Callon Petroleum has agreed to acquire Carrizo Oil & Gas for $3.2 billion, with shareholders of Carrizo set to receive 2.05 shares of Callon for each share they hold. That represents $13.12 per Carrizo share based on Callon’s closing common stock price on July 12 and a 25 percent premium to Carrizo’s prior day closing price. Pro-forma, Callon shareholders will own 54 percent of the combined company and 46 percent will be held by former Carrizo owners.
“This deal checks a lot of the boxes on what seems to make sense for corporate-level E&P M&A,” said Drillinginfo M&A analyst Andrew Dittmar. “You have two small-to-midsize companies active in the Delaware Basin combining to build economies of scale, reduce G&A expenses, and hopefully accelerate the move to positive free cash flow.”
With the all-stock consideration, Callon is building scale while preserving cash on the balance sheet for development and avoiding having to attempt raising additional capital from a frozen Wall Street. It can also leverage the slightly higher valuation its stock carries over Carrizo. While not exactly a “merger-of-equals” they are similar sized companies and the post-deal shareholder split will be a relatively even with 54 percent buyer, 46 percent seller.
From a valuation perspective, the acquisition looks very reasonable. A 25 percent premium to a prior close is a moderate premium for a public E&P buyout. After adjusting for the value of Carrizo’s existing production and Eagle Ford acreage, Callon is acquiring the Permian leasehold at a bit under $20,000 per acre. That compares favorably to the $30,000 per acre or more seen in other public E&P buyouts in the Permian.
“If there is anything slightly surprising about this deal, it would be that Callon is willing to pick up the Eagle Ford assets of Carrizo and lose its status as a Permian pure-play which the market seems to favor,” said Dittmar. “With more mature wells, the Eagle Ford assets do provide some stability to the combined company’s production base and supply much-needed cash flow, but we wouldn’t be that surprised to see Callon look to monetize these assets and return its focus exclusively to the Permian provided they can find a buyer in this market willing to pay a fair price.”
There continues to be a strong case for further consolidation among the shale drillers, especially in the Permian. Other companies will be closely monitoring how the market takes this deal and how badly Callon is beat up for announcing an acquisition in the current low-growth Wall Street mood. The market is already taking what would be expected to be the initial reaction and selling Callon off to the tune of ~15 percent. We will have to wait a bit and when the dust clears see what the longer-term implications are for its stock. Check back on our blog for more details and commentary from our expert M&A analysts as we follow this deal and others.