait Energy has a less mature asset base with huge potential, but it is more leveraged and needs to fund a substantial capital expenditure requirement to realise the potential."

Kuwait Energy had appointed Numis and BofA Merrill Lynch as global coordinators and joint bookrunners for last year's planned IPO, with EFG Hermes as co-bookrunner.

The Kuwaiti firm announced last June that it had not been able to complete the IPO. It did not give a reason, but said that in light of positive feedback from potential investors, it remained committed to obtaining a London listing and continued to explore its options.

In December, a board shake-up included the resignation of the company's long-standing chief executive and co-founder Sara Akbar and the appointment of six new board directors.

Kuwait Energy also announced last month that it had agreed to extend the maturity of the principal repayment of a $155 million convertible loan due in November 2017, partially held by private equity group Abraaj.

(Editing by Andrew Torchia and Susan Fenton)