In a continuing consolidation of oil and gas assets across the Permian Basin, Houston-based APA Corp., formerly known as Apache, agreed on Thursday to acquire crosstown company Callon Petroleum Co. in an all-stock transaction valued at $4.5 billion, including Callon’s net debt.
Under the transaction terms, each share of Callon stock will be exchanged for a fixed ratio of 1.0425 shares of APA stock, representing an implied value to each Callon share of $38.31 based on the closing price of APA on Jan. 3. The ratio implies about a 14 percent premium based on Wednesday’s closing prices.
APA is expected to issue about 70 million shares of common stock in the transaction.
The deal is expected to close during the second quarter of 2024 if it’s approved by shareholders of APA and Callon.
Citi and Wells Fargo Securities are financial advisors to APA and Wachtell, Lipton, Rosen & Katz is serving as legal advisor led by partners Daniel Neff and Zachary Podolsky in New York.
Morgan Stanley & Co. and RBC Capital Markets are financial advisors to Callon while Kirkland & Ellis is serving as legal advisor.
The Kirkland team was led by corporate partners Sean Wheeler, Debbie Yee and Camille Walker, executive compensation partner Rob Fowler, debt finance partner Mary Kogut, capital markets partner Michael Rigdon and tax partners David Wheat and Joe Tobias.
Callon’s general counsel Michol Ecklund, formerly of Marathon Oil and Baker Botts, where Wheeler was a partner. Anthony Lannie is her counterpart at APA.
Wheeler also worked on Callon’s $3.2 billion merger with Carrizo Oil & Gas Inc. in 2019 (see our story here).
Jeoffrey Lambujon, who follows APA at TPH&Co., wrote in a note that the deal helps boost both inventory and oil mix in APA’s unconventional portfolio, noting success with APA’s recent exploration and appraisal in Suriname (and entrance into Alaska and Uruguay).
But he said his firm has been historically less favorable on Callon’s asset base relative to small-cap peers, “though synergies could improve what we see as more challenged capital efficiency.” Lambujon added that the fixed exchanged ratio of APA stock for Callon stock implies around a 2 percent premium over TPH’s net asset value for Callon (at $75 per barrel long-term).
Leo Mariani, an analyst with Roth MKM, has worries about Callon’s properties as well. “Don’t think the market will embrace this transaction given the premium paid, slight increase in leverage and concerns about CPE [Callon’s] asset quality,” he said.
Callon has been often mentioned as a takeover target as well as Vital Energy and SM Energy (see our story here).
After closing, APA shareholders are expected to own around 81 percent of the combined company with Callon stockholders holding 19 percent. A Callon representative will join the APA board. APA’s executive management team will lead the combined company with the headquarters remaining in Houston.
APA expects to retire the existing debt at Callon and replace it with APA term loan facilities totaling $2 billion. APA said the term loan facilities should offer improved optionality for near-term debt reduction.
JPMorgan Chase Bank, Citigroup Global Markets Inc. and Wells Fargo Bank have provided $2 billion of committed financing for the deal.
APA expects the transaction will be accretive to all key financial metrics and add to its inventory of high quality, short-cycle opportunities.
APA estimates overhead, operational and cost-of-capital synergies should be $150 million per year and its bigger size should improve its credit profile, with the combined balance sheet remaining strong with leverage at 1.1 times net debt/adjusted EBITDAX (as of Sept. 30 and measured over the four quarters ended Sept. 30).
Callon’s assets provide additional scale to APA’s operations across the Permian Basin, most notably in the Delaware Basin, where Callon has nearly 120,000 acres.
APA’s oil-prone acreage in the Midland and Delaware Basin combined will increase by more than 50 percent following the transaction.
If the deal closes, the company’s production would exceed 500,000 barrels of oil equivalent and enterprise value would increase to more than $21 billion (derived from each company’s market capitalization based on closing stock prices on Jan. 3 plus the net debt as of Sept. 30).
John J. Christmann IV, APA’s CEO and president, said in a statement that the transaction is aligned with its overall portfolio strategy and fits all the criteria of its disciplined approach to evaluating external growth opportunities.
“Callon has built a strong portfolio in the Permian Basin that is complementary to our existing Permian assets and rounds out our opportunity set in the Delaware,” he said. “The acquisition is accretive and unlocks value for both shareholder bases.”
Joe Gatto, Callon’s president and CEO, said the combination with APA provides for an enhanced value proposition for its shareholders, “built on their depth of experience and strong execution in the Permian Basin, flexibility for increased capital allocation and ongoing delineation and optimization efforts.”