Callon To Buy Cimarex Delaware Basin Asset In $570 Million Bolt-On

[Editor’s note: this story has been updated from a previous version posted on May 24.]

Callon Petroleum Co. (NYSE: CPE) is building onto its Delaware Basin position with a $570 million bolt-on acquisition, the Natchez, Miss.-based E&P said May 24.

The bolt-on comprises oil and gas properties covering about 28,567 net surface acres primarily in Ward County, Texas, that Callon will acquire from Cimarex Energy Co. (NYSE: XEC).

Production from the properties is about 6,831 boe/d (73% oil), mainly from the Bone Spring Formation. The acquisition also includes 18,925 net undeveloped Wolfcamp acreage, of which 11,500 net acres have rights to the base of the Wolfcamp.

Callon expects the properties to expand its footprint in the Spur operating area, which the company purchased in late 2016 as its entry into the Delaware Basin, while also accelerating its path to free cash flow generation.

Meanwhile, Cimarex will part with an asset that Tom Jorden, Cimarex chairman, president and CEO, said doesn’t compete for capital in the Denver-based company’s deep portfolio of inventory.

“Cimarex was among the first horizontal operators in the Bone Spring Formation in Ward County and it’s been a great area for us over the years,” Jorden said in a statement. “However, the remaining Wolfcamp opportunities have not competed for capital vs. other Cimarex projects.”

According to its May corporate presentation, Cimarex currently holds roughly 216,000 net acres in the Delaware Basin. The company’s portfolio also includes about 116,500 net prospective acres in the Midcontinent targeting the Meramec and Woodford shale formations.

Callon expects its Delaware Basin position to grow upon completion of the bolt-on acquisition to almost 47,500 net acres in the Spur operating area and more than 86,000 net acres in the broader Permian Basin, President and CEO Joe Gatto said.

“Given the location of the acquired position and associated established infrastructure, we are positioned to benefit from increased lateral lengths on the combined position as well as scale benefits from larger pad development concepts,” Gatto said in a statement.

He added that the company expects the acquisition to boost its total fourth-quarter 2018 exit rate to more than 40,000 boe/d with “only minimal incremental activity.” The company previously forecast 2018 average daily production of 29,500 to 32,000 boe/d.

Assuming a $40,000 per flowing boe/d multiple on existing volumes, Seaport Global Securities estimates Callon inked the purchase at $15,700 per acre if one ascribes credit to the entire 18,900 net acre Wolfcamp footprint, Mike Kelly, senior analyst for the firm, said in a May 25 report.

“[The] deal looks good on a map given contiguous acreage positions and the $15,000 per acre purchase price doesn’t ruffle feathers when comped vs. recent Delaware deals,” Kelly said pointing to the Oasis Petroleum/Forge Energy transaction just to the north that went for $40,000 per acre in December.

However, Kelly said questions remain for Callon’s acquisition as Cimarex had trouble making the acreage work. Callon also didn’t lay out a development plan for the assets, which include 212 horizontal locations.

“We’ll be interested to see the breakdown of opportunities across the Third Bone, Wolfcamp A and Wolfcamp B,” he said.

To fund the acquisition, Callon launched an offering of 22 million shares of common stock plus a 3.3 million-share greenshoe. J.P. Morgan and Morgan Stanley are joint book-running managers for the offering, which is expected to result in gross proceeds of $259.6 million.

The companies said they expect to close the transaction in third-quarter 2018, subject to customary closing conditions and adjustments. Scotiabank was financial adviser to Cimarex on the transaction.

Emily Patsy can be reached at epatsy@hartenergy.com.