Energy Prospectus

(Reuters) - Callon Petroleum Co said on Monday it will buy Carrizo Oil & Gas Inc in an all-stock deal valued at $3.2 billion to bolster its presence in the oil-rich Permian and Eagle Ford shale basins.

The combined company will have about 200,000 net acres in the two basins and produce a total of 102,300 barrels of oil equivalent per day.

Carrizo shareholders will receive 2.05 Callon shares for each share held, or about $13.12 per Carrizo share based on Callon's closing share price on July 12.

Based on Carrizo's outstanding shares, the equity value of the deal is $1.21 billion.

The deal represents a premium of about 25% to Carrizo's closing price on Friday.

Callon shareholders will own about 54% of the combined entity, with Carrizo shareholders owning the rest.

The deal, expected to close in the fourth quarter, will immediately add to earnings, cash flow and net asset value per share, the companies said.

I believe this sets the world record for the number of times the phrase "free cash flow" is used in one press release. - Dan
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Carrizo Oil & Gas, Inc. has added a new press release to its website:

Callon to Acquire Carrizo in All-Stock Transaction
Creates a Premier Oil-Weighted Mid-Cap with Peer-Leading Capital Efficiency and Cash Margins

Materially Increases Scale with Over 100,000 Boe/d of Pro-Forma 1Q19 Production and 200,000 Net Acres in the Prolific Permian Basin and Eagle Ford Shale

Highly Complementary Delaware Basin Footprint of Over 90,000 Net Acres to Accelerate Scaled Operations and Leverage Shared Infrastructure to Unlock Additional Value

Immediately Accretive to EPS, CFPS, Debt-Adjusted Growth Per Share and Net Asset Value Per Share; Double-Digit Production Growth and Over $100 Million of Free Cash Flow in 2020 at Current Strip Pricing

Stock-for-Stock Transaction Maintains Strong Balance Sheet and Flexibility to Execute Full-Field, Large-Scale Pad Development

Expects to Realize Primary Annual Run-Rate Synergies of $100 - $125 Million in Addition to Optimized Capital Allocation Over Time

Companies to Host Investor Conference Call Today at 8:30 a.m. ET / 7:30 a.m. CT

HOUSTON, July 15, 2019 /PRNewswire/ -- Callon Petroleum Company (NYSE: CPE) and Carrizo Oil & Gas, Inc. (Nasdaq: CRZO) today announced that their Boards of Directors have unanimously approved a definitive agreement under which Callon will acquire Carrizo in an all-stock transaction valued at $3.2 billion. This highly complementary combination will create a leading oil and gas company with scaled development operations across a portfolio of core oil-weighted assets in both the Permian Basin and Eagle Ford Shale.

Under the terms of the agreement, Carrizo shareholders will receive a fixed exchange ratio of 2.05 Callon shares for each share of Carrizo common stock they own. This represents $13.12 per Carrizo share based on Callon's closing common stock price on July 12 and a premium of 18% to Carrizo's trailing 60-day volume weighted average price. Following the close of the transaction, Callon shareholders will own approximately 54% of the combined company, and Carrizo shareholders will own approximately 46%, on a fully diluted basis. The all-stock transaction is intended to be tax-free to Carrizo shareholders.

"We are excited about this transformational transaction, creating a differentiated oil and gas company by integrating core asset bases in premier basins. Together with Carrizo, we will accelerate our free cash flow, capital efficiency and deleveraging goals through an optimized model of large-scale development across the portfolio. We will also benefit from leading cash margins to navigate commodity price volatility and allow for reliable, continuous development of the combined asset base. With a deep inventory of high rate-of-return well locations in well-established areas and substantial upside opportunities for organic inventory delineation, we will be able drive differentiated growth deploying our life-of-field development model for many years to come," said Joe Gatto, President and Chief Executive Officer of Callon. "As a larger organization, Callon will be well-positioned to benefit from an expanded infrastructure footprint and critical mass for our production marketing and supply chain functions and also leverage our technology and data capture initiatives across a broader base. Importantly, this combination brings together two organizations grounded in strong values and a shared commitment to responsible operations, integrity, and a drive to deliver leading results. We look forward to welcoming Carrizo's employees and joining forces as a Houston-based company focused on the development of a premier Texas asset base to create enhanced value for all of our stakeholders."

