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Callon to Acquire Carrizo for $3.2B, Boost Permian Footprint

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Callon Petroleum Company CPE recently announced that the company has struck an all-stock deal to acquire Carrizo Oil & Gas, Inc. CRZO. Following the news, Callon’s shares declined 15.9% yesterday.

Per the company, the deal is valued at around $3.2 billion, which incorporates about $1.7 billion debt of Carrizo. The acquisition is expected to boost Callon’s footprint in the prolific Permian Basin. However, the company can lose its pure-play Permian status on acquiring Carrizo’s Eagle Ford shale play properties, pointed out by Drillinginfo's Andrew Dittmar. Some investors might be sceptical about this change in status quo.

Per the deal, for each Carrizo stock, its shareholders will receive 2.05 Callon shares. The transaction values each Carrizo share for $13.12, which is a 25% premium to the company’s closing price on Friday. Following the closing of the deal, which is expected during fourth-quarter 2019, shareholders of Callon Petroleum and Carrizo will own around 54% and 46% of the combined entity, respectively.

The combined company is expected to have around 200,000 net acres in the Permian Basin and Eagle Ford shale. Combined production in first-quarter 2019 was 102.3 thousand barrels of oil equivalent per day (Mboe/d), of which 71% was crude oil. The deal is expected to generate more than $100 million of fee cash flow and annual cost-saving synergies in the range of $100-$125 million. This information can be intriguing for investors as Callon’s free cash flow has been negative since 2011.

Notably, upstream companies are currently under pressure from investors, who are no longer supporting drilling programs in the absence of strong cash flows. Currently, investors want these companies to reduce costs, raise share repurchases, and increase returns. As such, the proposed acquisition can quench the company’s thirst for strong cash flows. Markedly, exploration and production companies require larger contiguous space to drill longer horizontal wells, which result in economies of scale and cost efficiency. Following the acquisition of Carrizo, Callon will have around 2,500 total gross horizontal drilling locations.

Second-Quarter Update

Callon expects second-quarter 2019 output in the range of 40-40.5 Mboe/d, of which 77% is anticipated to be oil. Total capital expenditure in the quarter is expected within $162.5-$167.5 million. Lease operating cost during the June quarter is estimated in the range of $6.30-$6.50 per barrel of oil equivalent.

Price Performance

Callon has lost 17.1% year to date against 3% collective growth of the stocks belonging to the industry.

Zacks Rank & Stocks to Consider

Currently, Callon has a Zacks Rank #3 (Hold). Some better-ranked players in the energy space are Cheniere Energy, Inc. LNG and Comstock Resources, Inc. (CRK - Free Report) , each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Cheniere Energy’s earnings growth is projected at 8.4% through 2019.

Comstock’s sales growth is projected at 117.3% through 2019.

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