Houston’s APA Corp., which in recent years has pursued overseas oil and gas prospects, is storming back to the Permian Basin with a $4.5 billion all-stock takeover of Callon Petroleum Co.
APA, long a Permian exploration and production (E&P) stalwart, already has a broad portfolio in the Midland and Delaware formations. In the Delaware, where the super independent has a wide swath of natural gas-rich opportunities, Callon has nearly 12,000 acres. The deal overall would give APA another 145,000 acres.
“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,” APA CEO John J. Christmann Jr. said.
“The acquisition is accretive and unlocks value for both shareholder bases, as increased scale will enable us to realize significant overhead and cost-of-capital synergies,” the CEO said. “The pro forma footprint in the Permian will also create opportunities to capture meaningful operating synergies.”
The transaction lands APA among big U.S.-based E&Ps, including Chevron Corp., ExxonMobil and Occidental Petroleum Corp., that in recent months have snatched up Permian-focused producers.
APA’s Permian output was 311,000 boe/d in 3Q2023. The Callon merger would set the basin’s focus back on track for APA, with total pro forma production estimated at 500,000 boe/d. The worldwide pro forma production mix would be weighted 64% to the United States, nearly all in the Permian.
Return To Alpine High?
APA in 2022 restarted development in the Permian’s natural gas-rich Alpine High portfolio in the Delaware portion of West Texas. The formation for a time was APA’s No. 1 global prospect, but as natural gas prices went sideways, more capital moved overseas.
The combination “now provides for an enhanced value proposition for our 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,” Callon CEO Joe Gatto said.
Callon, also headquartered in Houston, last year exited the Eagle Ford Shale and expanded the Permian position through a pair of transactions.
The APA transaction, unanimously approved by each board, is set to be completed by mid-year. Each Callon common share would be exchanged for 1.0425 APA shares, with APA shareholders owning 81% of the combined company.
The combined company would continue to be headquartered in Houston and led by APA’s executive team. A Callon representative would join the board.
“APA has a proven ability to deliver strong results from its unconventional assets in the Permian Basin, and we look forward to building on the progress that the team at Callon has made within its asset base,” Christmann said.
APA subsidiaries have ongoing development in Egypt, and the company has a floating production storage and offloading development in the works offshore Suriname. In addition, APA recently acquired onshore state-land leases in Alaska and some blocks offshore Uruguay.
No Surprise
A “dwindling number of potential acquisition targets is likely to eventually slow a scorching hot” merger and acquisition market in the Permian, but “that isn’t in the cards yet as 2024 kicks off with the acquisition of Callon by APA,” Enverus Senior Vice President Andrew Dittmar said. “With fewer remaining private targets in the Permian, public company consolidation is going to take a more central role for companies looking to boost their exposure in the key oil region.
“However, these deals can be significantly harder to put together as it is challenging on the public side to find management teams interested in selling,” Dittmar noted. In addition, there is “a limited number of public companies that will have inventory and attractive valuations to interest large-cap buyers.”
Callon is a “willing seller” with solid inventory, making it “no surprise that APA jumped on the opportunity to buy the company and increase its exposure to high-quality U.S. assets,” according to the Enverus executive.
Analyst Gabriele Sorbara of Siebert Williams Shank said the deal was not surprising as there were reports in December that Callon “was considering strategic options, including an outright sale.
“At the time, several investors speculated APA to be a logical suitor, given its need to scale up in the Permian Basin,” Sorbara said. “Thus, investors should not be shocked by the deal.”
For APA, the transaction “goes a long way to addressing investor concerns surrounding inventory depth, albeit with Tier 2 inventory.”
In valuing the deal, Sorbara said, “we arrive to $44,640/ flowing boe/d of production with a reasonable value placed on the upside inventory (7 cents/net undeveloped location), as the deal is predominately proved developed producing ($3.57 billion at strip prices, based on our estimates).”
Tudor, Pickering, Holt & Co. (TPH) analysts were more uncertain about the merger.
“We’re mixed on the deal,” TPH analyst Jeoffrey Lambujon said in a note. “On the positive side, while APA has found success with recent exploration and appraisal in Suriname (and in its deck, noted recent entries in Alaska and Uruguay), the deal helps boost both inventory and oil mix in APA’s unconventional portfolio.”
APA would control 426,000 net acres in the Permian once the merger is completed, the TPH analyst wrote, adding Callon’s 145,000 net acres. As important, Callon has “inventory extending into the early 2030s in our model, adding to what APA has been open about on recent calls regarding higher-quality longer-lateral legacy inventory through the end of the decade at five to six rigs.”