S.P. "Chip" Johnson, IV, President and Chief Executive Officer of Carrizo, commented, "We believe that Callon is the ideal partner for Carrizo. Through our combination, we bring together a strong foundation of Midland Basin and Eagle Ford Shale assets and overlay a substantial Delaware acreage position and value proposition that will be unlocked through an integrated plan of large-scale program development. This all-stock transaction provides Carrizo shareholders with the opportunity to participate in the significant near- and long-term upside potential of the merged company. We look forward to a bright future for our employees and all of our stakeholders and expect a seamless integration."

Strategic and Financial Benefits of the Transaction

Increases Corporate and Delaware Basin Scale: On a pro forma basis, Callon will have an approximate 200,000 net acre footprint in the Permian Basin and Eagle Ford Shale, including over 90,000 net acres in the Delaware Basin, and approximately 2,500 total gross horizontal drilling locations. The companies produced a combined 102.3 MBoe/d in 1Q19 (71% oil) and generated pro forma LTM 1Q19 adjusted EBITDAX of $1.2 billion. With an expected total of 9 to 10 drilling rigs and 3 to 4 completion crews working during the course of 2020, predominantly in the Permian Basin, the combined entity will have the critical mass to realize supply chain savings and sustain simultaneous operations initiatives.

Expands Portfolio of Complementary High-Quality Assets: Together with Carrizo, Callon will be a premier Texas operator with an extensive inventory of core Permian and Eagle Ford locations that compete for capital on a full-cycle basis. As a portfolio, our increased level of large project initiatives in the Permian Basin will be balanced by sustained investment in shorter cycle and less capital-intensive projects in the Eagle Ford Shale. Based on initial plans for capital allocation within the combined portfolio, Callon forecasts its free cash flow breakeven WTI crude oil price to progress to under $50/Bbl by 2021.

Accelerates Free Cash Flow Generation: Callon expects this combination to be immediately accretive to free cash flow per share in 2020 with positive free cash flow generation of over $100 million at current strip pricing while maintaining double-digit production growth. The combination brings together a well-established and repeatable free cash flow generating business in the Eagle Ford Shale with Permian Basin assets that are rapidly transitioning to positive net cash flows with increasing investment in high-return projects. In addition, the combined company's corporate free cash flow will be increased through an optimized development plan in addition to corporate cost savings. This sustained free cash flow generation will accelerate Callon's deleveraging initiatives and improve its capacity to return capital to shareholders in the future.

Maintains Callon's Financial Strength and Flexibility: Callon expects to have an enhanced credit profile due to broader scale and scope, and a substantial base of oil-weighted proved developed producing reserves. Importantly, significant free cash flow generation will drive the combined company's leverage ratio to below 2.0x in 2020 at current strip pricing. Additionally, upon closing, the combined company is anticipated to have pro forma liquidity of more than $1 billion under a new underwritten credit facility combined with no near-term debt maturities.

Drives Substantial Identified Synergies: The combination is expected to generate a total of $850 million in net present value from the following categories of primary synergies:
> Annual run-rate operational synergies of $65 to $80 million attributed to a structural shift in the combined program development model, consisting of:
Expanded large scale development in the Permian Basin, deploying simultaneous drilling and completion operations, improving production cycle times and reducing well costs;
> Optimized, integrated development schedule to capture efficiencies from continuous utilization of dedicated completion crews; and Improved uptime from concentrated development, resulting in reduced production downtime from offsetting completion operations.
> Estimated annual cash general and administrative savings of $35 million to $45 million.
> Optimized capital allocation initiatives, including a mix of shorter and longer cycle projects, select activity acceleration within a larger cash flow base and high-grading of drilling inventories.

In addition, Callon has identified further synergies that are anticipated to be realized over time:
> Integration of Delaware infrastructure and water management, expanding the opportunity for water recycling programs and increasing scale for potential monetization structures;
> Larger portfolio of non-core acreage for divestment and trades, high-grading overall returns on capital;
> Increased hydrocarbon volumes provide critical mass for marketing arrangements and ongoing initiatives to control critical parts of the value chain, including firm transportation on pipelines; and
> Cost of capital reductions, including opportunistic debt refinancings.

