Energy Prospectus

John White's valuation of CPE is $12/share.

Comments below are cut from Roth Capital's note sent to clients at 8:40 AM CT.

Callon and Carrizo (CRZO-NC) announced that CPE will acquire Carrizo in an all-stock transaction valued at $3.2 billion enterprise value. The companies believe 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. We expect the transaction to be positive for ROTH covered ESTE-Buy and LONE-Buy.

CRZO shareholders will receive a fixed exchange ratio of 2.05 CPE shares for each share of CRZO common stock they own. This represents $13.12 per CRZO share based on CPE’s closing stock price on July 12 and a premium of 25% to CRZO’s July 12 close.

CPE 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 oil and gas pricing while maintaining double-digit production growth.

Using consensus estimates and CRZO guidance, the transaction represents an EV/2019 EBITDA of 4.4x, a premium to our Eagle Ford Shale peer group’s median of 3.7x and a discount to our Permian Basin peer group’s median of 6.1x. Using consensus estimates and CRZO guidance the transaction represents an EV/2019 Flowing BOE per day of $47,200, a premium to our Eagle Ford Shale peer group’s median of $35,600 and a discount to our Permian Basin peer group’s median of 60,885. In our view, these valuations by region are appropriate as CRZO’s 1Q 2019 production was 64% from the Eagle Ford and 36% from the Permian.

Comments below are from TPH morning notes:

CPE to Acquire CRZO
Increased scale to drive FCF inflection in 2020, but more details needed to evaluate pro-forma business
Sector: NAm E&P | Ticker: CPE | Recommendation: HOLD | Target: $15 | Close: $6.40
More details of the pending deal to come on the 8:30am ET conference call, but terms laid out in initial press release imply a 25% premium to CRZO's Friday closing price in an all-stock transaction for a total deal value of $3.2B. CRZO shareholders will receive a fixed exchange ratio of 2.05 CPE shares for each share of CRZO common stock; following the close of the transaction, CRZO shareholders will own 46% of the company. Highlighted synergies of the deal include i) increased scale with 200k net acres between the Permian / Eagle Ford and 102.3mboepd (71% oil) of production as of Q1'19, ii) enhanced capital allocation with FCF breakeven of <$50/bbl WTI by 2021, iii) accelerated FCF with line of sight to >$100MM in 2020 with <2x leverage at current strip, and iv) significant synergies consisting of $65-80MM annually from operations and $35-45MM annually from cash G&A. Deal is expected to close in Q4'19. CPE Q2 ops update highlights 40-40.5mboepd of production (TPHe 39.8 / Street 39.3) with 77% oil (TPHe 78% / Street 79%) on total capex of ~$165MM (TPHe $183 / Street $176). CRZO Q2 ops update highlights 44mbopd (TPHe 42.5 / Street 43) which exceeds high end of guidance and 65.6mboepd (TPHe 66.5 / Street 67.2) which is below the low end due to weather-related 3rd party gas plant downtime in the Delaware; capex expected at $130-135MM (TPHe $144 / Street $149). Deal removes M&A overhang from CPE as the name was a rumored bidder for QEP, but we'll need more details before making a call on the pro-forma business.