Workers walk past storage tanks at Tullow Oil’s Ngamia 8 drilling site in Lokichar, Turkana County, Kenya, February 8, 2018. REUTERS/Baz Ratner/File Photo

June 1 (Reuters) – Tullow Oil TLW.L and Capricorn Energy CNE.L agreed to merge in an all-stock deal worth 656.9 million pounds ($826.7 million) that will deliver dividends after a payout drought and improve cash flow to allow investment in higher output.

Investors in Capricorn, formerly known as Cairn Energy, will receive 3.8068 new shares in Tullow, the bigger of the two companies, for each share they hold, the companies said on Wednesday. Reuters calculated the $827 million value of the deal based on Tuesday’s closing share price.

Tullow boss Rahul Dhir will lead the combined group, which will be majority-owned by Tullow shareholders.

It is expected to have an output of around 100,000 barrels of oil equivalent per day, with reserves of 343 million barrels of oil equivalent.

Oil companies’ earnings have been spurred by high energy prices as demand has returned following COVID-19 lockdowns and markets have surged in response to oil producer Russia’s invasion of Ukraine on Feb. 24, which prompted sanctions on Moscow and disrupted supplies.

The merged group, which will have a new name that has yet to be announced, is focused on African energy and should be able to invest in expanding production, potentially capitalising on higher energy prices.

“What would the combined company do that we can’t do independently? One is we would have a different capital programme, which would… have acceleration in it,” Dhir told a conference call.

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The merger, backed by the boards of both companies, would result in savings of $50 million and investors in the new group will get an annual base dividend of $60 million. Tullow shareholders last received a dividend in 2019.

Capricorn’s cash will also help Tullow to cut its leverage ratio of net debt to core profits to less that 1x, allowing the combined group to spend more on increasing output.

“This fixes Tullow’s balance sheet problem,” Stifel analysts said in a note.

Shares in Tullow traded 2.1% higher by 0945 GMT. Capricorn Energy shares were up 3.6%. The wider oil and gas index .SXEP fell 0.6%.

Tullow’s flagship offshore oilfields in Ghana will make up the biggest share of the new group’s reserves and production, three-quarters of which will be oil and one quarter gas.

The second biggest will come from Capricorn’s Egyptian onshore gas fields.

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Separately, energy services provider Wood Plc WG.L said on Wednesday, it agreed to sell its consulting unit for $1.9 billion. Read full story

($1 = 0.7946 pounds)

(Reporting by Pushkala Aripaka in Bengaluru and Shadia Nasralla in London; Editing by Shailesh Kuber, Edmund Blair and Barbara Lewis)