Governance and Leadership

The transaction has been unanimously approved by the Boards of Directors at both Callon and Carrizo. In addition, each of the Carrizo directors has committed to vote his or her shares in favor of the transaction.

Upon closing, the Board of Directors of the combined company will consist of 11 members, including Callon's eight current Board members and three to be appointed from the Board of Carrizo. The combined company will be led by Callon's executive management team and will remain headquartered in Houston, Texas.

Timing and Approvals

The transaction, which is expected to close during the fourth quarter of 2019, is subject to customary closing conditions and regulatory approvals, including the approval of shareholders of both companies.

Second Quarter Updates

For the second quarter of 2019, Callon expects daily production of between 40.0 and 40.5 MBoed with approximately 77% coming from oil. < This compares to my Q2 production forecast of 38,750 Boepd. - Dan.

Total capital expenditures, inclusive of capitalized expenses and on an accrual basis, is expected to be between $162.5 and $167.5 million with operational capital representing approximately $132.5 to $137.5 million of that estimate. Lease operating expense for the second quarter is expected to be between $6.30 and $6.50 per Boe.

For the second quarter of the year, Carrizo expects crude oil production to be approximately 44,400 Bbls/d, exceeding the high-end of the Company's guidance range. Total production is expected to be approximately 65,600 Boe/d. < This is below my Q2 production estimate for CRZO of 66,500 Boepd. However, crude oil production compares to my forecast of 42,560 Bopd, so revenues should exceed my forecast. - Dan.

Total production is below the low-end of the Company's guidance range for the quarter of 66,500-67,500 Boe/d as its production during June was materially impacted by weather-related downtime at a third-party gas processing plant in the Delaware Basin. In total, third-party midstream issues negatively impacted the Company's production by more than 4,000 Boe/d during the second quarter. Carrizo currently expects drilling, completion, and infrastructure (DC&I) capital expenditures to be $130-$135 million in the second quarter and expects to meet or beat its second quarter guidance ranges for expense items.

Advisors

J.P. Morgan LLC is serving as exclusive financial advisor to Callon and Kirkland & Ellis LLP is serving as legal advisor to Callon. JPMorgan Chase Bank, N.A. and BofA Merrill Lynch provided underwritten financing to Callon to support the transaction. RBC Capital Markets, LLC and Lazard are serving as financial advisors to Carrizo and Baker Botts L.L.P. is serving as legal advisor to Carrizo.

Conference Call and Webcast

The companies will host a joint conference call and webcast today at 8:30 a.m. ET / 7:30 a.m. CT to discuss the transaction.

The conference call can be accessed by dialing (800) 374-1355 within the United States and (270) 855-8553 for all other locations. The confirmation code is 2381448. Participants should dial in 10 minutes prior to the scheduled start time.

A live webcast of the conference call and associated presentation materials will be available in the investor relations section of each company's website at ir.callon.com and https://ir.carrizo.com/investor-relations/default.aspx.

A replay of the conference call will be available approximately two hours after completion of the conference call through July 29, 2019 and can be accessed by dialing (800) 585-8367 from the United States or (404) 537-3406 from outside the United States. The replay confirmation code is 2381448. The webcast will be archived in the investor relations section of each company's website.

About Callon

Callon is an independent energy company focused on the acquisition and development of unconventional onshore oil and natural gas reserves in the Permian Basin in West Texas.

This news release is posted on Callon's website at www.callon.com, and will be archived for subsequent review under the "News" link on the top of the homepage.

About Carrizo

Carrizo Oil & Gas, Inc. is a Houston-based energy company actively engaged in the exploration, development, and production of oil and gas from resource plays located in the United States. Our current operations are principally focused on proven, producing oil and gas plays in the Eagle Ford Shale in South Texas and the Permian Basin in West Texas.

Seems like CPE got a steal.
CRZO assets were worth a lot more than what the shareholders will get, and as we see this a.m. the merger news hit CPE hard and its price got down to 5.35, so CRZO saw little to any premium from friday.
currently CPE at 5.50 and CRZO at 11/share. Hmmm. perhaps people will see the value in the merged companies and their asssets.
I bought some more CRZO this am. at 10.65 (the most I have paid for CRZO as I started adding in the 9s).



d4v

The Wall Street Gang always assumes that the Buyer overpaid. Once the Wall Street Gang adds the two companies together, they should see how this is a "win-win" deal. CPE will be a solid Mid-Cap with production over 100,000 Boepd and lots of running room.

