Callon Petroleum (CPE) Update on merger with CRZO - Nov 14

[dan_s]

Callon Petroleum (CPE): Reducing the Premium Paid by CPE Shareholders from 25% to 7%: Positive
by John White at Roth Capital

CPE announced an amendment to the existing terms of their agreement for CPE to acquire Carrizo Oil & Gas, Inc. (CRZO-NC) in an all-stock transaction. The amendment reduces the premium paid by CPE shareholders from 25% to 7%. The amendment to the terms of its merger agreement with CPE that reduces the fixed exchange ratio of CPE shares to be received for each share of CRZO stock from 2.05 to 1.75.

This now equates to a revised 6.7% premium to CRZO shareholders versus the 25% premium agreed to in the original deal based on July 12 closing prices.

Paulson & Co., a 9.5% shareholder, and proxy advisory firm ISS had both previously come out against the transaction and the large premium was cited as a key reason by Paulson. This amendment likely proves favorable for the transaction to be approved.

The Boards of Directors of both CPE and CRZO have unanimously reaffirmed their support for the transaction as modified by the amendment to the merger agreement. In addition, each of the CRZO directors remains committed to vote his or her shares in favor of the transaction.

CPE and CRZO intend to file supplemental proxy materials with the SEC in the coming days. The companies continue to expect to close the transaction during the fourth quarter of 2019, subject to the approval of shareholders of both companies.

[bobs]

Could CRZOs Eagle Ford property be that bad where they are only worth a few times what they earn every year (assuming it continues) so that the reduced takeover premium is justified?
I suspect a lot of CRZO shareholders will vote no on the new deal terms.

[dan_s]

We will soon find out. The resistance to the merger has been on the CPE side and when both boards approve it the deals usually close.

[dan_s]

Here is what Carrizo brings to the merger:

Numbers below as a stand alone company:

2017A: $1.07 EPS, $5.46 operating cash flow per share, 53,758 Boepd of production
2018A: $4.41 EPS, $6.93 operating cash flow per share, 60,322 Boepd of production
2019E: $4.60 EPS, $6.81 operating cash flow per share, 67,268 Boepd of production
2020E: $5.17 EPS, $11.26 operating cash flow per share, 75,000 Boepd of production (64% crude oil, 17% NGLs and 19% natural gas)

I hope to finish updating the profile for CPE + CRZO tomorrow.

[bobs]

Something is wrong with this picture because CRZO is selling at less than 2X earnings (unless oil drops a huge amount) and yet CPE and other energy companies aren't apparently willing to recover their takeover investment in 2 years.

I don't follow all the energy companies but is this the case for many others that you follow?

[dan_s]

We will be sending out an updated "Pro Forma" profile for Callon on Saturday morning. Read it carefully.

[dan_s]

bobs: The answer to your questions is "yes" a lot of upstream companies are trading at deep discounts to their net asset value. Some are trading below the net asset value of just their PDP reserves, which implies that the company is just going to produce out its completed wells and die.

As of yesterday's closing prices 10 of the Sweet 16 are trading below book value. Because SEC and GAAP accounting rules are so conservative for upstream companies that should not happen; especially for companies the quality of the Sweet 16.

Big mergers and acquisitions cause confusion and makes investors more nervous than usual. Add to the non-stop FEAR of a U.S. vs China Trade War, articles about "Peak Demand" and EIA & IEA both over-stating U.S. oil production and you can see why these stocks are trading below break-up value.

CRZO is going to become CPE in a few months. Read the CPE profile that we sent out this morning (Nov 16).