Analysts: APA Takes Callon Off Board as Permian M&A Wave Hits ‘24

APA Corp. is getting deeper in the Permian Basin with a $4.5 billion takeout of Callon Petroleum Co., the latest deal in a historic wave of consolidation across America’s hottest oil play.

The acquisition of Houston-based Callon will give APA—and its subsidiary Apache Corp.—a notable boost in the Delaware Basin of West Texas and New Mexico. Callon holds about 119,000 net acres in the Delaware and another 26,000 in the Midland Basin.

APA holds about 281,000 net Permian acres, with 84,000 net acres in the Delaware and 197,000 net acres in the Midland, according to an investor presentation.

The deal will also grow APA’s oil and gas production in the Permian by about 48% compared to APA on a standalone basis. Pro forma daily average production was 311,000 boe/d during the third quarter of 2023.

Oil, gas and NGL output from Callon’s Delaware footprint averaged 75,000 boe/d during the third quarter of 2023; the company’s Midland volumes averaged 26,000 boe/d over the same period.

The $4.5 billion all-stock deal will exchange each share of Callon common stock for 1.0425 shares of APA common stock.

The all-equity takeout of Callon represents a roughly 15% premium, based on CPE’s stock price at last close.

“APA has a rigorous process for evaluating potential transactions and Callon fulfills our key criteria,” said John J. Christmann IV, APA’s president and CEO, during a Jan. 4 conference call with analysts.

Joe Gatto, president and CEO of Callon, said he believes combining with APA was the best path forward for Callon, which sold its position in South Texas and pivoted into a Permian pure-play last summer.

Combining with APA will unlock significant additional value for shareholders and enhance the company’s ability to succeed through the up-and-down cycles of the oil and gas industry, Gatto said.

“We know Apache will be a good steward for the Callon name and the assets that we have built over the last 70-plus years,” he said.

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Rig watch

APA has been running six rigs in the Permian, in contrast to Callon’s five-rig program, TD Cowen analyst David Deckelbaum wrote.

While declining to offer specific plans for rig activity after closing, Christmann said Callon’s drilling program competes for capital in APA’s own plans.

“We envision continuing those [rigs] right now,” he said. “We’ll continue ours, they’ll continue their’s.”

“Obviously, we get past close we’ll look at that. But we like what they’re doing and we like the opportunity set that it brings to the combined company.”

Analysts, oilfield services providers and midstream operators alike are interested in APA’s plans for Callon’s asset base once the deal closes.

Acquiring companies have largely deployed a buy-and-cut strategy when it comes to drilling and preserving inventory on their newly acquired assets.

When the deal closes, drilling activity is typically slashed to a fraction of the pre-deal activity levels.

That’s because operators are in no hurry to ramp up organic production by drilling into their highest quality inventory; the goal is to preserve those locations for years, or even decades, into the future.

The effects of the buy-and-cut strategy have been most notable on acquired assets that were held by private E&Ps. Acquired private operator rig counts were reduced by nearly 70% in 2023 due to Permian upstream consolidation, according to data compiled by East Daley Analytics.

APA envisions a comfortable drilling runway to the end of the decade based on its current drilling cadence and well design, Christmann said.

“We see similar duration in the Callon assets,” he said.

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Box-checking

APA’s acquisition of Callon is expected to be accretive to most key financial metrics, including cash flow per share, free cash flow per share and net asset value, wrote Tudor Pickering Holt & Co. analyst Jeoffrey Lambujon.

APA also aims to achieve more than $150 million in synergistic savings per year by combining with Callon through overhead, cost of capital and operational cost reductions, the company said.

The balance sheet accretion and synergies should accelerate APA’s ability to return cash to shareholders under the company’s existing capital return framework, Christmann said.

APA’s enterprise value will increase to more than $21 billion after closing, which is expected to occur during the second quarter.

The all-stock nature of the deal also limits the impact to APA’s leverage, which is expected to remain between 1x and 1.1x after closing, Lambujon wrote.

In short, the deal checks all the right boxes, Christmann said.

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New Year, new deals

The APA-Callon combination is the latest in a historic deluge of M&A inked across the Permian Basin in recent months.

Last October, Exxon Mobil Corp. announced a $60 billion takeover of Pioneer Natural Resources—the largest shale oil transaction ever signed—in a deal that will reshape the order of power in the Permian for decades to come.

Occidental Petroleum is also digging deeper into the Permian by signing a $12 billion deal to acquire CrownRock, one of the most attractive remaining private E&Ps in the basin.

Those megadeals top a long list of bolt-ons, scoop-ups and carve-outs made by smaller E&Ps in the Permian in 2023: Permian Resources, Civitas Resources, Ovintiv, Vital Energy and Callon itself drilled billions of dollars into Permian acquisitions last year.

The Permian, and other attractive U.S. shale basins, are awash in M&A as operators search for high-quality drilling locations.

Quality, low-cost drilling locations are hard to come by. In the Permian, the vast majority of these so-called Tier 1 drilling locations are already owned by a small handful of public operators.

So for operators to get their hands on the best rock, by and large they’re having to go buy it from one, or several, of their competitors.

This scarcity-fueled M&A bonanza fueled more than $100 billion in upstream transaction value across the Permian last year, according to a Wood Mackenzie analysis. The previous record was $65 billion in 2019.

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