Listen to the replay of this morning's conference call.

Bloomberg

This Shale Fracker's Decision to Sell Says It All

Carrizo bailing out at the bottom shows just how desperately the E&P sector needs to consolidate.
By Liam Denning
July 15, 2019, 11:09 AM EDT

A big deal in the Permian basin should be cause for fanfare in oil and gas circles. And yet, a distinct sad-trombone note sounds as Carrizo Oil & Gas Inc. falls into the arms of Callon Petroleum Co.

Callon is offering a 25% premium in an all-stock acquisition, based on Friday’s closing prices. But it’s the absolute price that tells the real story. Carrizo is selling out for $13.12 a share, getting it back to where it traded just less than three months ago – and way below the $23 level where it sold a slug of new shares last August. If Callon is engaging in some bottom-fishing, Carrizo is nonetheless grabbing eagerly at hook, line and sinker.

Timing Is Everything

Carrizo is selling to Callon at a low point

Carrizo’s decision to sell with its stock trading close to its lowest levels in a decade is the salient fact here. It is being paid with stock and its shareholders will own 46% of the enlarged Callon, so they can participate in any gains once the deal is done. They’re better off not looking too closely at their screens on Monday, though: Callon’s stock slumped by as much as 17% Monday morning, wiping out the implied premium.

Even so, there is a compelling logic to shale consolidation. A decade of breakneck expansion has left the onshore U.S. exploration and production business overcapitalized, with a long tail of inefficient smaller companies offering lackluster returns (see this). Carrizo is a prime example. Its total return over the past five years is negative 84%, which makes the sector’s negative 64% look good (the S&P 500 has returned a positive 69% in that time). Indeed, activist firm Kimmeridge Energy Management Co. tried last year to nudge the company into streamlining or selling itself to address this. Carrizo, which was trading at about $17 a share back then, disagreed.

It is telling that up to $45 million of Callon’s synergies target relates to cutting general and administrative overhead. That is equivalent to more than two-thirds of Carrizo’s G&A line, reinforcing one of Kimmeridge’s lines of argument about the inefficiency inherent in such a fragmented industry.

Those cash savings also speak to the other key point in Callon’s marketing push, namely an implied free cash flow number north of $200 million in 2020. Based on Callon’s current price, that implies a pro forma free cash flow yield of about 10%, which may be enough to tempt some investors back into the stock when the smoke clears – although pro forma net debt of two times Ebitda (including synergies) means some of that will have to go toward reducing leverage.

Proving those synergies work and that free cash flow will actually find its way to shareholders is Callon’s main task now. The company hasn’t had a single year of positive free cash flow since 2010, according to figures compiled by Bloomberg. And its own total return has been negative 41% over the past five years – better than Carrizo but still far to the wrong side of zero.

That is the problem with E&P as a whole. Carrizo will hardly be missed by investors, and wringing out some costs would be a good thing. Yet the very fact that Carrizo has chosen to take this price at this time, rather than the usual E&P playbook of banking on the next upswing, says a lot.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net

This is not a "sale", it is a merger. That is much different.

CRZO did not "sell at the bottom". CRZO shareholders will just transfer their basis in the stock to CPE. After the merger they will own shares in a much larger company with lots of running room.

Size matters in this business. After the merger closes CPE will have over 100,000 Boepd of production. Should be FCF positive and have double digit production growth locked in.

The Bloomberg article certainly reflects Wall Street sentiment. From Chip Johnson’s perspective it clearly reflects throwing in the towel.

One of our members knows Chip well. He told me that Chip is ready to retire. He's no Spring Chicken. I think the MERGER (NOT A SALE) is a wise move and will draw a lot more attention to two grossly oversold companies. If the Wall Street Gang wants FCF from operation + double digit growth they should love CPE. When the dust settles I will see if I can get them to host a Houston luncheon for us. CRZO shareholders should be happy, but it may take a few months to grasp.

The deal should draw more attention to our Eagle Ford companies. Might be why LONE got some "love" today.

I am now in Dallas. When I get back on Thursday I will work up a "Post Merger Forecast" for CPE. Both companies are in the Sweet 16 so it should be easy.