CPE + CRZO Merger Update - Nov 4

[dan_s]

COMPANY COMMENTS ON ISS REPORT

HOUSTON, Nov. 4, 2019 /PRNewswire/ -- Callon Petroleum Company (CPE) ("Callon" or the "Company") issued the following statement in response to a report by Institutional Shareholder Services ("ISS") regarding Callon's all-stock acquisition of Carrizo Oil & Gas, Inc. (CRZO). Callon strongly disagrees with ISS's recommendation and believes the following points are essential to understanding the merits of the transaction:

Callon's stated strategy remains unchanged: As we have articulated in numerous quarterly investor calls, and on slide 20 of our recently filed investor presentation, Callon has been pursuing four strategic financial objectives: increase cash return on invested capital, generate free cash flow, reduce leverage and maintain a long-term focus. This transaction clearly advances each point of Callon's strategy.

Scale is critical in an evolving industry landscape: As the shale industry turns from acreage acquisition to manufacturing mode, the efficiencies gained from large pad development and simultaneous operations are increasingly important for achieving a competitive cost structure. While Callon has made important progress implementing a scaled development model in select projects within its existing portfolio, the larger capital base of the combined company is expected to enhance its ability to optimize asset development through larger pad investments across the combined footprint on a sustained, repeatable basis.

The highly achievable synergies reinforce the strategic rationale of the transaction: The combination is expected to generate $850 million in net present value from G&A and operational synergies, delivering over $2 per share of value to Callon shareholders. The Company has conviction for the operational synergies, reflecting in part the proven structural efficiencies from scale described above, but the transaction is supported even with conservative synergy assumptions. As ISS notes in its report, "G&A synergies seem achievable, and the deal seems accretive even without accounting for the operational synergies." 1

The transaction strengthens Callon's credit profile: The combined high-quality asset base delivers both scale and geographic diversification, including access to premium crude markets, driving sustainable, high-margin oil-weighted production. The enhanced EBITDA profile and accelerated free cash flow generation also better position Callon to meet its target leverage metric of net debt to EBITDA below 2.0x. Two independent rating agencies have recognized the improved creditworthiness. Since the transaction announcement, Callon has been placed on positive credit watch by S&P and Moody's has confirmed a recent upgrade, commenting "This acquisition will be a credit positive for Callon." While pro forma credit metrics are largely unchanged, the combined business is better positioned to deliver substantial improvements to these metrics over time. Additionally, the combined company will benefit from a strong balance sheet, no near-term debt maturities and pro forma liquidity of more than $1 billion.

A larger company brings greater predictability: ISS believes "what [Callon's] shareholders seem to be seeking is greater predictability." In fact, this combination is expected to enhance predictability. With increased size and scale, the combined company will be well positioned to withstand a changing industry landscape and commodity price volatility with a lower corporate free cash flow break-even cost of approximately $50 per barrel in 2020. In addition, the pro forma company is expected to benefit from balanced diversity of projects, cycle times and product markets, all supported by a larger capital base.

Callon's post-announcement performance is consistent with peers: Against peers that most closely resemble Callon, our performance since announcement has been relatively in-line or better, reflecting the promise of the transaction. As ISS noted in its report, "Rather than looking at medians of imperfect peer sets, it may therefore be more informative for shareholders to compare CPE's TSR to that of individual peers."1 This was precisely what Callon articulated on slide 17 of our recent investor presentation, with additional detail on slides 28-30, when we identified peers by criteria especially relevant to investors as sector sentiment has been challenged these past several months: market cap, oil mix and leverage.

Callon is confident in a successful integration: Callon is led by an experienced management team with a track-record of successful value-enhancing acquisitions. In recent years, the Company has repeatedly demonstrated the ability to achieve significant well cost savings and productivity improvements relative to predecessor operators and offset operators in both the Delaware and Midland basins. Importantly, Callon expects that a large portion of Carrizo employees will join the combined company, providing stability and support throughout the integration process.

Research analysts overwhelmingly support the transaction: The vast majority of independent research analysts who follow Callon and Carrizo closely have expressed support for the combination and maintain a buy recommendation for Callon.

Callon encourages investors to review its recently filed investor presentation that highlights the benefits of the Carrizo transaction in more detail. The presentation is available on the Investor Relations section of the Company's website at https://ir.callon.com/ as well as on https://www.sec.gov/.

As previously announced on July 15, 2019, Callon and Carrizo have entered into a definitive agreement under which Callon will acquire Carrizo in an all-stock transaction that was unanimously approved by each company's boards of directors. Callon expects that the transaction will close during the fourth quarter of 2019, subject to approval by both Callon and Carrizo shareholders and other customary closing conditions.

The Special Meeting of Callon shareholders will be held on November 14, 2019, at 9:00 A.M. Central Time in the Advice & Counsel meeting room of the Hotel ZaZa, 9787 Katy Freeway, Houston, Texas. All shareholders of record of Callon common stock as of the close of business on October 7, 2019, will be entitled to vote their shares either in person or by proxy at the shareholder meeting. Each vote is very important, regardless of the number of shares owned. Your failure to vote your shares of common stock or your abstention from voting will have the same effect as a vote "AGAINST" the transaction.

The Callon Board reiterates its belief that approving the Carrizo transaction is in the best interests of all Callon shareholders and urges all shareholders to vote FOR the Carrizo merger agreement as well as all other proposals set forth in the proxy materials at the upcoming Special Meeting.

[dan_s]

Since both of these companies have been in our model portfolios for several years, it was easy for me to combine the two forecast/valuation models. I posted my "Pro Forma" forecast for CPE to the EPG website. Here are the highlights.

> 2019 combined production is approximately 106,700 Boepd (71.1% crude oil, 18.9% natural gas and 10.0% NGLs)
> 2019 combined cash flow from operations s/b approximately $1.17 Billlion with over $100 million of free cash flow from operations.
2020 Pro Forma:
> 119,000 Boepd of production
> $1.30 to $1.35 Billion cash flow from operations
> $1.35 EPS and $3.15 to $3.20 operating CFPS < Assuming WTI averages $60/bbl in 2020.
> First Call's forecasts TODAY for 2020: $1.01 EPS and $2.96 operating CFPS

In the last 3 months since the merger was announced, 8 ranked analysts set 12-month price targets for CPE of $4.80 to $12.00. The average price target among the analysts is $7.79.
Note that the $4.80 valuation is from Morgan Stanley on 10/4/2019. I believe the analysts at Morgan Stanley are now using $45/bbl WTI in all of their forecast models.

In my opinion, when the merger closes CPE should trade for AT LEAST 3X operating cash flow per share.

[bobs]

I ended up voting my CRZO shares for the merger but if CPE shareholders vote it down does CRZO get some $ since the deal doesnt go thru?

[dan_s]

Probably not, but I'm not 100% sure.

Deals like this normally provide for a "Stalking Horse" fee to be paid to the target company if the buyer accepts a higher bid; not if it is voted down by shareholders.

I do know that SM Energy and at least one other company did make competitive bids. One of them might step forward to buy CRZO for cash.